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 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.