In the last article I discussed how it is that relativity comes into place when looking at a currency decline. In the case of the Euro, an investor needs to understand that both the USD and the Euro were decreasing in that time period, meaning that the decline in the value of the Euro actually represents a much greater decline than what was explicitly reported.
That being said though, 2012 has already started off with a bang as markets rally around previously undervalued assets. While the Euro crisis is still dragging on with no sign of resolution, I will propose in this article a couple of reasons why there is still hope for the Euro currency itself.
As mentioned above, the Euro decline is being understated by the fact that it is declining at a rate that is faster than the USD. However, the US is still fighting off its own recession, and will likely see another debt crisis in the near future due to expanding credit card debt. While Europe is seeing a great deal of public debt, the US is plagued by consumer debt. The question is then one of which will prove to be more pervasive.
If the Euro-Zone can manage to float its debt with additional offerings, it will likely begin to decline at a slower pace, while the value of the USD continues to whizz downwards. Alternatively, if the US consumer debt situation escalates to the point at which it is beyond the severity of the Euro Debt Crisis, the rate at which the USD declines will increase past the rate of the Euro’s decline, thus causing the value of the Euro to have effectively increased.
If we look back to essential economics, we can understand that the main reason as to why the Euro is falling comes down to demand. Investors are simply not buying the Euro currency, which suggests that there might be an opportunity to reap some reward if we choose to take on that risk ourselves. However, as investors, we need to think about what purchasing powers are strong enough to also recognize this opportunity and support our position.
While we could spend hours discussing the nuance of Chinese treasury holdings, just take my word for it when I say that China has too much USD, and is frantically trying to spend it on other assets so as to diversify out of it. To date, the Chinese have been rumoured to be buying up hard assets like real-estate and commodities to spend their USD, but they have also been reported to be major supporters of the unworldly gold prices of 2011. While this is all fine and good, one would be hard-pressed not to think that they’d be interested in diversifying their currency holdings into other countries if the opportunity presented itself.
While the Euro is attractively priced, it is still too risky a venture for a government to fully support. However, in the event that the valuation and risk should ever line up against the stars in a way that inspired the Chinese central bank to buy in, which they have expressed an interest in doing in the past, it would be a whole new ball-game for the Euro-Zone, and Euro-Investor.