Two years ago the euro was trading at just under US$1.35. Six months later, in March 2015 it hit US$1.05 as America could do no wrong and Europe – Germany aside – could do no right.
Since then it has bounced around within the relatively tight range of US$1.05-$1.15. There have been a few days during that time when it has jumped above or fallen below that range but they have been, in the greater scheme of things, few and far between.
At the beginning of 2017 the exchange rate was bouncing along the bottom with the year-end valuation mark having been at US$1.0517 since when the recovery of the European single currency has been astonishing. As of this morning the euro is breaking new ground at US$1.1670 and US$1.1700 looks easily achievable, given the momentum. To infinity and beyond!
As ever, looking at just one exchange rate does nothing for the observer and reminds of the old British newspaper headline “Fog over Channel – Continent cut off” but in this case the it is not entirely wrong. Since the new year began, the US dollar spot index has fallen 8.17% to 93.91 from 102.21, of itself a pretty grim picture, whereas euro-dollar has moved 10.98% (using US$1.1671 for calculation purposes). That therefore has a weak dollar fighting a strong euro. But what now?
Resurgent
Germany, the main engine of European growth, fiscal revenue and funding for the EU, has spent the past 10 years benefiting from euro weakness and even at its now perky levels it is still trading below its lifetime average rate of just above US$1.1900. Thus the question arises as to where and when a resurgent euro with all the benefits for the morale of a euro area, battered by the sovereign debt crisis and the reluctant admission that it was its own incompetent and corrupt regional lenders that nearly brought down its banking edifice and not the slick b’stards of the City and Wall Street, will begin to negatively impact the German export powerhouse.
The Dax index peaked on June 19 at 12,888.95 but closed on Friday down more than 5% from that level having shed 1.66% on the day to close at 12,240.06. That is being dragged back to earth with a bang. Although most European investors look at the big stock index charts first thing in the morning – Dow, S&P and Nasdaq closes and Nikkei, Hang Seng and ASX overnight levels – it is necessary to distinguish between the periods when equity prices lead and when they follow. Currently they are clearly following and it is the forex market that is setting the tone and it is apparently dancing to some very rum tunes.
The Trump presidency, to date, has brought nothing but currency weakness. The stunning performance of the stock markets therefore probably has more to thank the dollar for than for the stimulatory policy promises of the administration. Sooner or later this was going to have to impact on Germany but the belief in the unstoppable juggernaut has held up. VW’s ’dieselgate’ didn’t help, although the unparalleled eagerness with which the US appears intent on reducing its budget deficit by fining any foreign company it can lay its hands on as much as it can get away with did a lot to generate empathy back home.
Vorsprung durch Technik
Daimler got quoted last week and now we hear that German federal prosecutors are looking into allegations that the big German car companies held regular clandestine meetings to co-ordinate their “technical solutions” to environmental legislative initiatives. So far the investigation is only into allegations of misdeeds and not misdeeds themselves but it seems that in Germany where there is smoke, there is a cheat device.
Those who remember the heyday of “Deutschland AG”, where industrials, banks and politicians sat in each other’s pockets on the understanding that if they all looked after each other, the collective would benefit, will know that, by and large, it was true. The age of transparency has not made any of this go away, it has merely driven it underground. Heinrich Heine already observed and commented on this behaviour in the early 19th century when he wrote “in public they preached water while in secret they drank wine”.
On Friday, a day on which all but one of the 30 Dax stocks was in the red, VW lost 3.64%, BMW lost 2.61% and Daimler, already in the wars, lost 2.07%. This time the revelations are not coming out of the US but are home grown and the usual “Vee did nozing wrong; vee vere only obeying orders” might not carry the same weight as id had in the past. That said, Hans and Helga SixPack have felt severely assaulted by last year’s wave of immigration which, though no longer daily news, goes on. The rattling of Deutsche Bank’s bones wasn’t good after VW but a full-frontal on the central car industry could shift the national mood. Bundestag elections are only 62 days away.
Not talking about Brexit
Meanwhile, in the UK, apart from Chris Frome’s 4th TdF victory, England’s women cricketers taking the World Cup in the most stunning fashion and Jordan Spieth’s mighty come back to take The Open there’s not much to talk about, other than Brexit. From the weekend’s press one could infer anything, from the UK not leaving in the end to impending thermo nuclear war between Brussels and London over the future shape of cucumbers. Nothing is yet decided although there is a growing sense that Britain will continue to talk tough while gradually backing down on most fronts.
Under its new leader, Sir Vince Cable, the Liberal party is formally setting out to scupper Brexit. Well, it’s not calling it that but planning a strategy to defeat the Great Repeal Act can be seen as nothing else. Trying to do so in league with Jeremysaurus’s Labour Party, which has a documented policy of respecting the result of the referendum, is a different matter entirely. Having won 52.8% of the vote in Richmond and Twickenham on a 79% turnout in the June election, I have no doubt that Sir Vince will also show a modicum of respect to the 52% who voted to leave on a 72% turnout. Funny old thing, democracy, isn’t it….?
Have a great week and remember that it is the clients whose money you manage who pay your fees, not index compilers.