With all the European sovereign debt downgrades and the possibility of some countries going under, the euro and its related exchange traded funds (ETFs), have been sinking under the pressure. It may be counterintuitive, but some feel that the time is right to buy the euro.
Maybe not now, but someday soon, there could be a buying opportunity in the euro, opines Matt Hougan for IndexUniverse. Why? [ETFs Lifted on Hopes of an Imminent Greece Bailout.]
All the bugs and kinks in Greek’s financial situation are coming out. In response, the European bailout package has increased from $58 billion over one year to $130 billion-$156 billion over three years. International Monetary Fund Chief Dominique Strauss-Kahn believes it’s “impossible” to know the total amount needed in the bailout package.
Hougan outlines a dismal possibility. The EU could prevent Greece from defaulting on May 19 with a $58 billion package, and Greece would enact more unpopular austerity measures. In a few months, Greece would announce it is in more debt than previously thought, be rejected a second bailout by EU political pressure and finally be forced to more austerity concessions.
Notwithstanding the dreary depiction, the euro may emerge stronger, comments Hougan. The EU economic agreement requires all eurozone countries to maintain low debt loads, and this makes it impossible to inflate away debt by increasing money supply – Greece is stuck with the euro for the time being.
In the future, the ECB will still use inflation as the primary target for its monetary policy, adding stability to its currency, and EU members will crack down earlier on indebted countries. [6 ETFs to Ride the Euro’s Changing Fortunes.]
When will it be time to buy the euro? According to our strategy, when it crosses the 200-day moving average. These days, though, it’s a hefty 6.8% below that point. Watch this one and wait for the trend to appear before determining your next step. [How to Follow Trends.]
- CurrencyShares Euro Trust (NYSEArca: FXE). FXE is highly liquid, which allows investors to trade in and out at 1-penny spreads, and the fund has no credit exposure in the European short-term paper markets.
- WisdomTree Dreyfus Euro (NYSEArca: EU). EU has better tax treatment – investors who hold the fund for more than a year qualify for capital gains tax rates. FXE’s gains, on the other hand, are taxed as ordinary income. EU invests in short-term European government and commercial paper.
For more information on the euro, visit our euro category.
Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.
Max Chen contributed to this article.