Going into 2015, the consensus in the currency market was that divergent monetary policies, namely ongoing accommodation from the ECB, with the Fed and BoE preparing to hike rates, would see the single currency continue to cede ground to the dollar and sterling.
Indeed, the euro would go on to fall from its 2014 high of $1.39 to a 12-year low of just under $1.05 in Q1 2015.
There was a similar decline against sterling. In July of this year the euro closed below 70p, for the first time since 2007.
In recent months, the euro has begun to reverse these falls, improving to $1.13 and 73.5p respectively ahead of the October 22 ECB Governing Council meeting.
This reflects the market’s revised assessment that Fed and BoE tightening will come later than had been expected, largely due to the deteriorating global growth outlook, particularly in emerging markets such as China.
In our commentaries on the economy this year, we have repeatedly painted a buoyant picture for Irish exporters, even going so far as to say that “2015 will go down as a vintage year”.
We are still comfortable with this view, the merchandise trade surplus rose 43% year-on-year in the first eight months of 2015, driven by a 19% year-on-year jump in exports and a relatively more pedestrian but still strong 7% year-on-year increase in imports.
With only a few weeks to go before we have to invest in new calendars, it seems fanciful to suggest that anything will derail that growth.
It’s a similar story on the services side, with national accounts data suggesting low double-digit annual growth in services exports in H1, while the export component of the monthly Investec Services PMI suggests that this momentum continued into H2.
While factors linked to the large multinational sector here, such as transfer pricing and contract manufacturing, can distort headline export figures, other data point to strong expansion by indigenous firms.
Monthly industrial production data show that while the five-month streak of double-digit annual growth in the volume of production in the ‘traditional’ (indigenous) sector came to a halt in August, the 4.7% year-on-year growth posted that month was still impressive.
Looking ahead, it is clear that the outlook for 2016 has become more uncertain. To us, it seems that the narrative around economic data releases from the US and UK, key trading partners for Ireland, has shifted from positive to mixed.
Elsewhere, we continue to note lacklustre headlines from emerging markets, with growth in China slowing to a six year low, albeit to a still enviable 6.9% year-on-year in Q3 2015.
This month’s World Economic Outlook report from the IMF revealed cumulative downgrades of 40bps (to 3.1%) and 20bps (to 3.6%) since April for its global growth forecasts for 2015 and 2016 respectively.
Within that, its estimates for the eurozone were unchanged over the period, while the US, UK, and Ireland’s other major non-eurozone trading partners all saw their growth forecasts downgraded. So the upturn in the value of the euro in recent weeks was not a surprise. But has it further to rise?
It is clear that Mr Draghi sees exports as a key contributor to the eurozone’s recovery, so if the euro rises to a level that he views as harmful, we can expect to see plenty of implicit (verbal) and/or explicit (more quantitative easing) interventions to bring down the value of the single currency.
Indeed, a good example of this was the ultra-dovish tone of last week’s ECB meeting, where Mr Draghi signalled that he is reviewing “a whole menu” of monetary stimulus options, prompting an immediate fall in the value of the euro and Eurozone sovereign yields.
So what should Irish exporters do now? While we are mindful of Mr Buffett’s earlier admonition about forecasts, we are not paid to sit on the fence.
Can any other great financier provide us with a much-needed dig out?
Another quote comes to mind, when once asked what the market will do, Mr JP Morgan replied: “It will fluctuate.”
In a nutshell, that’s where our minds are at currently, driven by evolving expectations around the timing and magnitude of Central Bank moves across Ireland’s key trading partners, we expect a volatile few months ahead in the currency markets, with rates oscillating between levels that are beneficial to many Irish firms and those which are harmful.
For that reason, we reiterate our recent advice that the “volatility in the currency market should underline the importance for Irish companies to have appropriate hedging policies in place”.
Philip O’Sullivan is chief economist with Investec Ireland