Euro Returns 5% for Bulls Who Acted as Trichet Defied Breakup
Jean-Claude Trichet, president of the ECB
Hannelore Foerster/Bloomberg
Traders who held off purchasing the common currency on June 18, when Gartman called it “doomed,” missed an 7.2 percent return. Buying on May 6 when European Central Bank President Jean-Claude Trichet said the euro was a “good store of value,” earned 5.23 percent.
Traders who held off purchasing the common currency on June 18, when Gartman called it “doomed,” missed an 7.2 percent return. Buying on May 6 when European Central Bank President Jean-Claude Trichet said the euro was a “good store of value,” earned 5.23 percent. Photographer: Hannelore Foerster/Bloomberg
Aug. 9 (Bloomberg) -- Lauren Rosborough, a senior currency strategist at Westpac Banking Corp., talks about the outlook for the euro versus the dollar. She speaks with Linzie Janis on Bloomberg Television's "Start Up." (Source: Bloomberg)
The euro’s rally from a four-year low in June resulted in losses for followers of bears from Paul Volcker to Dennis Gartman.
Since Volcker, the 82-year-old former Federal Reserve Chairman, said May 13 the euro may face “disintegration,” it’s up 5.99 percent against the dollar. Traders who held off purchasing the common currency on June 18, when Gartman called it “doomed,” missed a 7.3 percent return. Buying on May 6, when European Central Bank President Jean-Claude Trichet said the euro was a “good store of value,” earned 5.28 percent.
While the rebound from $1.1877 on June 7 was sparked by a European Union-led 750 billion-euro ($996 billion) regional aid package and a strengthening German economy, the pessimists such as Jim Rogers say the gains won’t last. They are betting that the currency area will split as austerity measures undertaken by Greece, Spain, Portugal and other nations curb growth and widen the rift with stronger member states.
“The euro has had a spectacular bounce,” said Gartman, 59, editor of the Gartman Letter in Suffolk, Virginia. “Were all of the problems that were attendant and discussed and so obvious in February, March and April of this year, have they been alleviated? Not even slightly. The major trend for the euro is still toward disintegration.”
Brink of Default
Strategists and economists calling for the euro’s demise grew abundant as the currency weakened 15 percent in the first half of 2010, driven lower by a deepening debt crisis that led Greece to the brink of default. Economist Gary Shilling, who predicted the recessions in 1969 and 1991, according to his website, called for parity with the dollar on Feb. 18.
Now, attention has shifted to the U.S., where a government report last week showed companies hired fewer workers in July than economists forecast, adding to evidence the recovery is sputtering. Rogers, who predicted the start of the global commodities rally in 1999, said he bought the euro in June at about $1.20 because sentiment turned too negative, even as he predicted its demise in 10-15 years.
The euro slipped 0.3 percent to 1.3242 at 12:50 p.m. today in London after rising to $1.3308 earlier.
“The recent events have weakened the euro from within by propping up its bankrupt members,” said Rogers, 67, chairman of Rogers Holdings in Singapore and author of “A Bull in China.” “I don’t expect the euro to survive.”
Proving Bears Wrong
The manager of the world’s largest hedge fund focused on currencies says he is still expects Greece to default, followed by Spain.
“As time goes on, we’re going to see the Greek numbers and Spanish numbers look worse than we expected,” John Taylor, who oversees $7.5 billion as chairman of FX Concepts LLC in New York, said last week in a Bloomberg Television interview.
Data from Europe has proved the bears wrong. Trichet said Aug. 5 the euro-area economy is strengthening faster than forecast and that money markets are improving as the region recovers from the sovereign-debt crisis.
“The available data for the third quarter are better than expected,” Trichet said in Frankfurt after ECB policy makers kept their benchmark interest rate at a record low of 1 percent. “The market is functioning a little bit better.”
Growth in Europe’s services and manufacturing industries accelerated in July. A composite index based on a survey of euro-area purchasing managers in both industries rose to 56.7 from 56 in June, Markit Economics said Aug. 4. Germany’s Ifo institute said July 23 its business climate index rose to 106.2, the highest level in three years, as exports jumped.
Relative Yields
Relative yields on Europe’s junk bonds were poised to fall below their U.S. counterparts for the first time since June 2008 amid diminishing concern about the debt crisis, Bank of America Merrill Lynch indexes showed on Aug 5.
The extra yield investors demand to own Spanish 10-year bonds instead of similar-maturity benchmark German debt shrank last week to 153 basis points, or 1.53 percentage points, after climbing to a euro-era high of 221 basis points on June 16. Spain, Portugal, Ireland and Greece successfully auctioned more than 33 billion euros of bonds and bills since the beginning of July, according to data compiled by Bloomberg.
“I was glad to see the euro come back to the $1.20, $1.25, $1.30 range,” Robert Mundell, 77, a Columbia University professor who won the Nobel Prize in 1999 for research that helped lay the foundation for Europe’s single currency, said in a Bloomberg Television interview on July 11 in Siena, Italy. “This is a better range for it because going down to $1.18 is exaggerating the risks to the euro.”
U.S. Doubts
U.S. data reinforced concern the recovery is petering out. Private payrolls that exclude government agencies rose by 71,000 last month, less than the 90,000 predicted in a Bloomberg survey of economists, Labor Department figures in Washington showed on Aug. 6.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six U.S. trading partners including the U.K., Canada and Japan, slid for the ninth consecutive week, the longest stretch since 2004.
Greece should qualify for a 9 billion-euro instalment of emergency loans after showing “great progress” in implementing the cuts it accepted to qualify for the aid, Poul Thomsen, head of the IMF’s mission to Greece, said in Athens on Aug. 5. The nation aims to cut its deficit to 8.1 percent of gross domestic product this year, from 13.6 percent in 2009, and meet the EU’s 3 percent limit by 2014. Portugal said it plans to reach the EU target by 2012, reducing it from 9.4 percent last year.
‘Political Capital’
“The market realized that the politicians in euro-land have invested a lot of political capital towards this euro project,” said Thanos Papasavvas, who helps manage more than $5 billion in currencies at Investec Asset Management Ltd. in London. “They’re going to address the underlying economic issues to ensure its sustainability.”
Papasavvas, who was a euro bear from January until early June, reversed his bet and now owns a greater percentage of the currency than is contained in benchmark indexes, he said.
Analysts predict the euro will decline this year even as they revise their estimates higher. The currency will end 2010 at $1.22, according to the median of 40 forecasts compiled by Bloomberg. It was $1.18 on July 2, the data show.
“Parity is still going to happen,” said Shilling, 73, president of economic research firm A. Gary Shilling & Co. in Springfield, New Jersey. “I don’t think the fundamental differences within the euro-zone have changed. I have a serious question as to whether the euro-zone can continue, at least in its current form.”
Coordinated Planning
Shilling, who was correct in all 13 of his investment guidelines for 2008, said Greece, probably Portugal and possibly Spain will be forced to restructure their sovereign debt.
Since the fiscal crisis began, euro-region officials have been working on proposals to better coordinate budget planning, strengthen penalties for rules violators and put in place a permanent backstop for countries in trouble.
Some euro members are showing signs of weakness as the fiscal cuts sap growth. Spain’s unemployment rate unexpectedly increased to 20.09 percent in the second quarter, the most since 1997, a report showed July 30. Greece’s economy probably shrank 3.4 percent in the three months to June, extending the nation’s recession to six quarters, according to a Bloomberg survey of economists before the report Aug. 12.
The euro is still down 7.38 percent for the year as measured by Bloomberg Correlation-Weighted Indexes, which measure foreign-exchange rates against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other.
Pimco ‘Cautious’
While the euro became a rival to the dollar after its inception in 1999, the debt contagion that began in Greece led Volcker to say May 13 in London that he’s concerned the European area may break up. Volcker wasn’t available to comment.
“The hoped-for outcome on the part of the ECB, or German or French policy makers is countries make their adjustments and the currency union becomes much stronger,” said Andrew Balls, London-based head of European portfolio management at Pacific Investment Management Co., which runs the world’s biggest mutual fund.
“The other end of the distribution, you could have restructuring by one or more countries and you could even have countries leave the euro-zone. The fact that you have such a wide range of possible outcomes makes us cautious.”
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net.
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