A Cheap Euro Is a Good Thing

The European Central Bank is starting a quantitative easing campaign and, as expected, the Euro is falling. The consensus of finance ministers in Europe and European stock markets is that a cheap Euro is a good thing! This is a useful thought to keep in mind when trading the Euro against the US dollar as the dollar is likely to rise due to the Fed raising interest rates and the Euro is likely to keep falling as the Euro Zone prints money to buy bonds. How is it that a cheap Euro is a good thing?

Stimulus Instead of Austerity

The Wall Street Journal reports on how the European Central Bank head defends the ECB stimulus program.

European Central Bank President Mario Draghi on Wednesday defended the bank’s decision to launch a massive stimulus program centered on large-scale purchases of government bonds, saying such policies are a standard part of the tool kits of central banks around the world.

“Asset purchases are unconventional but they are not unorthodox. In fact they are eminently orthodox,” Mr. Draghi said at a conference of economists and central bankers at Goethe University. He said asset purchases are “nothing new” and were even deployed by Germany’s Bundesbank in the 1970s.

Mr. Draghi’s remarks came two days after the ECB starting buying large amounts of government bonds and other debt instruments under a program known as quantitative easing. The plan was approved by the ECB’s governing council on Jan. 22 despite opposition from Bundesbank President Jens Weidmann who said Monday he was “skeptical” that more expansionary policies were needed.

When the stock market and real estate market crashed in 2008 it sucked $7 trillion in assets out of the global economy. The EU followed the course that the USA did after the 1929 crash. They tightened up monetary policy, killed credit and promoted fierce government austerity. The result was unemployment in the 25% range in countries like Spain and 50% range in countries like Greece. Luckily the head of the US Federal Reserve at the time of the 2008 cash was Ben Bernanke who is a recognized expert on the causes of the Great Depression. His Federal Reserve opened the spigot and bailed out banks and General Motors. The Fed instituted a quantitative easing campaign to the tune of $85 billion a month to purchase treasury bills and corporate bonds. Today the USA is out of the recession with the lowest unemployment rate in decades and an expanding economy. Stimulus seems to work and the EU is finally coming around and trying it.

Who Is Happy with a Cheap Euro?

Anyone owning stocks in Europe is happy as the markets, especially the German DAX, are up. MarketWatch report that European stocks are up with German stocks leading the pack.

European stocks climbed Monday, with a new milestone for German stocks highlighting the flood of money that’s been rushing into the market as the European Central Bank embarked on its massive asset-purchase program.

The Stoxx Europe 600 DAX, +2.56% rose 0.7% to 399.21, with only the utilities sector SX6E, +0.76%  lagging other groups. Stocks found early support in part after the Chinese government over the week pledged to bolster economic growth.

Top advancers on the pan-European index included Balfour Beatty PLC BBY, +1.67% with shares of the U.K. construction and engineering services company rising 3.3% following a ratings upgrade to buy from underperform at Jefferies.

The point of this rally is that investors expect the stimulus program to pump some life into the European economy and especially to help exporters who products will be more competitive due to a cheaper Euro.

How to Trade the Euro

The Financial Times gives their thoughts about quantitative easing.

It is unclear how much the depreciation is a signal that QE is working rather than an actual mechanism by which it works but indications that the programme is beginning to have some effect are welcome.

There remains considerable disagreement about how QE functions. The way it operates in the eurozone is likely to be different to that in, say, the US, given the contrasting structures of their financial systems. But a very simple way of looking at it is that QE involves boosting the supply of a currency. It would be surprising if that did not lead to it falling in value.

The point of all this being that the Euro may well continue to fall so long as the European Central Bank prints money to buy bonds to stimulate the Eurozone economy.