US outperforms EU in absolute terms when $ rises against €
Updated
Thesis: US markets outperform EU markets in absolute terms when $ rises against €.
EWG/SPY (Germany ETF/SPY both in $) vs EURUSD (red line)
I've read many opinions on what happens to US stocks (versus EU stocks) when the dollar rises. Usually people say a strong dollar is bad for US exporters as their revenues will fall and labour costs will rise. Similarly they say a weak euro is good for EU exporters as their foreign revenues rise and labour costs fall. And comparisons are often made between national indexes, which take no account of currency, and are thus pointless IMHO.
So this chart shows that the common sense view is completely wrong. It compares EWG (Germany ETF in US$) divided by SPY - which I'm using as a proxy for EU outperformance over US - and EURUSD. As you can see, they are very strongly correlated.
In other words when the $ started strengthening in 2008, the US indices started outperforming the EU indices. And in the previous cycle, when the dollar started weakening around 2002, and the euro strengthened, the EWG outperformed the SPY. And in the cycle before that, which ended around 2001/2003, € weakness again correlated very well with EWG weakness.
EWG/SPY (Germany ETF/SPY both in $) vs EURUSD (red line)
I've read many opinions on what happens to US stocks (versus EU stocks) when the dollar rises. Usually people say a strong dollar is bad for US exporters as their revenues will fall and labour costs will rise. Similarly they say a weak euro is good for EU exporters as their foreign revenues rise and labour costs fall. And comparisons are often made between national indexes, which take no account of currency, and are thus pointless IMHO.
So this chart shows that the common sense view is completely wrong. It compares EWG (Germany ETF in US$) divided by SPY - which I'm using as a proxy for EU outperformance over US - and EURUSD. As you can see, they are very strongly correlated.
In other words when the $ started strengthening in 2008, the US indices started outperforming the EU indices. And in the previous cycle, when the dollar started weakening around 2002, and the euro strengthened, the EWG outperformed the SPY. And in the cycle before that, which ended around 2001/2003, € weakness again correlated very well with EWG weakness.
Note
Over the last year (2017) the EUR has finally rebounded against the USD, allowing the chart thesis to be properly tested. And indeed we have a seen a corresponding uptick in EWG vs USD. The thesis holds!
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