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Why A 9-Year Trade-Weighted Low In The Euro Won't Help EU GDP

Tyler Durden's picture




 

The euro has depreciated to its lowest level in nearly nine years when measured in trade-weighted terms. Common wisdom is to assume that this might trigger a GDP forecast upgrade for the common currency area. UBS says "no", while at first sight, this 'devaluation' should boost output, the exchange rate response is simply part of the bigger, well-known picture of economic stress in the common currency region. Simply put, the currency has depreciated on fear and risk aversion - and economic growth tends to suffer rather than flourish in that environment - and furthermore, the two structural measures that help determine the outlook for the currency - the internal balance (output gap) and the external balance (current account) - point to further weakness.

 

UBS: Euro depreciation: Implications for GDP

The euro has depreciated to its lowest level in nearly nine years when measured in trade-weighted terms. Clients have asked if this might trigger a GDP forecast upgrade for the common currency area. The short answer is no; the currency has depreciated on fear and risk aversion – and economic growth tends to suffer rather than flourish in that environment.

The euro has depreciated by 15% since its recent peak in October 2009. The depreciation is, in fact, exactly in line with our forecast, which is for the EURUSD to drop further to 1.15 by the end of this year and to 1.10 by the end of next year.

At first sight, this should boost output, but the exchange rate response is simply part of the bigger, well-known picture of economic stress in the common currency region. Our asset allocation team highlighted this point in their latest piece, with a compelling chart that shows a tight relationship between the value of the euro and the relative size of the ECB’s balance sheet (Chart 2). The ECB’s balance sheet has expanded much faster than the Fed’s, and this is simply because the eurozone economy and its banks remain troubled (sounds familiar).

This evaporation of confidence in parts of the European banking sector has a direct impact on the real economy, including through a higher cost of capital for companies and from tougher credit conditions for loans. The Spanish, Italian, Greek and Portuguese economies are in recession, and growth in the eurozone as a whole has ground to a halt.

To establish our point more explicitly, we have run a macro simulation on NiGEM, a large global macro model. We have specifically asked: what is the impact on the economy of the heightened fear that is reflected in wider risk premia? The calibration of the shock can vary depending on one’s judgements and on the time period under consideration, but the bottom line is that fear can drive the exchange rate lower – and economic growth.

What next for the exchange rate? The policy response to the crisis will remain an influence, but, as Chart 2 above shows, in essence it is the fundamentals that will be crucial for the long-term value of the currency.

The two structural measures that help us determine the outlook for the currency – the internal balance (output gap) and the external balance (current account) – point to further weakness. The charts below compare: (1) the euro area output gap with the weighted average output gap of its main trading partners; and (2) the euro area current account balance compared with that of its main trading partners. The charts essentially show that, although the current account is in balance, the euro area output gap is bigger than its trading partners’. If we think of the equilibrium exchange rate as one that restores internal and external balance, these charts suggest that there is scope for further depreciation in the euro.

To summarise, the euro has depreciated in response to broader concerns related to solvency and competitiveness in the single currency region. Although the weaker currency will help the troubled economies rebalance, the weakness is not a trigger for forecast revisions. Looking ahead, fundamentals continue to suggest that there is further scope for euro depreciation. We expect EURUSD at 1.15 by end-2012 and 1.10 by end-2013.

 

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Sun, 07/22/2012 - 18:00 | 2641039 Peter Pan
Peter Pan's picture

A nine year low might not help European GDP, but a ten year low WILL when the Euro hits zero value against the rest of the death bed fiat candidates.

Sun, 07/22/2012 - 18:05 | 2641047 Conman
Conman's picture

Oh my did the muppets get Stolpered yet again?

 

http://blogs.marketwatch.com/thetell/2012/07/13/euro-poised-to-rise-17-o...

7/13/12

Goldman strategists, led by Thomas Stolper, said in a note Friday that they were sticking with their 12-month forecast for the euro to rise to $1.40

 

Sun, 07/22/2012 - 18:13 | 2641065 fonzannoon
fonzannoon's picture

i am guessing that is based on massive QE3. But I am probably giving them too much credit. He may really be that stupid.

Sun, 07/22/2012 - 18:36 | 2641099 EuroInhabitant
EuroInhabitant's picture

If all the PIIGS step out.

Sun, 07/22/2012 - 18:20 | 2641081 Chief KnocAHoma
Chief KnocAHoma's picture

Duh - the media is so perceptive! The headline might as well read - "Researchers discover Water is wet."

Sun, 07/22/2012 - 18:07 | 2641054 fonzannoon
fonzannoon's picture

To think that someone owning the mighty USD still loses almost 25% of their buying power when exchanging to euro is just funny to remember.

Sun, 07/22/2012 - 18:08 | 2641058 fonzannoon
fonzannoon's picture

"We expect EURUSD at 1.15 by end-2012 and 1.10 by end-2013."

I wonder what their S&P forecasts are...

Sun, 07/22/2012 - 18:11 | 2641063 lewy14
lewy14's picture

What we're seeing is something very confusing indeed:

- Currencies can obviously be destroyed by rising interest rates / sovereign risk premia rising through the roof. Once sustainability is breached, the currency is destroyed.

- Currencies can (less obviously) be destroyed by zero interest rates. We're possibly seeing this with the dollar and the swiss franc... 

What's strange with the Euro is that both of these processes are happening at the same time, with interest rate spikes in the south and negative interest rates in the north.

Like some star about to go nova, except it's being ripped apart by a black hole first...

Sun, 07/22/2012 - 18:15 | 2641073 new game
new game's picture

Like some star about to go nova, except it's being ripped apart by a black hole first...

could that black hole be a galaxie of debt?

Sun, 07/22/2012 - 18:29 | 2641092 Chief KnocAHoma
Chief KnocAHoma's picture

One minute the euro is dead, then with some magic juice duct tape and holly engineering... It is saved.

This story has been a long unfolding menstrual sludgefest of panic whores. Time to change the subject and see what we can fuck up next. Anything going on in Africa?

Mon, 07/23/2012 - 06:36 | 2641789 MSimon
MSimon's picture

The DEA and the whole narc squad is moving in.

 

http://www.nytimes.com/2012/07/22/world/africa/us-expands-drug-fight-in-...

Sun, 07/22/2012 - 18:18 | 2641077 q99x2
q99x2's picture

'in essence it is the fundamentals that will be crucial for the long-term value of the currency.'

Oh God, this one had my side hurting after I got back up off the floor.

Sun, 07/22/2012 - 18:56 | 2641128 Snakeeyes
Snakeeyes's picture

Spain is toast: http://confoundedinterest.wordpress.com/2012/07/22/6-spanish-regions-may...

And the US has lowest money velocity since Eisenhower: http://confoundedinterest.wordpress.com/2012/07/22/the-week-ahead-the-me...

This will take another ten years to work through.

Mon, 07/23/2012 - 08:30 | 2641989 Chief KnocAHoma
Chief KnocAHoma's picture

Ten years!? Ten years!? I can't go another ten years with beer prices this high. Who the fuck is in charge here anyway?

Sun, 07/22/2012 - 21:26 | 2641459 Offthebeach
Offthebeach's picture

No body knows the price of anything. Interest rates, Libor, homes, commercial property, laws, crop /energy prices all. All rigged, distorted, warped, politicalized.
And getting more opaque, unstable.

Sun, 07/22/2012 - 23:45 | 2641607 mjk0259
mjk0259's picture

German and other stable countries have negative real interest rates. Those are the biggest exporters. Countries with high interest rates are not major exporters, their main industry is tourism. That will benefit as well.

 

Mon, 07/23/2012 - 00:49 | 2641638 pashley1411
pashley1411's picture

This is the story, noone knows the price of anything anymore, its all political fodder. 

From the old Soviet Union, the joke was that they would have to leave at one capitalist economy left standing, so they could know what the price of goods were.   We need to do the same in 2012.

Mon, 07/23/2012 - 06:45 | 2641780 falak pema
falak pema's picture

The sick dynamics of greed gone mad; and looking for scapegoats to fukk bad. Corporate life is so sad and corrupt its stink taints our daily lives if it wasn't the glee of seeing the sea at sunset and hearing the cigala chirp like the monkeys at Bali.

UBS is part of a banksta wet basket going dry who can't get a hard-on to earn their legendary bonuses and now bad mouth all and sundry for their inevitable fall, using hyped-up econometric models that their grandmothers would spit on as bad faith and worse morality. When Wall Street becomes Hole in the wall and the whole shooting match brings down the fiat cabal of which the transnationals who hoard 25T in safe havens will lose more than they bargained for, we will see which banks stay and at what terms. As the first world will rip open their innards and let it all hang out for the buzzards.

That is small consolation 'cos in the meantime the sheeple will get shafted deep and bleed like pigs at the slaughter house. 

Tipping times and oligarchy frustration and panic chimes. Musical chairs and it plays "may the devil take the hindmost" in this den of thieves.

Les paradis fiscaux abritent 25.000 milliards d'euros

 

Mon, 07/23/2012 - 08:40 | 2642029 Chief KnocAHoma
Chief KnocAHoma's picture

The blame is pretty obvious... if you live in the northeast US, it is the fault of red state red necks. If you live in a red state, the blame is clearly on the jews or the blacks... take your choice. If you live in Europe the blame lies squarely with the US and their fucking trash mortgages they sold. If you are a banker the blame is clearly with the deadbeat borrowers. If you are a borrower the blame is clearly with the trash bankers that threw money at you until you were sucked in.

If you are muslem the jews are once again to blame. They and the Christians. 

If you are a democrat, blame the republicans. If republican blame the dumb ass educational system that allowed so many to be raised believing in socialism.

If a capitalist blame the unions. If a union member blame the greedy.

I think it is pretty clear... we are all to blame.

Mon, 07/23/2012 - 10:00 | 2642305 Duck
Duck's picture

Zerohedge repealing supply and demand?

When prices go down (external EZ) people buy more, less or the same?

It will help but not enough to overcome the rest of the mess they are in.

Mon, 07/23/2012 - 13:18 | 2643131 Confundido
Confundido's picture

Always the same idiocy with these mainstream economists: Lower currency boosts exports, higher is dangerous to growth. I am not surprised with the analysis above, for....can someone name me one, I only ask one, case where a currency would have depreciated without a context of uncertainty and fear? By the same token, can someone name one, just one, country that would have been successfully growing without a strengthening currency (pls. don't save yourselves naming China, because that is not a country, it's a jailhouse and if people had their way, the Yuan would be way higher from where it is now).

Fucking mainstream economists. I am sick and tired of their bullshit!

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