NEW YORK (
) -- The euro decline on Monday morning -- the first euro decline versus the dollar in four sessions -- was a reminder to solar investors that the European currency isn't going to give up its power to dictate trading in the sector. In fact, euro forecasts for 2011 being issued by global banks reflect a less-than-rosy trading range for the euro next year.
In releasing its earnings outlook for 2011 on Monday morning, Chinese solar company
said its earnings per share forecast was predicated on a euro at $1.33.
The euro immediately fell below the level. The euro decline on Monday morning came amid renewed fears about euro zone government debt. International Monetary Fund Chief Dominique Strauss-Kahn is expected to present a report to euro zone economic chiefs this week arguing that the Euro bloc nations need to do more to head off an even worse financial crisis, according to a copy of the IMF report obtained by
. The IMF argues in its report that the euro zone should increase the size of its 750 billion euro, or $995.81 billion, rescue fund and the European Central Bank needs to boost bond buying, according to
Last week, with the euro rebounding to $1.34, Suntech's assumption of a $1.33 rate in 2011 seemed reasonable. There was no doubt about the correlation between a stronger euro and solar stocks, as most of the sector rallied alongside the rebounding euro.
Yet since the June euro swoon caused the solar sector to crash, a false sense of comfort may have been constructed in the sector, since the worst June fears of a euro at parity with the dollar, or at least at $1.20, didn't come to pass.
Solar stocks were not selling off on Monday morning, but many have posted double-digit declines over the past month as the euro outlook deteriorated. In the least, the euro crisis has kept coming back throughout 2010 every time the markets thought it was put to bed as an issue that has the power to rock the markets, and the solar sector in particular. So even if the euro never even came close to parity with the dollar, to say the euro is the currency boy who cried wolf in 2010 would be going too far in the other direction.
The IMF report leaked on Monday may be the latest single-day trigger for renewed euro fears, but the bigger issue for solar companies is the longer-term forecasts that banks are issuing about the euro.
Suntech Power is far from alone having the euro serve as an albatross around its trading neck. Most of the Chinese solar companies, including
Yingli Green Energy
have hit investors in recent quarterly earnings reports with unexpected, or higher than expected foreign exchange charges.
For the solar sector as a whole, a declining feed-in tariff environment and sector oversupply in 2011 would require lower pricing and at the same time, a weaker euro would make it more difficult to stomach lower pricing. Chinese solar companies, in particular -- adding to the solar inventory pile more than any manufacturing locale -- need to be able to lower prices in a declining feed-in tariff environment. However, it's harder to do so when the functional sales currency is also weakening, reducing the leverage that the Chinese solar companies get by having their domestic manufacturing costs in Chinese currency.
More of the Chinese solar input players -- focused on a single point in the supply chain, such as wafers or cells -- are becoming more focused on vertical integration and module sales into Europe, among other regions, in 2011.
are among examples of wafer and cell players with bigger module sales ambitions in 2011.
The link between solar trading and the euro is nothing new. A further weakening in the euro, though, is exactly what many currency forecasters are now predicting.
HSBC's director of currency strategy, Paul Mackel, told
that the euro still has room to weaken.
And remember that just last Tuesday the euro slipped below $1.30.
Bond investing giant Pimco told
last week that the euro will still fall 10% against the dollar in coming months, to the range of $1.10 to $1.20.
Last week, Deutsche Bank lowered its year-end euro forecast by 7 cents, down from $1.45, though that's still relatively healthy, at $1.38, compared to more bearish outlooks.
In fact, a
analysis of what it considers the most accurate currency forecasters also shows a poor outlook for the euro extending well into 2011.
Standard Chartered, ranked by
as the top overall forecaster in the six quarters ended Sept. 30, predicts that the euro may weaken to less than $1.20 by mid-2011, in line with Pimco's expectation.
Bloomberg's second-ranked currency forecaster, Westpac Banking, described its euro outlook as "bearish in the short term." Westpac predicts the euro may weaken to $1.2650-$1.2670 in one month. Longer-term, the Australian bank is bullish on the euro, though, predicting a rise to $1.35 by March and $1.38 by June.
BNP Paribas, the fifth-most accurate forecaster in the Bloomberg rankings thinks the euro will trade at $1.25 by the end of June and $1.20 in the third quarter.
Overall, the Bloomberg currency data doesn't indicate a big swing to a consensus bearish bet on the euro, though, with the median mid-2011 estimate of 41 strategists surveyed by Bloomberg rising to $1.36 from $1.35.
Last month, the euro reached a level just under $1.43, the strongest showing in the currency since the beginning of 2010. Last week's optimism about the euro isn't well-placed, though, at least as far as the short-term outlook goes, given the continuing gyrations in the currency and the euro zone throughout the year.
"We're going to get a continuation of the problems that Ireland, Portugal, Spain and others are suffering," said Callum Henderson, Standard Chartered's global head of foreign-exchange research in Singapore told
These continuing problems could mean more suffering for solar stocks. In the least, sifting through the consensus euro forecasts for 2011 is as important an activity for solar investors as sifting through the solar company earnings reports. The euro forecasting consensus for 2011 makes the Suntech assumption of $1.33 look conservative. That said, the euro outlook from the top currency forecasters make the Suntech outlook look downright rosy by comparison.
-- Written by Eric Rosenbaum from New York.
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