The
euro has been plunging for a variety of reasons recently. They include:
·
A left wing Syriza party win in recent Greek elections
·
Continued British pound and U.S. dollar strength
·
The Swiss National Bankscrapping the franc
1.20-to-euro currency peg
·
The European Central Bank (ECB) announcing a 1.14 trillion
euroquantitative easing (QE) program
CLIMBING THE BULLET
POINT LADDER
That last reason is a big one and will involve the purchase of
bonds fromeurozone member
states. The QE program will remain in effect through September 2016 and its
goal is to help fuel inflation to 2%.
The
third point on the list above likely happened because the Swiss somehow knew
that the ECB's QE announcement was coming. The Swiss had no interest in its
francs being tied to a euro that would surely plunge as a result of that
announcement. The Swiss pegged its franc to the euro in 2011 in order to
improve exports and services performance. But it likely doesn’t see the euro as
sustainable and wants the franc to remain one of the safest currencies in the
world. On the negative side, the appreciation of Swiss francs will hurt Swiss
businesses. But Swiss authorities have promised that it won’t have a
devastating effect and that it’s the best move for the country over the long
haul.
The
second point on the list simply relates to relevance.
The first point is a potentially frightening one for Europe.
Alexis Tsipras is the leader of the Syriza party and he’s sick of austerity.
This could increase the risk of bankruptcy. It’s easy for a new party to come
into power when a nation is dealing with an unemployment rate of 25.8%,
increased taxes, reduced wages for those who are employed and public spending
cuts. Unfortunately, despite the steep pain, these people don’t realize that
they were likely on the correct and responsible path. What’s done is done. And
from an investing perspective it’s not likely to be a net positive for the
euro.
RECENT
NUMBERS
Eurozone unemployment came in at 11.4% in December, which is
slightly lower than the 11.5% reported in November. This is a broad number.
Consider these divergences for unemployment rates in the eurozone:
·
Greece 25.8%
·
Spain 23.7%
·
Germany 4.8%
Nevertheless, the eurozone recently reported record deflation. In January
prices declined 0.6% year over year compared to a 0.2% decline in December.
Energy prices have had a huge impact, but if you subtract food and energy from
the equation prices increased 0.5% in January. That might sound like a positive
but the increase was a higher 0.7% in December.
So, what happens now? The word on the street, which is not
always correct, is that the euro will eventually fall to parity with the U.S.
dollar.
THE BOTTOM
LINE
Some
investors are taking positions in the euro due to low prices. Low prices,
however, doesn't always indicate a bargain. While it’s possible that the value
of the euro may increase, there are too many head winds for the currency at the
moment. Most importantly, there is no significant growth catalyst that will
lead to sustainable growth for the euro. Currency values change quickly and
this isn’t an investment to dive into if you’re a beginner.
Source: http://www.investopedia.com/
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