Profit From Currency Hedged ETFs If The Euro Falls To Parity

The long-awaited milestone – euro parity with the U.S. dollar – seems much real now given the political uncertainty in Europe and the fiscal splurge in the U.S. The slump in euro and the surge in greenback could lead to $1 worth €1, a situation last seen in 2002.

Euro-Dollar Parity in the Cards?

Notably, the dollar surged to the highest level in almost 14 years to 0.96 against the euro while euro tumbled to 1.0353 against the greenback.

The trend is likely to continue given that the U.S. economy has gathered momentum with increasing inflation and the longest streak of overall job growth since the financial crisis.
President-elect Trump is acting as a trump card for the currency as he promised to accelerate economic growth, spend big time on infrastructure, reduce regulations and slash taxes to create an inflationary environment.

This has raised the prospect of further interest rate hikes next year with the Fed now eyeing three lift-offs compared to two previously. In particular, a rise in interest rates will pull in more capital into the U.S. and lead to further appreciation of the greenback. On the other hand, a terrorist attack in Germany and loose monetary policies by the European Central Bank (ECB) are resulting in lower euro. The political drama resulting from the wave of high-stake elections in several Eurozone countries next year will further weigh on the euro (read: Fed Hike Looks Likely, Time for High Dividend Europe ETFs?).  

Given the current trends, the euro will soon reach parity with dollar. According to the head economist of Oxford Economics Adam Slater, the parity could be reached by the end of the next year while many other economists think the key milestone will be hit even sooner. Analysts at Goldman project the parity of the two currencies by the fourth quarter of 2017.

Solid European Fundamentals

On the other side, weak euro is making the European products cheaper for Americans. As such, a slumping euro is actually benefiting exporters and the manufacturing industry, resulting in soaring stock prices. Further, the European economy is on a solid footing as growth in the Eurozone has picked up momentum with an increase in inflation.

Earlier this month, the ECB extended its bond-buying program by nine months until the end of 2017 but reduced the amount to €60 billion from €80 billion starting in April 2017. The bank kept its interest rates at record lows for an extended period to support the economy and boost inflation. This underscores the growing confidence in the European economy (see: all European ETFs here).

In the latest development, Italy has stepped up its efforts to stabilize the struggling banking sector as it is preparing for a potential €20 billion rescue package for the country's ailing banking system. The move has infused optimism into the European outlook pushing the stocks higher.

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Disclosure: None.

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Nick De Peyster, CFA 4 years ago Contributor's comment

And if the Eurozone breaks up such that Lira, Francs, Pesetas, etc. come back, then what?

Nick de Peyster

http://undervaluedstocks.info/