A rising single currency has confounded and hurt European exporters. An increasing number are becoming euro bulls, but their conversion could be ill-timed. While the currency’s rally may not be over, the ECB seems too unhappy with euro strength for it to last past autumn.
The euro has gained nearly 7 percent on trade-weighted measures since June 2012, eroding exporters’ competitiveness and the reported value of overseas earnings. Foreign exchange hedges can limit the damage from such fluctuations, but many firms had expected the currency to weaken. Bank of America Merrill Lynch finds that many firms remain under-hedged compared with pre-crisis levels, despite increasing the level of cover since 2012. A litany of corporate currency complaints during the reporting season bears this out.
Having got it wrong so long, companies are capitulating. For instance, a Commerzbank survey of German firms shows the proportion expecting the euro to rise in the next three months has nearly doubled since February, to 35 percent. Exporters typically cover some of their currency exposure three to six months ahead, so that change of sentiment could presage the purchase of more hedges. That would better protect them against adverse currency swings.
True, hedges could pay off for a little while, as the combination of ultra-low inflation and an inactive central bank points to a stronger currency. But the rally may not have much further to run.
The ECB is increasingly uncomfortable with euro strength, which brings unwanted disinflation through lower prices on imported goods. Further currency gains may lead the ECB to ease further – and in a way that inflicts the maximum damage on its currency. Moreover, the dollar is likely to draw more strength from the prospect of U.S. rate rises as the year progresses.
Exporters burnt by the euro’s rise may now feel an urge to buy more comprehensive protection. They might want to resist that particular temptation.