There is an interesting story this morning on Bloomberg about the travails of European automakers and the strong euro. According to Bloomberg, the already troubled French automaker Peugeot will take a €1.1 bn non-cash charge due to adverse currency fluctuations in Russia and Latin America. In Italy, the country’s biggest automaker Fiat has cut its year-end profit target by  13% to take into account currency movements.

Quote Bloomberg

The euro has strengthened 19 percent against the real, 36 percent against the peso and 13 percent against the ruble in the past 12 months. Peugeot isn’t alone in suffering from the euro’s strength, which hurts the value of vehicles sold outside the region.

Italy’s Fiat SpA (F) cut its 2013 profit target by as much as 13 percent to take into account the impact of fluctuations in the Brazilian real and other currencies. German carmakers are better hedged after setting up factories in the U.S. in the 1990s after currency swings hit finances.  Peugeot, which plans to step up efforts to offset exchange-rate fluctuations, reiterated today a target to reduce cash burn by at least half to about 1.5 billion euros this year and break even in 2014.

Nothing comes for free and with the eurozone periphery deflating its way to a currency account surplus the aggregate external balance of the euro area has increased to its highest level ever at more than 2% of GDP. Coupled with tighter liquidity (less euros sloshing around), improved sentiment and repatriation ahead of AQR* the EUR has seen strong support this year.

We have been more bullish on the EUR this year than the consensus who has stuck with the weak euro meme even as it has pushing higher. Things are obviously going to become slightly more difficult. With the EUR up strongly against especially EM currencies, profitability of European exporters is hurt. That means lower earnings and lower growth.

As such, it does not really matter if the current level is the top for the EUR (1.38 looks like strong resistance), the damage from a stronger euro will continue to weigh on export sensitive sectors in coming quarters.

Europe is coming to resemble Japan and as we have seen in Japan it takes a central bank who is willing to target the currency in order to push it lower. The ECB has already lowered interest rates in response to deflation and we will likely see more accomodative initiatives from the ECB which could come to weigh on the EUR next year.

* Many banks in the eurozone are preparing for the AQR (which will be based on year-end balance sheets) by selling off (distressed) assets. Given the global hunger for yield demand for such assets (and thus EUR) has been strong which has been a big driver of the euro this year.