the euro, the US$ and the Swiss franc

With the beginning of quantitative easing by the European Central Bank, the euro has slipped against the USD by about another 3% today to a value of 1 € = US$1.12.  That’s a decline in the euro of about 7.5% just since January 1st.  The EU currency has tumbled by more than 14% vs. the greenback over the past year, and by almost 20% since its high of $1.39+ last May.

This is an astounding fall for the world’s second most important currency.  It’s an enormous boost for EU-based enterprise overall and for exporters in particular–as well as a huge burden for their hard currency-based rivals. It would also be a mind-boggling loss of national wealth for EU citizens, were it not that Japan has depreciated the yen by a third over the past few years in a bid to regain global relevance for its manufacturing base.

Enough of this.   Down to brass tacks:

the euro/dollar

The income statements of US companies with EU exposure will be savaged by the currency decline.  Yes, in theory they may be able to raise prices to recover some of their depreciation-created losses.  But the general rule in this situation is that prices can only go up in line with overall inflation–which is non-existent in the EU at the moment.

My strong feeling is that Wall Street hasn’t fully worked this out yet.  So combing through our holdings to find euro victims should be a high priority for each of us.

the euro/Swiss franc (CHF)

The CHF has gained almost 25% against the euro since the Swiss central bank depegged its currency from the euro a little more than a week ago.  The speed of the move clearly shows what should have been apparent over the past year of euro depreciation–that the Swiss government was trying to maintain a peg that was miles away from where the cross rate would be without constant economy-distorting intervention.

We know this sort of thing can’t last.  If the forty-year history of floating exchange rates shows anything it’s that trying to maintain an artificial exchange rate always ends in disaster.  Yet what continues to come out in the press post-depegging is that:

–lots of EU property owners had decided it was a great idea to take out a CHF-denominated mortgage on their homes.  Short-term rates were negative, after all.  Ouch!

–a number of commodities brokers are in serious financial trouble because they allowed individual clients to build up short-CHF positions on margin that were so big there’s no chance they’ll ever be able to repay the losses they’ve incurred.

–there’s been a parade of currency trader departures from hedge funds caught out by the same short-CHF bet.

I guess this just shows that P T Barnum was right–that despite the examples of the collapse of the pre-euro Exchange Rate Mechanism in the early 1990s, the Asian debt crisis later in that decade and all of the problems with one-size-fits-all Eurobonds, there are still tons of people willing to take what history shows is the losing side of a wager.



6 responses

  1. I’ve been following the Novartis ADR.

    The day the swiss made an announcement, the ADR jumped. (the underlying stock was down).

    the Euro announcement drove the stock down, to where it is basically before the swiss news.

    Any thoughts? I do think money is leaking out of phama/biotech a bit this week, so that explains a bit of the downward pressure. But the reasons for the moves in terms of the currency?

    I do think pharma is more exposed to the euro than they let on. Look at Thermo Fisher.

    • Thanks for your comment. I don’t know enough about Novartis to have an opinion about it. I do know what the issue is, however:
      generally speaking, the highest profits come when a company has its costs in weak currencies and its revenues in strong ones. The EU has a population of about 500 million, Switzerland around 8 million. So its a reasonable guess that euro-denominated revenues are much more important to any pharm than Swiss ones. On the cost side, the question is how much of a Swiss-based pharma’s R&D and administrative costs–and how much of its assets and liabilities–are in Swiss francs and how much in euros. CHF costs would be bad, euro costs good. The percentage will presumably differ, firm by firm.

      For Novartis, or any other pharma, the questions are:
      –how much has the currency shift damaged the attractiveness of pharmaceutical group as a whole vs. other sectors in the stock market and
      –within the pharma group, has the shift made Novartis look better or worse than other firms.

  2. Yep, that is it.

    Earnings call this morning.

    Large cost base in CHF. 30% High dollar isn’t helping either.

    My very rough thesis was that a Euro pharma would benefit from a stronger dollar. You can see more in the US, and the prices are higher here anyway. Stronger dividend as well, although a 35% withholding may kill that.

    I noticed that Wynn Macau jumped hard today. I can’t invest directly, the ADR is sketchy, so I gave up on that one.

    • I think the idea of finding companies with revenues in hard currencies and costs in weak ones is correct. Unfortunately, this is no longer true for many Switzerland-based firms.
      On the Macau gambling stocks, apparently a major broker turned positive on the group last week, arguing that the stocks have been beaten down a lot and that market conditions, while not getting better yet, are not getting worse. I think this is correct—but I’ve been badly wrong about these stocks for the past six months or more.
      On the pink sheet ADRs, I also think it’s right to worry about the low trading volumes and potentially wide bid-asked spreads. But if you’re interested, both Fidelity and Charles Schwab offer low-cost international stock trading, including Hong Kong.

  3. The money is in an IRA, and Fidelity won’t let me do international stock trading on that.

    The basis thesis you had appears to be sound. But yes the liquidity on the ADR was scary.

    Thank you for your writing, which has been very reasoned.

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