Euro–US dollar currency movement
The euro–US dollar currency pair touched a low of 1.05 on March 13, 2015. It was the multiyear low for the euro against the US dollar (UUP).
At that point, the euro had depreciated by 13.3% on a year-to-date (or YTD) basis. The ECB (or European Central Bank) extended its quantitative easing program on March 9, 2015. The euro depreciated following the extension of the program. Throughout the year, the ECB’s stimulus and low–interest rate policy kept the euro weak against global (ACWI) (VEU) currencies.
How does this benefit Eurozone exporters?
A weaker currency is always a boost to export-oriented industries, as it’s a major driver of price competitiveness.
The graph above shows the inverse relationship between the euro and the STOXX EuroZ Exporters ETF (EZEX.DE), which tracks the performances of export-oriented industries. Major export-oriented companies Volkswagen (VLKAY), Siemens (SIEGY), and SAP (SAP) have benefited from the weaker euro in the last year.
Role of the ECB in 2016
Market participants believe that the ECB has exhausted all its ammo to spur growth in the Eurozone (VGK) (EZU) (HEDJ). There will be a little room for further expansion of its stimulus program. Hence, the price competitiveness of these export-oriented companies could fall as the euro starts recovering.
Alexander Dryden also spoke about the ECB President Mario Draghi’s move, saying that there are difficulties in the credit market, as negative interest rate is no use. The negative interest rate won’t increase consumer spending. Read Blackrock’s Larry Fink: Negative Rates Reduce Consumer Spending to learn more.
In the next part of this series, we’ll analyze whether the possible exit of Britain will hamper the trade relations of Europe and Britain.