EURUSD No Concern for European Equities

David Wienke
Sep 15, 2017
2 min read

The stronger EURUSD is no longer weighing on European equity indices. The strong global economic backdrop is outweighing the continued strength in the euro currency according to many analysts. A Goldman Sachs analyst says global growth is close to 5%, WEO estimates are 3.5%. The 8% pullback seen in DAX and Eurostoxx from the June highs came at a time when the euro was gaining some real upside momentum. Although that momentum has stalled a bit, DAX and Eurostoxx indices have risen more than 5% off the recent lows (while EURUSD is only 2% lower).

Percentage gains ytd

Technically the DAX and Eurostoxx futures held some major supports at their 200 day moving averages causing some recent short covering as EURUSD dipped a bit. But, maybe we should not be focusing on EURUSD (more on this below).

The euro is a top performer this year among the G-10 currencies (EURUSD +13.8% on the year) and really gained momentum once above its 200dma in April. It has now retraced nearly 50% of the 2014/2017 decline. With Eurostoxx 600 members getting about half their revenue from exports, further strength in the euro could be a concern. According to Germany’s IFO Institute the business climate in Germany has improved for six straight months from Feb through July, and seems poised to continue. While growth prospects in Europe are being upgraded, domestically focused euro area stocks have mostly under-performed and valuations are cheap relative to the US. This may leave room for more upside in European stocks.

Proactive hedging may be helping to limit losses due to currency impact, but what may be more important in the short run is EURGBP which has fallen more than 5.5% from its recent high on August 29th. This correlates with the recent low and rally in the DAX and Eurostoxx.