Boom time for Irish exports - but the only thing we're certain of is more change
Are the good times set to continue? Philip O'Sullivan and Justin Doyle of Investec weigh up the odds
Published 21/06/2015 | 02:30
CSO data show that Irish goods exports to the US and Britain rose 22.4pc and 7.5pc respectively in the first four months of 2015 compared to levels the year earlier, while respondents to Investec's monthly Services PMI reports have repeatedly identified those two markets as key sources of demand for Irish services exports.
This growth has been driven by two key factors - the appreciation of both sterling and the US dollar relative to the euro and also expanding domestic demand in the US and UK. These are good times for Irish companies exporting to those markets. But are the good times set to continue?
The latest estimates suggest that the UK economy grew by 3.1pc in GDP terms last year, an admirable performance that left all other major advanced economies in the shade.
Going into 2015, the key concern was around political risk, with opinion polls pointing to an inconclusive outcome from May's election in the UK. In the event, the surprise overall majority secured by the Tories removed this risk (at least for the time being), prompting a violent move in the currency markets.
Sterling, which had drifted out to nearly £0.75 against the euro ahead of the election, improved to just under £0.71 in the weeks that followed. At the time of writing it is at £0.72, a level that makes Irish exports into our next door neighbour quite attractive (recall that during the crisis years sterling slumped to as much as £0.98 to the euro).
Despite impressive headline growth figures, the UK has been in an extended period of 'lowflation'. The headline CPI was only +0.1pc year on year in May, and it has been stuck below 1.0pc since November.
Muted overall price pressures have encouraged the Bank of England's Monetary Policy Committee to step back from beginning to normalise interest rates.
However, this inaction is unlikely to last, with resurgent wage growth futures markets (and our own expectations) are settling on a likely rate hike in early 2016. As we get closer to that point we would not be surprised to see the pound move to less than 70p to the euro, which would provide a further benefit for Irish exporters.
It's a similar story in the US. The overwhelming sense going into 2015 that the Fed was gearing up to imminently hike rates eased off on the back of disappointing economic data for Q1.
A slightly less hawkish, more vague Federal Open Market Committee announcement last week has markets now pricing in a tentative (data dependent) September rate hike (the first in nine years) which should see the US dollar resume its recent advance against the euro in the coming months.
With this in mind, it's worth noting that it was only 12 short months ago that the oft watched, benchmark EUR/USD and EUR/GBP rates were sitting pretty at a lofty $1.36 and £0.80 respectively.
The sharp and aggressive move in the intervening period has taken even the most seasoned FX participants by surprise.
But should it have? When you consider a rapidly deteriorating inflationary picture in the eurozone and a more bellicose ECB, then add a smidge of divergent monetary policies and a heft of Greek drama into the mix it is perhaps not a huge shock that the aforementioned currency pairs were nearly 25pc and 15pc lower respectively.
The almost vertical drop ceased at $1.05 (12 year lows) and £0.70 (seven year lows) in mid-March - just as the Eurozone was printing its second sub-zero inflation print in as many months.
Another three months later and it seems that the ECB's €1trn QE programme is doing pretty much what it says on the tin, as a slightly re-inflated, more robust economy has dragged the single currency back to around $1.13 and £0.72.
The lower euro exchange rates have unquestioningly been a boon for the European export sector in general, and the Irish export market in particular, with recent record-breaking Irish export data bearing witness to that fact.
ECB president Mario Draghi has consistently said that the ECB will follow through on its 18-month QE commitments until it reaches its inflationary target (close to, but below, 2pc).
As such, in the short/medium term, we feel that the initial 'QEuphoria' has run its course - and from a European perspective, the only major concern is the spectre of a potential Greek euro exit.
At the time of writing, that situation certainly looks ominous, with the Greeks seemingly intent on taking negotiations to the wire, while media speculation surrounding the introduction of Cyprus-style capital controls are intensifying.
With regard to Greece, our core view is that an 11th hour deal will be brokered, involving the usual eurozone 'fix' of kicking the can down the road. After all, a rolling loan gathers no loss and a defusing of tensions will probably lead to a short lived relief rally for the single currency, possibly taking it towards $1.20 and £0.75.
Once that initial euphoria wears off and we settle into the usual illiquid summer FX market, we don't think that it's beyond the realms of possibility that we see the euro trading in wide ranges in the coming weeks - possibly from below $1.10 to above $1.18 and from below £0.70 to over £0.74.
If realised, these large swings should provide opportunities for Irish companies on both sides of the trade spectrum seeking ways to manage their revenue and cost lines, before the market's attention is invariably refocused on the more hawkish rhetoric we expect to hear from the Fed and BoE later this year.
Philip O'Sullivan is chief economist at Investec, and Justin Doyle is a senior treasury dealer at the same firm
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