Globalisation, Technology and the interconnectedness of global markets provide real estate buyers to invest in property globally. The German real estate market is seen as the safe heaven for real estate investors that provide financial stability and predictability.
When you consider buying property in Germany as an overseas buyer you would not only have to know the local market but ultimately manage exchange rates.
So it is of utmost importance to understand how fluctuations in Euro/USD can severely impact your financial results holding German properties in your portfolio.
A strong Euro means a decreasing purchasing power for overseas buyers.
A weak Euro means an increasing purchasing power for overseas buyers.
So the ultimate goal for you would be to enter the German real estate market when the EUR/Dollar is low and exit the German real estate market when the EUR/Dollar is high.
With this blog post I would like to explain which economic factors have an impact on Euro/Dollar fluctuations.
The euro has consolidated its status as the second most important international reserve currency. So reserve currencies play a major role in international trade and financial transactions and determines the currency reserves of central banks.
The question is what drives the EURO/USD and what are the most economic factors to follow.
Monetary policy ECB
“The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.”
The ECB has different methods to maintain price stability. One instrument are the ECB rates. By controlling the ECB rates, the ECB can indirectly control the interest rates of an entire economy. When the economy is in a good shape and inflation is above the inflation target, the ECB will increase interest rates to reduce the money supply and vice versa.
A change in interest rates has also an impact on supply and demand on currencies. For example high interest rates attracts global money to maximise returns. So in case of rising interest rates, global money will allocate more money in Euro which leads ultimately to an appreciation of the Euro against other foreign currency pairs.
But if interest rates are lowered by the ECB, the demand for Euros will go down and the Euro will depreciate against other foreign currency pairs
The three key ECB rates
ECB refinancing rate
Overnight deposit rate
The overnight marginal lending rate
Commodity trading is an important economic activity because 1/3 of global trading is commodity trading. So it is important to understand the pricing dynamics of commodities. And since it has such a big contribution to the overall global economy, commodity prices have a big impact on inflation and Europe in particular.
Now you don’t need to be an expert in the commodity sector. Oil has the biggest CRB index weighting, so it is enough to monitor price movements in oil. Europe is a big importer of oil.
So for you it is important to know and remember that there is a strong correlation between oil prices and inflation in Europe.
Low commodity prices make the import of oil for example cheaper (deflation).
High commodity prices make the import of oil for example more expensive (inflation).
GDP is the abbreviation for Gross Domestic Product and is defined as the total market value of all final goods and services produced within a country in a given period.
If the economy is doing well, households tend to make more money and have more disposable income to invest.
Real Estate tends to do well in a prospering economy and low interest rate environment because of the effects that take place during the cycle.
Now when central banks can’t lower interest rates, they have to try print money. And more money in circulation means a depreciation of the currency.
Thank you for reading this blog post. I hope this short blog post will help you better understand the fluctuations in EUR/USD and if you have any questions or something is not clear just drop me a message.