The euro shot up to its highest level in a month against the dollar last Thursday after the European Central Bank (ECB) provided a lower-than-expected level of monetary stimulus. Speaking at a press conference the next day, ECB President Mario Draghi said further measures would be introduced to boost the Eurozone’s economy if required.
Friday was witness to impressive U.S. payrolls data, with the economy adding more jobs in November than were expected. This paves the way for an interest rate hike, which is nearly certain later this month. However, the euro has held onto its gains, which bodes well for U.S. companies which conduct significant business operations in Euro countries.
ECB Measures Disappoint
Fresh stimulus measures from the ECB disappointed market participants. The ECB extended its asset purchasing program of 60 billion euro a month until Mar 2017 from Sep 2016. However, the ECB didn’t increase the size of the monthly purchases to the extent many investors were looking for.
The ECB also announced that it had trimmed its deposit rate to minus 3% from minus 2%, while keeping the lending rate unchanged at 0.05%. The ECB’s move to lower its negative deposit rate came in at the low end of expectations. Additionally, the ECB intends to buy new securities by using the proceeds of maturing bonds. It also wants to extend its fixed-rate refinancing loan program till the end of 2016.
Euro Surges Despite Draghi’s Comments
Disappointing stimulus measures pushed the euro to a one-month high versus the dollar. The bloc’s single currency touched $1.0981 before declining slightly to $1.0940 late Thursday in New York. This was an unfavorable development for a central bank trying to achieve ultralow inflation.
The euro remained unaffected even though ECB President Mario Draghi once again remarked that the central bank would provide additional stimulus if required. Draghi said there was “no particular limit to how we can deploy any of our tools.” He added: “There is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would.”
Yellen’s Remarks, Positive Jobs Data
Federal Reserve Chairwoman Janet Yellen reiterated the comments she made on Wednesday to Congress last Thursday. Yellen expressed confidence that the U.S. economy will grow modestly over the next year or two. She believes that more jobs will be created and inflation will climb up to the desired target rate of 2%. These factors have reassured her that a rate hike this month is in the cards. Yellen cautioned that the central bank may be forced to tighten its policies “abruptly” provided a rate hike is delayed for too long.
Jobs data released last Friday seems to have provided the Fed with the right conditions for monetary tightening. The U.S. economy created a total of 211,000 jobs in November, beating the consensus estimate of 199,000. November’s job gains pushed average monthly jobs growth to 210,000 so far this year.
Separately, the average hourly earnings gained 2.3% in November from a year earlier. The average hourly earnings are also up 2.6% from January through November, registering its strongest cumulative growth since 2009.
U.S. Stocks to Watch
The euro did fall against the dollar after Draghi’s comments and Friday’s strong jobs data. However, it remained largely steady versus the dollar on Friday. Markets continued to focus on stimulus measures which came in below expectations. Ultimately, the common currency ended with the highest weekly gains since May.
The euro ended Friday at $1.087, representing a 2.6% increase over the week. This was a 0.6% decline over Thursday but still means that it remains at an appreciably higher level. This will reduce the negative effect a strong U.S. dollar has had on corporate earnings for most of the year. Such an impact may also boost the broader markets.
According to data from S&P Dow Jones Indices, the top five companies with the highest revenue exposure to Europe are Coca-Cola Enterprises, Inc. CCE, The Priceline Group Inc. PCLN, Owens-Illinois, Inc. OI, Mondelez International, Inc. MDLZ and McDonald's Corp. MCD. It is likely that they will gain from a favorable euro dollar exchange rate.
In Conclusion
The dollar is expected to gain from the series of rate hikes that the Fed is planning. The central bank has made its intentions amply clear and its “data dependent” decision making will view last Friday’s jobs numbers in a favorable light. However, the immediate market impact of a rate hike is difficult to predict. If investors have not completely priced in a rate increase or its quantum, events could unfold very differently.
Moreover, the euro could continue to hold its ground and decline only marginally in a post Fed tightening scenario. In this event, U.S. companies conducting significant business in Europe will continue to gain. As these crucial announcements unfold, it would be a good idea to keep a close watch on these companies in the days ahead.
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