Merk called the bottom in the EUR in August after the pledge by Mario Draghi, European Central Bank (ECB) president, to do “whatever it takes” to save the single currency. He says the negative feedback he received after the call confirmed he was neither following the herd nor buying something too expensive.
After profiting from a strong run-up in the single currency last year as eurozone debt tensions eased, Merk believes the EUR has potential to outperform further.
“The euro may be the rock star of 2013,” he says. “Sure, there are plenty of problems, but the euro is morphing into yet another currency, but is still priced as if it had a contagious disease.”
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| Axel Merk, president and chief investment officer of Merk Investments |
According to Merk, while the Federal Reserve, the Bank of England and the Bank of Japan are likely to print money by engaging in further balance-sheet expansion, there is a chance that the ECB balance sheet might shrink. That, he says, is because some eurozone banks have indicated they will pay back early part of the $1 trillion in three-year loans they took from the ECB, as part of its long-term financing operations.
“Some suggest the ECB might print a boatload of money should the outright monetary transaction (OMT) programme be activated to buy the debt of peripheral eurozone countries,” says Merk.
“Keep in mind that the OMT programme would be sterilized, likely by offering interest on deposits at the ECB.”
As such, he believes the OMT would lower government bond spreads in the eurozone and, through that, act as a massive stimulus.
“In our assessment, however, such a stimulus is far less inflationary than central bank action in other regions,” says Merk. “It’s no longer a taboo to be positive on the euro, but most we talk to are at best closet bulls.”