Upsides to a tumbling euro? | FT Alphaville

Upsides to a tumbling euro?

The single currency is at its lowest level in 9-years when measured in trade-weighted terms and has fallen 15 per cent since its recent peak in October 2009.

That downward spiral has triggered hopes of a GDP forecast upgrade for the eurozone. To which UBS say, sorry… no, not really (with out emphasis):

At first sight, this should boost output, but the exchange rate response is simply part of the bigger, well-known picture of economic stress in the common currency region. Our asset allocation team highlighted this point in their latestpiece, with a compelling chart that shows a tight relationship between the value of the euro and the relative size of the ECB’s balance sheet (Chart 2). The ECB’s balance sheet has expanded much faster than the Fed’s, and this is simply because the eurozone economy and its banks remain troubled.

Which is to say, the euro’s fall has some advantages and may help the zone rebalance but you are thinking about the ’cause and effect’ thing here the wrong way around and, heck, it’s a bit like spitting into a hurricane right now anyway.

Or as UBS put it:

To summarise, the euro has depreciated in response to broader concerns related to solvency and competitiveness in the single currency region. Although the weaker currency will help the troubled economies rebalance, the weakness is not a trigger for forecast revisions.

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