Currency Impact Report
Currency Impact Report: July 16-19
July 23, 2012
Page 1 of 2
The euro’s sharp 1.2 percent drop on Friday hurt returns for U.S. investors significantly. And the weakening is likely to continue as officials in Spain and elsewhere in the eurozone look for bailouts to help stabilize their financial systems. Indeed, markets were again in sell-off mode on Monday amid growing views Spain will require a formal bailout.
But, pulling back to take measure of the bigger picture in our “FX Impact” report for the week ended July 20, IndexUniverse ETF Analyst Ugo Egbunike said many currencies around the world have been weakening sharply against the dollar over the past year.
Pointing to loose monetary policies by central banks around the world, Egbunike told IndexUniverse.com Managing Editor Olly Ludwig that the resulting weakening of currencies has become damaging enough to U.S. investors for them to think seriously about getting international equity exposure using currency-hedged ETFs.
Ludwig: When you look at last week, what’s the broadest brushstroke you can cull from these data?
Egbunike: Definitely Europe. We see the hard toll that the euro took on Friday, with a nearly 1.2 percent loss in a single day for the euro against the dollar! And that directly impacts the returns of U.S. investors in Europe.
Ludwig: Do you see that big move as a kind of a final shaking out of the eurozone, or this one more step along the way of the series of half-measures that everyone’s been griping about over the past few years?
Egbunike: This latest bailout of Spain is not the last bailout we’ll see, and I think that’s exactly how the market reacted to it. Bailing out the Spanish banks was simply not doing enough for the Spanish economy, and more than likely that we’ll see government officials come back for more.
Ludwig: …Let alone Italian officials, looking further down the road.
Egbunike: Exactly. We still have a lot more to deal with in Europe.
Ludwig: Apart from Europe, is there anything else that stuck out last week?
Looking at Russia, it’s interesting that there’s a positive currency impact that’s fairly significant. If you look at the local Russian market in the past week, it was only up about 40 basis points, whereas a U.S. investor in Russia actually saw a 2 percent return over the past week. And the key to Russia is that ruble dynamics are really tied to energy dynamics —especially as it relates to Brent crude.
Ludwig: So, Russia’s economy remains very much tied to what’s going on in petroleum markets?
Ludwig: Looking at another currency cross, it looks like the Swiss franc got dragged down last week.
Egbunike: Yes, and kudos to the Swiss, they’re really still doing a great job of pegging the franc to the euro. So we can still expect to see the Swiss franc mimic the positive and the negative returns of the euro, and this week is certainly did that. We saw a positive return in the local Swiss equity market of 1.65 percent, but U.S. investors in Switzerland trailed that by 63 bps, and that's because it is tracing the euro.
Ludwig: Any general observations about the emerging markets?
Egbunike: Pulling back, the larger story to tell is that if you look back at what has been the traditional emerging markets, and especially Brazil—the returns we’re seeing there at least over the past 12 months have really been pulled down by the performance of the currency. Over the past 12 months, Brazilian equities have been relatively flat surprisingly—in the MSCI Brazil Index it’s up about 68 basis points, while the returns that U.S. investors have seen in that same period are -22 percent—and that’s all been tied to the depreciation of the real relative to the dollar.
And that’s despite the fact that we’ve gone through QE1, QE2 and we’re possibly going to go through QE3 and everybody’s saying that Bernanke is printing money.
Essentially we’re in a global currency war at this point. All the central banks are looking for ways to devalue their currencies to stay competitive in this global economy. And we’ve really seen that with the real and the impact of its weakening on U.S. investors.
The dollar has been the risk-off play, and people are still rushing into it, when times get tough, we are still the standard.