#110 Euro Crisis – a Euro Blessing?
About a year ago, it still took about 1.40 US dollars to buy one Euro, and today they’re almost on par. European tourists will find the United States a lot less attractive as a holiday destination, and European companies that have obligations in dollars are seeing their costs explode. What may look like a crisis to some, however, comes as a blessing to others. Products manufactured in Europe all over sudden are a lot more affordable to American buyers. As the Wall Street Journal reports on March 13, exports by most Italian or French luxury good producers to the United States are up. Ironically, some European companies that have been more careful by hedging their orders against long-term currency risks are not seeing such positive effects yet. On the other side of the Atlantic, export companies are hurting from the dollar’s recent surge.
March 17, 2015 @ 7:19 pm
Currency effects are for me a very fascinating detail in international business because they may very well erode margins from the core business on the one hand, or provide an additional lever for earnings on the other hand; if left unhedged. Then again, having hedged exposure as a Euro area exporter may just put you at a disadvantage right now if others in the industry haven’t hedged, though they’d earn bad marks for risk management.
Looking at some specific examples on the overall matter, Bloomberg notes that VeriFone, the US maker of credit card readers, reported that the strong dollar is already hurting earnings and lowered its 2015 forecast. Emerson Electric also doesn’t come across as too thrilled with the strong dollar and contemplates shifting production to eastern Europe or Mexico. Staying in the US, Abercrombie & Fitch reports that the strong dollar did cut 2.7% off its quarterly sales and sees continued negative effects in 2015. Bloomberg also states that the US medical-device sector will be hard pressed. In the Euro area, Siemens sees itself supported by its weak base currency. Already, Deutsche Post actually did benefit with currency translation effects adding millions to sales. Total, Eni and Repsol will also be propelled since they pay salaries and other costs in euro while experiencing USD inflows through oil and gas sales. 
Interestingly, despite these obvious examples, the effects from currency swings on international business are complex and should be evaluated in detail:
For example, the US apparel sector, although largely sourcing abroad, doesn’t really benefit from the dollar strength (which more or less occurs across the board) that much: One reason is that their contracts with suppliers are often denominated in USD. This even translates into a net setback for Ralph Lauren with costs in USD and 20% of its sales in Euro.
Now, what does all that mean for managers in international business? In my opinion, in order to be able to concentrate on the core business, currency effects ought to be tracked vigilantly and protected against as much as possible through contracts with business partners, netting and hedging the remaining exposure.
March 21, 2015 @ 7:03 pm
In my perception the declining Dollar course came on silent feet. Europe is at the moment busy with the financial fiasco of Greece, the ongoing rumor in eastern Ukraine and the currency rates to the Swiss franc. All this is overshadowed by a malicious media campaign regarding Yani Varoufakis (Finance Minister of Greece, 2015), showing him in a video from 2013 where he showed off his middle finger saying the words “… and stick the finger to Germany…..” (Gordon, 2015). In January Europe was shocked by the decision of the Swiss Central Bank to void a three-year-old cap on the Swiss franc, resulting in soaring of the Swiss franc against the Euro (Baghdjian & Koltrowitz, 2015), causing inner-European financial troubles like for people who held foreign currency loans in Swiss francs. How should they hedge?
When looking on the currency exchange rate trend from US Dollar to Euro over the last two years I find my perception acknowledged (European Central Bank, 2015). After having a maximum of 1.3953 USD for one Euro in May 2014 the course deteriorated over the period of a year continuously to 1.0776 USD for one Euro on the 20th March 2015. Companies making international business are aware of this trend. Generally, European countries have a high export rate e.g. Germany is the second largest exporter in the world, with around 30% exports from total economic output (Trading Economics, 2015), which lets them profit from this development. Companies that hedge for currency risk are always aware that it results in some costs. Although if they do everything right, they can compensate for drastic exchange rate changes.
In principal exchange rate changes result from demand and supply, however, in my opinion the influence of central banks and governments (defining the key interest rates) has dramatically increased. That is to say, that at the moment international politics and national policies have the biggest influence on exchange rates. Is it now a crisis or a blessing? For companies in the bigger economies like US, Europe or Asia it´s neither nor, because they can still rely on the national market as a second pillar whether they hedge or not. For companies totally relying on a foreign market it is a real threat.
Baghdjian, A., & Koltrowitz, S. (2015, 01 15). Swiss central bank stuns market with policy U-turn. Retrieved 03 21, 2015, from Reuters: http://www.reuters.com/article/2015/01/15/us-swiss-snb-cap-idUSKBN0KO0XK20150115
European Central Bank. (2015, 03 21). Euro exchange rates USD . Retrieved 03 21, 2015, from European Central Bank: http://www.ecb.europa.eu/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html
Gordon, N. (2015, 03 20). Giving Germany the Middle Finger. Retrieved 03 21, 2015, from The Atlantic: http://www.theatlantic.com/international/archive/2015/03/giving-germany-the-middle-finger/388204/
Trading Economics. (2015). Germany Exports. Retrieved 03 21, 2015, from Trading Economics: http://www.tradingeconomics.com/germany/exports
March 22, 2015 @ 12:19 pm
Working in the Supply Chain currency fluctuations became a more and more important risk management topic over the last years. USD, CHF, INR or JPY currency fluctuations over the last years had a huge impact on the balance sheets of many multinational companies. Where do I buy and sell or where do I produce in the future? For global companies a sophisticated currency hedging is crucial in order to have any chance to minimize risks for the corporate budgets. According to Wall Street Journal Currency-hedged ETFs (Exchange-traded funds) have more than doubled their assets this year to $50.3 billion, largely thanks to strong inflows of $21.6 billion. 
The EUR weakness especially over the last year created a huge chance for export oriented countries and their industries. Especially Germany but also Austria benefit a lot by the fact that buyers get more for their USD. International European companies do benefit from their USD incomes when they convert it in EUR.  Generally I would say is that international companies have a bigger risk diversification if they have incomes in different currencies. At the end it is not about earning money by currency fluctuations it is about minimize the risk of negative effects. 
Talking about the corporate readiness of a company which is planning to go global the financial resources are one of the most important facts to look at. Where are the target markets and how is the currency doing? That are very important facts especially in industries with low margins and high quantities. A potential currency risk can turn a profit very fast into a loss.
March 24, 2015 @ 10:16 pm
Well, to be precise today 1 EUR costs 1,0920 US dollar at finanzen.net. In the last decades the United States were very interesting place for private people and also for companies to invest money or buy things. On the one hand side private people loves sightseeing at the USA and bought articles which are more expensive in Europa. On the other hand side for companies it is time to think about alternative buying currencies.
Computer hardware like desktops, notebooks or other mobile devices are mostly produced in different countries. For e.g. this link should illustrates the different locations of hardware suppliers for Apple devices.
For bigger units the buying currency is already the US Dollar. For example a European company wants to by 2000 unites of the same notebook the price to pay is much more than a year before. With the same planned budget you get a smaller unit of these devices. This is a critical situation for the most running projects which have not calculated with such a valuation. Especially at a time when Microsoft will launch their new operation system Windows 10. A lot of companies are waiting for the final launch in the middle or at end of the year.
The export from US to Europa can be high effected and the purchasing power reduced. Maybe in future the paying currency for such devices is changing directly to manufacturing countries. Perhaps we pay the next bigger hardware units in Yen? Is this even possible?
March 26, 2015 @ 4:32 pm
If the Euro crisis is a blessing is questionable. It depends who will leverage the most on a lower €uro. The German economy has picked up swiftly since 2009, driven by a remarkable recovery in its exports while keeping costs especially in labor low which constantly brings unions on strike. In the years from 2000-2009, U.S. exports grew significantly due to several factors incentives most notably a low dollar and various free trading agreements allowing a more freely move of goods. (USTR) A lower dollar makes it easier to export, but also reduces U.S. purchasing power. Countries like Germany, France and of course Austria who rely on exports of high tech machines, foods and luxurious products certainly will benefit from this trend. No wonder that actually German politicians including the chancellor are in favor of further pushing TTIP (Transatlantic Trade and Investment Partnership) to stimulate exports. U.S. consumers are wealthy and interested when looking on the global scale, and Americans are willing to give outsiders a chance. They enjoy trying a new product early and to exercise their right and capability to choose. For companies like Volkswagen and Daimler this will be a good chance to further penetrate the US market. It will however be difficult to answer yet if the EU as whole with all its member states will profit in a similar fashion. It will depend where raw materials are purchased and where manufacturing is done. Also depending if interest rates in the US will go up or not, overseas competition will have more or less margin pressure. For many industry sectors and companies from the US like hotel lodging a lower Euro will certainly attract more travelers and bring more revenue. Overall the buyback of the EZB to stabilize and boost the economy in the EU will require long-term planning as costs for acquisitions and investments outside the EU will become more expensive and one cannot forecast if the potential lower demands and purchasing powers within the EU are not limiting factors long-term. Altogether it is not just one factor like the dollar/Euro parity but also how energy prices and Trade agreements will affect the economy as a whole.
(https://ustr.gov/trade-agreements/free-trade-agreements) access on 24.03.2015
March 26, 2015 @ 5:36 pm
The total world export in average is more than 30% of GDP (1). Further growth of such export numbers are expected in near future. Therefor exchange rates and currency issues are extremely important for all trading economies (2) and companies with international business. “The euro is a blessing for us?”. Yes, from my company´s point of view it is. We produce production lines for automotive components and have an export rate of more than 90% (within EU, NAFTA and ASIA). In the NAFTA region we expect a rate of more than 40% within the next years. With the weak Euro it is much easier for us to compete with US competitors in the NAFTA market! But it is important to think about the development of the currency exchange rates in future. Some of our global OEM automotive customers require payment terms of 1 year and more. The rate between EURO and USD changed from 1.3826 to 1.0927 within one year (3). That variation (>30%) shows how important it is to use hedging instruments for long-term payment terms (time for payment).
A great opportunity to reduce currency risks are financial instruments like plain vanilla bonds. It is a non-exotic option which is charged by a one-time premium fee and reduces risk of currency losses for long-term projects.
(1) Apfelthaler G., BUS 592 International Business, Slides & Lectures
(2) Economics Online, retrieved from http://www.economicsonline.co.uk/Global_economics/Exchange_rates.html
(3) Bloomberg Business, EURO-US DOLLAR Exchange Rate, retrieved from http://www.bloomberg.com/quote/EURUSD:CUR
March 26, 2015 @ 10:14 pm
The current Euro crisis can indeed be seen as a blessing for US consumers or European companies that rely on exports to the United States. In order to minimize foreign exchange risk, hedging is a substantial tool for companies operating internationally. But how efficient is hedging if the long term economic outlook in those markets that suffer from a currency crisis are not optimistic at all. While hedging in the Euro/Dollar example provides a tool to enable long-term planning through risk minimization, is this the same for other current examples where one currency significantly depreciated compared to another.
Let’s have a look at the depreciation of the ruble and how this affected the industry I am working in, the automotive industry. One company that currently suffers from both, the weak Euro as well as the week ruble, is GM with its European operations. GM announced this month that it will shut down its Saint Petersburg plant and scale back the presence of its major European brands, Opel and Chevrolet, by the end of the year and will instead focus on the premium segment with the Cadillac brand and the Corvette, Camaro and Tahoe models which will be imported. Why this drastic measures?
I see two main reasons:
First, the depreciation of the ruble vs. the Euro and the US dollar as well makes car production in Russia very expensive. Compared to some other foreign brands, Opel suffers from a rather low integration into the local market. It has to import more than half of all parts needed to assemble cars in Russia. By contrast, around 75 percent of car parts for Renault-Nissan vehicles sold in Russia come from local suppliers. At the current exchange rate, this is clear competitive advantage for Opel and GM. You could ask the question if they haven’ hedged. Well they certainly have but if the long-term economic outlook is pessimistic about a currency, hedging eventually becomes more difficult as less ruble hedging products are offered on the OTC market and thus hedging becomes more expensive.
Second, In the case of Opel not only the weakness of the ruble but also the appreciation of the US dollar vs. the Euro threatens the business as Opel, being GM’s major European brand with German headquarter and many production facilities within the Euro zone, pays huge amounts of its operations and suppliers in US dollars.
The future will show if this was a rather short term oriented reaction to protect the current business or a wise strategic decision. One thing is clear, if eventually the Russian car market will start booming again, not being part of it can be a huge disadvantage.
What do you think?
http://www.reuters.com/article/2015/03/18/us-opel-gm-russia-idUSKBN0ME1GG20150318GM to shut Russian plant as sales slide
Gerd R. Leser
March 28, 2015 @ 2:14 am
Whether they intend to or not, everyone is directly or indirectly participating in the foreign exchange (FX) markets and is affected by the exchange rates of major world currencies (i.e. EUR-USD, GBP-USD, USD-JPY, etc.) . The conference in Bretton-Woods in 1944 introduced a system of fixed currency exchange rates based on a gold deposited US Dollar was introduced. After this gold standard was abolished in the 1971, flexible currency exchange rates were introduced .
Therefore, today’s FX markets are global and totally interconnected: Trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. The US dollar remained the dominant vehicle currency; it was on one side of 87% of all trades in April 2013. The euro was the second most traded currency, but its share fell to 33% in April 2013 from 39% in April 2010 .
The valorisation of currencies is primarily based on :
– Purchasing power
– Interest rates
– Currency politics of central banks
– Macroeconomic data (i.e. foreign trade balance, economic growth)
– Politics in general
– Market psychology and market expectations
According to yesterday’s Close the EUR-USD exchange rate amounts to 1.0889. EUR-USD 52-week range is between 1.0458 to 1.3993.
According to a weekly market report by LGT Capital Partners, the current strength of the USD is a clear sign of a strong and self-supporting US economy. Therefore, the bull market in US stock exchanges will most likely continue, although weakened (in comparison: S&P 500 gained 0.7% YTD whereas the stock markets in France, Germany, Italy and the Netherlands gained 18% and more YTD).
Strong currencies do not result in general in weak stock markets. For instance, the YEN is the second strongest currency YTD (after the USD) and the stock market in Japan is among the most performing stock markets in the world in 2015. During the 1990ies, the strong USD was positive for US stock markets, in the 1980ies the strong YEN was positive for the Japanese stock market and even in the 2000 years, the strong EUR was positive for the development of European stock markets .
According to analyst opinions by UBS, the US is still leading the global recovery and Janet Yellen and her peers are comfortable with the US currency reflecting this lead . Further, Mario Draghi (ECB) just launched ECB’s Quantitative Easing program , also known as “taking out the bazooka” , to stimulate markets and ward off deflation.
The open question is: Cui bono. Who will benefit from this massive QE program? Was it announced at the right time or far too late in comparison to the US Federal Reserve QE program, which was announced in 2008 .
For sure there are more aspects to obey in Europe such as a potential Greek default or a shift from European bond allocations to European equities – the resulting force of these asset allocation shifts is positive for the Dollar and negative for the Euro .
– Companies should monitor their FX exposure as they are participating in the global FX markets – whether they like it or not.
– Companies should develop a hedging strategy in case there is a need to offset risk. Hedging is primarily an “insurance” instrument – this premium paid is the price for security. Therefore, I do not agree with some previous posts that hedging could be interpreted as speculation or as a “loss” in case not needed. With the wisdom of hindsight we all would have known better.
– Private individuals should avoid any foreign currency loans (mostly forbidden in Austria already) as their risk is not one-dimensional but highly unpredictable. Further, they are most of the time not able to monitor the situation on a frequent and accurate basis.
Leser, G., Leser, G., & Habsburg-Lothringen, M. (2013). Finanzinstrumente. Wien: LexisNexis ARD ORAC.
Triennial Central Bank Survey, Foreign exchange turnover in April 2013: preliminary global results, Monetary and Economic Department (September 2013). Bank for International Settlements (BIS). Basel, Switzerland.
LGT Beacon, Weekly Market Outlook (18 March 2015). LGT Capital Partners AG. Pfäffikon, Switzerland.
Currency Markets Report, Chief Investment Office WM (20 March 2015). UBS AG. Zürich, Switzerland.
March 29, 2015 @ 2:18 pm
The blessing works if you have an established market with continuous flow of products. Our company (Kendlbacher Getränkevertriebs GmbH, trades with “Omi’s Apfelstrudel” fruit juice) just tries to enter new markets like the USA and Switzerland. A weak EUR helps to enter the market faster, but does it really help?
The USA works with many middleman in fruit juice trade: the importer, the distributor, the broker, the retailer. And all want two digit margins (where some even get confused with markups…), raising the end customer price from 1.45 EUR way above 3 EUR!
Switzerland is gentler when it comes to unnecessary middlemen, but demands extremely high taxes for products they produce themselves.  Lucky we, apple juice is the most produced fruit juice in Switzerland, and with recent organic demands extremely well protected.  Up to 1.2 EUR per Liter taxes need to be paid, leaving the end Customer again with a price of almost 3 EUR.
So a weak EUR would help us enormously now. We could negotiate with our importers quickly and get reasonable end customer prices.
But what will happen when the EUR regains its strength (and it will , )? The end customer will not forgive a price increase of 30%… And Kenldbacher won’t be able to fight a chain of middle men in the USA to lower their margins, nor the Swiss government on their protectionist taxes…
There’s no free lunch, so be careful if you get money or an opportunity too easy!
Florian A. Dunst
March 31, 2015 @ 8:32 am
When looking at the numbers and comparing export ratios, one can see that for instance Germany exports about as much as the USA (Germany: $1.47 trillion, USA: $1.48 trillion). The total export sum for the EU-27 is around $6.04 trillion.  Therefore a weak Euro can have a very positive impact for European organizations, if they export. However, there are two sides of the coin: Importing (e.g. raw materials for production) will have a negative impact.
I work at Sappi, a global player in the pulp and paper industry, and we have seen the impact of the weaker Euro compared to the Dollar exactly from these two sides: Sourcing and exporting. Variable costs e.g. for pulp are invoiced in Dollar, so this had a negative impact on the European division. However, paper exports from Europe benefited from the strong Dollar. In total, the gains in exports offset the increased costs for pulp. The weaker Euro had also a translation benefit on the Euro denominated debt. For the North American division, the export pricing into European markets was negatively affected. 
But the strong dollar does not only have effects on specific companies or tourists. Especially emerging markets borrowed big amounts in dollars when the US Federal Reserve kept credits flowing. According to Bloomberg, by mid of 2013 more than 4 trillion in dollar-denominated debt was issued to non-bank borrowers in developing countries. With recent currency problems in countries like Brazil, Russia or Ukraine and the decline of the oil prices, the debt for emerging markets has grown much faster than the revenues. Worried investors might pull out their money from emerging markets which would even worsen the situation. 
 Apfelthaler, G. (03 2015). International Business Lecture Material: The World is Flat: World Export Champions
April 2, 2015 @ 9:08 pm
The Euro, celebrating its 16th birthday, is pretty much falling as fast as advanced currencies can. The currency has fallen against the dollar over the past year to its weakest level in almost a decade. Moreover, Mario Draghi, President of the European Central Bank (ECB), has chosen not to intervene. That is because a weak currency could be the region’s best shot at reviving its stagnant economy.
Almost half of Europe’s GDP is achieved with exports (compared with 10-20% in U.S. or Japan).  By making European products more competitive, a cheaper Euro could drive growth and inflation. The ECB’s model suggests that a 5 percent decline in the Euro’s trade-weighted exchange rate would lift the GDP by 0.3 percent and inflation by 0.5 percent. That sounds not much, but it is good news: The ECB expects the Euro region to grow by ~1 percent in 2015, with an inflation rate of only 0.7 percent. 
Furthermore, a cheaper Euro could be a blessing for some of Europe’s largest companies, which depend on exports for much of their sales. E.g. Sanofi, largest drugmaker in France, achieves about 30% of its revenue from the U.S. Same with Renault, who sees the Euro’s drop as good news because it helps exports from France to other markets, or at least prevents imports to Europe. Especially France, number two in the Euro area and struggling hard with the economic crisis, may benefit strongest from a weak Euro as well as most of the large German companies. 
A weak Euro may still not be enough to accelerate growth in the Euro region. Some of the benefits of a cheaper Euro are lost because EU countries conduct much trade with one another: About 45% of Euro-area exports never leave the Euro area. Producers’ lower cost benefits get annulled by the lower purchasing power of the consumers. A slowdown in China & Japan will also limit foreign demand for European products, as will those countries’ efforts to weaken their own currencies. “That’s a problem for the Eurozone, which is desperately trying to improve competitiveness”, says Janet Henry, chief European economist for HSBC. 
April 11, 2015 @ 9:35 am
In Europe half of the countries are suffering because of the euro crises, while for example Germany profits on this crises. Germany´s economy benefits from the crise; the unemployment is down and the exports are booming. The interest rate is decreasing and loans are more cheaper than usually.
But other countries like Italy are facing more criticial conditions, for example the interest rates are increasing and have reached a record since years. Further Italy has problems to pay back high debts. In Austira the unemployment rate reached the highest rate since years. Austria´s exports are decreasing and the economic growth 2014 were near 0 %.
For US now the Euro crises is affordable, because of less costs in exporting goods from europe. But on the other hand tourism in US will decrease because of bad exchange rates.
In fact some countries has definetly benefits from the crisis but when in European Union one country has benefits and the other one´s are suffering in sum the European Union will face more problems from the crisis then benefits. The European Union has to take countermeasures against the crisis and boost growth. The value of the Euro cannot continue to fall. The unemployment rate has to fall again and the European Union has to try to bring growth to the economy.
Apfelthaler, G. (03 2015). International Business Lecture Material
March 26, 2016 @ 12:03 am
Even though the initial blog post was over a year ago, the issue has not changed and the topic is still current. Although German manufacturers are able to export at cheap prices, slowing global demand takes its toll. The U.S. surprised today with high growth numbers for the 4th quarter, 2015 but the report also showed that corporate profits declined most in almost seven years. The U.S. is highly dependent on U.S. household spending and indeed it was the U.S. consumer once again, who supported the economy and balanced the sluggish demand from overseas customers. Falling commodity prices as well as reluctant investments from foreign markets are hurting the economy. Nevertheless, the labor market is in a good shape and interest rates are still at low levels which keeps the U.S. households spending. Falling transportation costs (due to depressed oil prices) are adding to the consumer’s cash pile.
The U.S. economy does not heavily depended on exports. It is the consumer that accounts for around 70% of the U.S. GDP. Hence the exchange rate of EUR/USD is not hurting the U.S. economy as expected. I would suspect that it is not a low EUR but a strong USD that gives companies headache. The DXY (USD Dollar Index) is trading sideways at elevated levels for the last 1,5 years. The USD Index measures the USD relative to the currencies of the US major trade partner (EUR, JPY, GBP, CAD, SEK, CHF). The DXY came from 70 points, five years ago and trades now around the 100 level. This means that the USD has appreciated against the basket currencies 30%. Especially against emerging market currencies has the USD appreciated substantially.
Many U.S. companies have global franchises in the emerging markets (e.g. Coke, Procter, Kimberly). Their international profits are hurt due to emerging market currency devaluations. Oil exporting countries slid into recession on falling oil prices (Venezuela, Brazil, Russia). This will cause further pressure on emerging market economies and US companies’ profits.