The Euro Appreciation in Spotlight
06-Sep-2017, 10:49 / Brokerage From the start of the year, the attitude of investors to Europe has changed radically. In January, financial markets were getting ready for the grave consequences of a “Hard Brexit” for continental Europe and the expected appearance of populist governments in some countries of Western Europe. These concerns did not come true, though Brexit still remains a known unknown. Moreover, Europe became appealing to investors when the national economies showed unexpectedly healthy growth. This reversal of attitude of investors to European assets has been quite vividly reflected in the euro exchange rate.
Up to early May, the main forces affecting the euro were expectations on tightening of the FRS monetary policy and results of the presidential elections in France. Later, the main moving force became numerous positive economic data from Europe. By the end of the summer, when the financial markets were giving less than a 50% chance of the third hike of FRS rates this year, the focus shifted to the ECB.
In the first half of the year, the ECB played a waiting game. However, positive data from Europe and scarcity of assets applicable for the qualitative easing programme reduce the probability of further inactivity of the central bank.
The rapid recovery in Europe and expectation of a ECB’s move resulted in considerable appreciation of the euro. As the exchange rate is one of the main transmission channels for regulating inflation, speculation occurred that a strong euro can affect the monetary policy plans of the ECB.
As for the ECB, it tried not to publicly touch upon the strong euro issue. The speech of Mario Draghi at the meeting of central bankers in Wyoming contained no mention of the appreciated euro or other references to possible changes in monetary policy. Instead, the ECB President talked about the issue of long-term prospects and justified stronger regulation of financial markets. Still, some days later, rumours appeared regarding the concern of some ECB governors regarding the rapid appreciation of the euro.
Thus, the key topic for many investors during the coming week will be the ECB meeting. According to the recent survey of economists, changes to the quantitative easing programme will take place in October. The most probable scenario is extension of the programme and reduction of monthly purchases. At the September meeting of the ECB, discussion of the programme is most likely to be started, without taking specific decisions. The passiveness of the coming meeting is largely explained by the forthcoming elections in Germany. Nevertheless, the communication of Mario Draghi will be of great importance.
It has to be noted, that the appreciation of the euro is a negative factor for exporters of commoditized products (for example, producers of fertilizers) and is positive for importers (for example, retailers). However, on an individual basis, the size of effect and timing depends on the internal policy of hedging currency risks.
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