Install the Sina Finance client to receive the most comprehensive market information at the first time →【download link】
Euro zone companies have been hoping for a weaker euro for years. Now “get your wish”, but it really is not the time.
The euro has fallen more than 12 percent against the dollar this year and has fallen below parity for the first time in two decades. A fall in the exchange rate has pushed up the cost of imports in the euro zone, adding to the destructive power of soaring energy prices and adding fuel to a record surge in inflation that has rattled the economy.
All of this is bad news for corporate earnings, with German companies warning on Tuesday that they still face “strong cost pressures”. In addition, consumer inflation in the euro zone has approached 9 percent, dampening demand and also weighing on sales and profits.
back to par
Whatever the positives of currency devaluation, such as export competitiveness, the impact of exchange rates on foreign profits, are overshadowed by the threat of an energy crisis and recession. Europe is particularly vulnerable because of its reliance on energy imports from Russia. Gas supplies have already been reduced, and further cuts will put more pressure on regional economies, especially in Germany.
The euro is not the only asset reflecting concerns about the European economy.JPMorganMadison Faller, global strategist at Private Bank, said the euro’s fall below parity against the dollar “reflects greater downside risks to European growth”.
“European equities are currently priced at 30 percent below U.S. equities, a significant margin reflecting these risks and the market’s emphasis on sectors such as energy and financials,” she said.
Economic worries have also added to currency volatility, with traders betting that this will limit the ECB’s ability to tighten policy, causing it to fall further behind the Federal Reserve’s aggressive pace of rate hikes. Widening interest rate differentials are benefiting the dollar, and the current trend is also a reflection of a stronger dollar. Against a basket of global currencies, the euro was only close to its lowest level since 2015 at closing prices, an index showed.
Not what it used to be
But there is also a major structural problem at play, as the energy crisis has forced Germany to reassess a longstanding industrial model that has been at the heart of the economy. This model – which ING Group strategist Chris Turner sums up as “importing cheap energy, taking advantage of globalisation, adding value and exporting products around the world” – has lost an important first pillar.
“If you see the euro at parity against the dollar, you think the euro looks super cheap,” he said. “But in reality, the fair value of the euro has already been damaged by the energy crisis, and the possibility of another 10-digit decline in the euro cannot be ruled out.”
Other strategists also see risks to the euro to the downside.Morgan StanleyThe euro is forecast to fall to $0.97 this quarter, not seen since the early 2000s. JPMorgan expects it to test $0.95 in the second half of the year.
The euro’s latest move has taken it to its lowest point since 2002, with its weakest point on record in 2000, when it fell below $0.85. Appreciation followed, averaging above $1.30 during the global financial crisis and subsequent euro debt crisis. That led to complaints from businesses and politicians as the euro’s strength at the time hurt exports and the economy.
Now it’s two days. The weaker euro means some European companies have seen a boost in profits converted from other currencies. On average, more than half of the Stoxx 600’s revenue comes from outside the euro zone, with the US one of the biggest markets.
But any benefit from currency devaluation could be eroded by the impact on costs, especially if raw materials are denominated in dollars.
“A weaker euro can push up U.S. dollar-denominated input prices, hurting companies’ margins,” he said.Societe GeneraleKenneth Broux, head of research at Banking Corporation, said. “If soaring energy prices and weakening global demand hit real incomes and consumer spending, and consequently domestic/global demand, companies’ sales and profits could also be adversely affected.”
Massive information, accurate interpretation, all in Sina Finance APP
Responsible editor: Wang Yongsheng