The euro currency on May 13 stood at 1.3715 against the dollar. At the time that this article is being written the EURUSD is trading at 1.1231. Over a one year period the euro fell by over 18 per cent leading to significant gains for US dollar cash, bond and equity holders.
In perspective, a holder of Apple stock during the same period gained 48 per cent as the price of the share increased from $85 to $125. Add to this another 18 per cent in currency gains and the total gains shoot up to 66 per cent.
The depreciation also mitigates weak performances elsewhere; Schlumberger declined six per cent over a one year period. However, selling the stock and converting into the euro erases this loss and transforms it into a more than acceptable 12 per cent gains.
Whether this is the right time to be converting your US dollar investment is debatable and subject to one’s individual investment requirements. However, the following are some arguments that one might consider.
Forward market
The forward exchange rate market constitutes a relatively strong forecast of future exchange rates. Forwards are bought for hedging and for speculative reasons. All global trades are embodied by one market price, so it is fair to say that the forward market price gathers the expectations of all the market participants.
The forward price on the euro against dollar is 1.13 by the end of 2015, 1.14 by the end of 2016 and 1.17 by the end of 2017. While these prices may change day by day, the trend is indicative that market participants believe that the euro is past its bottom.
Grexit
A Greek exit from the Eurozone may lead to a lower euro especially in the short-term. However, we believe that the Greek government will eventually give in to European demands. So while the euro may go lower in the coming days, the eventual outcome will be a stronger euro.
US interest rates
The US Federal reserve is expected to start raising interest rates later this year. Initial indications pointed towards a September rate hike. However, I do not expect a rate hike in the US earlier than December 2015. I also expect the magnitude to be the minimum 0.25 per cent as to avoid the risk of ‘braking’ an accelerating economy.
The slow pace of the interest increase is unlikely to exert enough force on currency markets to significantly appreciate the dollar more than it has already appreciated.
European growth outlook
Premature tapering of the current quantitative easing programme is out of the question as this may have a severe impact on financial markets. And while I do not expect any high economic growth figures, a slow recovery will probably take hold as a return to employment continues.
Power of incumbency
In this environment my bet would be on the euro rather than against it. However, this scenario hinges on several significant risk factors, however, Maltese investors have an advantage in holding euro as at any level one euro will remain one euro.
Disclaimer:
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.