At several points in the last two weeks, you’ve probably read something like this from Reuters:
“The euro fell below $1.36 and is set to remain under pressure in the near term as investors focused on fiscal troubles in Ireland and Portugal and await meetings of European finance ministers on Tuesday and Wednesday,” said Greg Farinella, managing director and head of Treasury and trading at Espirito Santo Investment S.A. in New York.
“The issues in Europe have been very focal the last couple of days and that’s lending itself to euro weakness.”
It’s popular to claim that the euro is getting hit by the PIIGS, but there’s just no evidence for this.
Sure, the currency is down sharply against the dollar (4.4%) since peaking at $1.42 on November 4 but if this were really a euro problem, you’d expect it to have fallen similarly against the yen, it hasn’t. Instead it’s only down 1.6% in the same time frame. As we noted earlier, this isn’t about Ireland or Portugal, this is about higher yields in the US, and a firming dollar.
OK, you say, but the euro is still down 1.6% against the yen, so isn’t THAT due to sovereign debt woes? It’s possible, but even then we’ve had evidence lately of a firming Japanese economy (see: last night’s GDP) and a weakening European economy.
As Haver Analytics recently pointed out, German factory orders are starting to tank:
This month we saw the bottom suddenly fall out of German orders with especially weak results visited on German export orders. While the German trade picture seems to have held up in September Germany’s industrial output is dropping off with weakness in its most important sectors. Still, through the third quarter output seems to holding up as we can see the total IP index is rising at a 6.5% annual pace in Q3 compared to Q4. That is more than just ‘respectable.’ But that is slower than its six-month pace and slower than its 12-month pace. Moreover, if we calculate a simple three-month growth rate, (instead of a quarterly rate based quarterly averages of output) the pace of IP expansion slows to 3.9%. IP has dropped by 0.8% in September to damp that result. That will send the output numbers for Q4 off on a very weak footing.
So, add it all together: the economic weakness, the failure to fall much against the yen, and it’s hard to find any evidence that the PIIGS crisis is yet hurting the euro.