The end of the holidays has brought with it a greater role in the foreign exchange market. Until it is influencing equities around the world. Because the strength of the euro is being the common denominator in financial markets. Not surprisingly, the currency of the community zone has exceeded the levels of 1,20 dollars for the first time since 2015. With a force that is leading to an adjustment in the prices of the main international currencies and that is influencing that many investors have to adjust their investment portfolios taking advantage of their return from vacation. In what is formed in one of the most relevant news that brought us this August.
Since central banks met in Jackson Hole (United States) the European currency has appreciated by almost 3%. Of course, one of the reasons for highlighting the enormous strength of the single European currency is linked to monetary policy on the part of the European bank of issue. In this sense, the comments of the President of the European Central Bank (ECB) on the good performance of the European economy cannot be forgotten. And that has been interpreted by the financial markets as a warning about the withdrawal of stimuli by the European issuing bank.
In any case, the euro has been climbing upwards since the beginning of this year, especially with respect to the exchange with the North American currency. A fact that is being very followed by the different financial agents. Although they cannot detect what may be the ceiling that the euro can reach in the near future. With a very important resistance at levels of $ 1,35, which would mean a greater appreciation for the end of the year. One thing is very certain and that is that the forex market has returned to prominence. With a notable increase in its volatility, as can be seen these days.
The euro stronger than ever
The maximum price that the euro has reached these days, with respect to the United States currency, has been $ 1,205. A change not seen in the last few months, even the last three years. Which means that the single European currency has appreciated by no less than 15% so far this year. Settling as one of the most profitable financial assets of this year. Even more than the equity markets themselves, whose percentage in favor is 10% on average in the main international markets. Again investors have turned their sights to monetary investment. Although it is those with the most experience who are opening positions after the return from their summer period.
In any case, one thing is very certain for savers and that is that the appreciation trend of the American currency has ended. After having taken this process much longer than estimated. Because in effect, it has been developing it since 2014. With what a new scenario opens for the investment world and very specifically for equity markets. Precisely at a time when no one was counting on them, or at least very few financial analysts. In any case, it is a new situation that small and medium investors will have to live with from now on.
Impact on the stock market
While it is good news for the economy of the old continent, it is not so good for the stock market in general. It reflects a better state of the community business body, but with serious repercussions in other areas of the economy. From this new scenario, it is not good news for the stock market or for investors. In this sense, the strength of the euro has brought widespread falls in all European stock indices. Specific, the Eurostoxx 50 has dropped almost 2% over the last week and it seems that its trend is being bearish. At least in the short term.
With a depreciation in almost all sectors, almost without exception. It is not the time, then, to enter the equity markets, but it is more advisable to wait a few days to see what the evolution of the currency market is from now on. Of course, the downward drip of the stock indices is a reflection of the new reality that has been imposed on the foreign exchange market.
Benefits of a strong euro
However, there are some advantages to a high price of the European common currency. Without going any further, the lower cost of importing products from outside the European Union. For example, in the purchase of oil in financial markets because the price of operations is set in dollars. On the other hand, a boost to the credibility of the European project at a time when there are many doubts about its resolution. In addition, it means that the economy in this geographical area is doing better than those estimated in some short-term reports.
But the interests of the economy do not always coincide with those of the financial markets. Because it is very difficult to please everyone. In addition, the maximum change is not only with the North American currency, but also with respect to the English pound. Not surprisingly, the change with this financial asset is 0,9299 pounds per euro. Levels never seen since the end of 2009. Where the Brexit effects they have a lot to do with these quotes on the forex market. To the point that they can continue to deepen in the coming weeks.
Disadvantages in the appreciation of the euro
A strong euro, on the other hand, has negative effects. One of the most relevant is the one that has to do with the increased cost of exports. To the point that it can cause serious imbalances in the community economy from now on. Also the tensions between the currencies can induce that the cuts in the stock markets of the old continent are more pronounced from now on. With a series of values that can be more sensitive to develop these bearish movements. As for example, the representatives of the important banking sector.
Because it should not be forgotten that if economic stimuli are withdrawn in the euro zone, the large financial groups would be the most affected and above other values. Also the companies with a strong indebtedness that will be more difficult to correct this problem in their income statement. Victims of this scenario and that you must take them into account to prepare the investment portfolio once you have returned from vacation. Likewise, it will be more difficult to operate in the currency markets due to a serious increase in its volatility from the month of September.
How to adjust investments?
One of the strategies that you will have ahead is to guide the state of your savings from now on. It may be the most opportune time to undo positions in European equities and head to other geographical areas that have a greater potential for appreciation in their stock market proposals. Regarding the sectors that of raw materials You can be one of the chosen ones. Very specifically oil, which can give more of a positive surprise as of September. With regard to fixed income, it may be very appropriate to go to peripheral bonds, but only for very short terms. They present a very favorable relationship between profitability and risk for users at this time.
In this sense, importing companies will be one of the safest bets to choose an effective investment portfolio. On the other hand, through the foreign exchange market you could also obtain significant capital gains. But it will require extensive experience in this kind of operation. Because they must be very fast and, if possible, imposed in the same trading session. That is, through the known intraday operations. Not surprisingly, it will be one of the most active financial markets of all. In particular, with all the changes that are linked to the single European currency.
In any case, one thing is clear and that is that the strength of the euro will generate new relationships in the different financial assets. Where it will be necessary to take advantage of this newsworthy fact that has exploded at the end of the holidays. Because this circumstance in the euro should serve in all cases to explore new business opportunities. They will certainly appear and from different fronts in the investment. It only remains to show whether this situation in the euro is temporary or if the opposite will be established for longer than expected by financial analysts. In any case, one of the keys to this scenario will lie in whether the change of 1.25 or 1,30 dollars. So that you can even continue with this escalation in the prices. We will only have to wait a few weeks to see where this financial market can develop.