The euro has fallen to a 12-year low against the US dollar due to divergent monetary policies between the European Central Bank and US Federal Reserve. The ECB has implemented quantitative easing measures to purchase toxic loans and bonds, lowering interest rates to combat deflation in the eurozone. However, this is weakening the euro. Additionally, the crisis in Greece adds downward pressure and concerns that Greece may exit the eurozone. A weaker euro boosts European exports but hurts US companies relying on exports to Europe. It benefits US importers and companies relying on imports. Investors must consider the impact of euro fluctuations on trade and their investment strategies.
1. The Euro
Morgan Stanley Financial Training Program Spring 2015
Group 5:
Margie Vinogradova, Tianyi Zhou, Evan Jun Shum, Bryan Zhao, Waqas, German Cueva
2. Intro
● 12-year low against Dollar
● Dollar increasing value against world’s major currencies
● Divergent Monetary Policy: ECB vs. US Federal Reserve
● Possible factors:
o likelihood of increasing US interest rate
o Crisis in Greece
o And the Quantitative Easing program
● Exports boost
3. QE by the ECB
● The ECB has lowered interest rates to near zero.
● Banks took the money and invested in safe ventures.
o Afraid of lending to investors looking for a loan.
o They’re being very careful = stagnate in the economy.
o Combating deflation.
● Quantitative Easing will have the ECB buy up toxic loans and bonds
bringing interest rates down on bonds.
o Makes Gov’t bonds look less lucrative and force the banks to loan
their money to others.
4. Weakening of the Euro
● Why is the Euro Falling?
○ European Central Bank’s
(ECB) quantitative easing
■ 1 Trillion Euros will be pumped
into economy
■ Will continue to weaken Euro but
will boost exports and ease
inflation
○ Strong Dollar
■ Rose 13% in 2014 and 5% in
2015
■ Strong economy and improving
Trade Balance ● As of April 27th, E= 1.09 USD/Euro
Exchange Rate Between Dollar and Euro
5. Weakening of the Euro
● Why is the Euro falling?
○ ECB’s record low interest rates
■ Program includes buying government
bonds back; Investors will look to
invest overseas where interest is higher
○ Crisis in Greece
■ Concerns regarding “Grexit”
■ Adds downward pressure on Euro
● If Greece goes bankrupt or decides to leave the 19-nation
eurozone, the situation could create instability in the region and
reverberate around the globe
6. The Euro’s Impact on Imports/Exports
● What happens to our economy based on strength of euro?
● Stronger euro → dollar depreciates → more purchasing power for
European consumers
o American companies that rely on exports gain more
revenue (foodstuffs, chemicals, textiles)
Signals good financial health to investors
Drives up demand for shares
o Tradeoff with companies in industries that rely on imports
o Overall result in our economy: trade surplus - exports rise,
imports fall
7. The Euro’s Impact on Imports/Exports
● In contrast, depreciation of the euro → stronger dollar →
increased financial performance for US companies in
imports
o Higher demand for American goods
o Opposite trade-off occurs for companies
here in the US
Harms US companies that rely on exports, beneficial
for those that rely on imports (automobiles,
machinery)
o Overall result: trade-deficit in our economy
8. The Euro’s Impact on Imports/Exports
● Exactly how much of an impact?
9. The Euro’s Impact on Imports/Exports
● Exactly how much of an impact?
● Estimated 20% consumption of US exports
by Europe
o Carnegie Endowment
for International Peace (policy
researchers)
o Significant impact on investment
choices
(Zepal Corp.) →
10. The Euro’s Impact on Imports/Exports
● Example of magnitude and frequency of fluctuation
o US investors must take into consideration
11. Strategy Investment - Forex
Forex
- “Foreign Exchange”
- Similar to a stock, holding
onto an asset that will
appreciate in value
- Profits contingent to
speculation on when Euro
may reach parity with USD
12. - CurrencyShares EuroTrust
- Ticker - FXE
Example ETF (Exchange Trade Fund)
- PowerShares DB Fund
- Ticker - UUP
ETF’s that closely tracks EURO/USD relationship
13. Industry Correlates
Winners -
- European Exports
- A weaker euro makes exports
more attractive, as most of the
global trade is denominated in US
dollars.
Losers -
- Airlines
- Even though the price of crude is
falling, airliners need to buy jet
fuel in dollars
16. Euro Losing to SGP, RMB, IND
● In the face of Eurozone volatility, the
Singapore, Chinese, and Indian
economies continue to grow
● invest in the SGP, RMB, IND
18. Strategic Investing in The UK
● Bank of England to pursue Credit Easing
● stopped QE in 2013
Company city ticker annual growth %Sales in North America
Jazz Pharmaceuticals Dublin JAZZ, 29% 90%.
19. In Conclusion
● QE in the Eurozone and PIGS will continue to keep the Euro weak,
● Weak Euro benefits European exporters, mainly manufacturing companies
● Forex Trading to capitalize on Euro fluctuations
● Invest in stable growth currency: SGD, RMB, INR
● Invest in Asian and UK Export sector; non-durable, non-cyclical goods (Pharma)
Forex - Asset class similar to a stock where you are able to invest and profit varing you how well you speculate
Top down approach → viewing the economy and seeing factors that shift value of currency.
Example of factors that move value of a currency
Monetary policy
Janet Yellen - Head of US Federal Reserve System
Mario Draghi - Head of the European Central Bank
An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.
Even though the price of crude is falling, airliners need to buy jet fuel in dollars