Euro: Rock Star of the Year?

By: Axel Merk | Tue, Feb 5, 2013
Print Email

After we referred to "Draghi's Genius" last August we received pity and ridicule as feedback. It is no longer taboo to be bullish on the euro, but in our 2013 outlook we took it a step further, predicting the euro will be a "rock star." Despite the recent run-up, we may not have seen anything yet. Let me explain.

Euro Rock Star?

First, for some background, we were positive on the euro in 2010, when the currency was tumbling towards 1.18, arguing that the issues in the Eurozone were rather serious, but should primarily be expressed in the spreads in the bond markets. The euro, we argued, was sold as a proxy as it was easier to short than peripheral Eurozone bonds. Sure enough, the euro recovered to the high 1.40s while spreads were blowing out.

We then turned gradually negative in the fall of 2011, noting that the processes to adjust the crisis were increasingly dysfunctional. If you don't know what direction management is taking a business in, investors stay away from buying shares in the company as they cannot price the risks. Similarly, a bad process is better than no process when it comes to dealing with the challenges in the Eurozone crisis. In the spring of 2012, European Central Bank (ECB) President Draghi implored policy makers to define roles, set deadlines, hold people accountable; in good political fashion, nothing happened. Then Draghi gave his we will "do whatever it takes and, believe me, it will be enough" speech. What got us positive on the euro, though, was Draghi's announcement that the ECB would buy peripheral Eurozone bonds should such countries a) ask for help; and b) other countries agree to help. The move was ingenious for a number of reasons, including:

This does not mean everything is well in the Eurozone. The lack of further progress is mostly due to some slacking off as bond market pressure has abated in the periphery. A scandal alleging that Spanish Prime Minister Rajoy has taken bribes is a symptom of how fragile peripheral Eurozone countries continue to be. Few tears should be shed if Rajoy loses his job over the issue, as we believe he squandered the opportunity to engage in real reform with the absolute majority he has enjoyed. Similarly, Italy's next government is likely to be weak as populist politicians continue to be on the rise. As a result, the tone at the beginning of this week is a more somber one after euphoria of late. We call it profit taking. Clearly, the ascent of the euro won't be a straight line.

So what may drive the euro higher from here?

What are the risks?

What about the political risk, such as that German, Spanish or Italian elections go "the wrong way?" Clearly, we have to evaluate information as it becomes available, but the above list explains why we believe the euro is cursed to move higher. Cursed because what's good for the euro is not necessarily good for exports from the Eurozone. How high can the euro go? That depends on how low the dollar, sterling and yen might fall. We have long argued that there was never really a Eurozone crisis; there has been and continues to be a global crisis. It focused on the Eurozone first; we believe Japan may be next, then the U.K., then the U.S. Keep in mind, though, that the U.S. has a current account deficit; as such, the dollar may be far more vulnerable to a misbehaving bond market than the Eurozone has ever been (the Eurozone current account is roughly in balance).

 


To learn more about where we think the Euro may be heading, and how we identify currencies as investment opportunities, please join us in our webinar on Thursday, February 21, 2013. Please also sign up for our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies.

 


 

Axel Merk

Author: Axel Merk

Axel Merk
President and CIO of Merk Investments, Manager of the Merk Funds,
www.merkfunds.com

Axel Merk

Axel Merk wrote the book on Sustainable Wealth; peek inside or order your copy today.

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Merk Investments LLC makes no representation regarding the advisability of investing in the products herein. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice and is not intended as an endorsement of any specific investment. The information contained herein is general in nature and is provided solely for educational and informational purposes. The information provided does not constitute legal, financial or tax advice. You should obtain advice specific to your circumstances from your own legal, financial and tax advisors. As with any investment, past performance is no guarantee of future performance.

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/