Interest rates are the sun around which all the other capital markets revolve. That’s one of the most important lessons I can share with you.
So it stands to reason that IF you can figure out what’s going to happen with interest rates and monetary policy, you can make a killing in other markets as well.
That brings me to one of my absolute favorite investment moves to make right now — shorting the euro currency.
First, the outlook for European Central Bank (ECB) policy versus U.S. Federal Reserve policy couldn’t be more divergent.The Fed has already slashed its QE program by $10 billion at three consecutive policy meetings. Another $10 billion should come off the $55 billion program at the end of this month, followed by even more cuts later in the year.
|To appease exporters, the ECB is trying to sink its own currency.|
But the ECB is actively discussing launching aggressive QE, cutting interest rates into negative territory, and taking other non-traditional steps to inflate away its problems. At the conclusion of its last policy meeting a few days ago, ECB President Mario Draghi said the central bank is “unanimous in its commitment to also using unconventional instruments.”
He added that “we talked about lower interest rates, a lower deposit facility rate, we talked about QE,” and that “there was an ample and rich discussion.” That signals to me that European interest rates will remain lower for longer than U.S. rates, something that should drive the euro lower.
Second, the ECB is actively trying to tank its own currency. Companies in Europe are bellyaching about the strength of the currency, and how it puts them at a disadvantage when it comes to exporting goods to the rest of the world. So the central bank is shifting into high gear.
Draghi warned two weeks ago that the euro is “an increasingly important factor in our medium-term assessment of price stability.” Then a few days ago, he got even more explicit, warning that “the strengthening of the exchange rate requires further monetary stimulus.”
Third, growth is chugging along nicely in the U.S. We created 192,000 jobs in March after an upwardly revised 197,000 in February, with private sector employment finally eclipsing its pre-recession peak of 116 million.
Initial jobless claims also just plunged to the lowest level since 2007, while retail sales rose a greater-than-expected 1.1 percent in March. That was the biggest rise since September 2012, with general merchandise stores alone racking up the best monthly performance in seven years.
But in Europe, growth remains moribund. Very low inflation also has policymakers increasingly concerned about the risks of deflation in their neck of the woods. That contrasts with some increasing inflation readings for the last month or two here in the U.S., including a hotter-than-expected reading on the March Consumer Price Index. That is yet another reason to expect the euro currency to weaken over time.
Bottom line: Interest rate differentials, monetary policy developments, and economic growth all point to a weaker euro currency. So that’s why I like investments such as the ProShares UltraShort Euro (EUO), and why I believe the interest rate moves we’re seeing now will have wide-ranging ramifications for all kinds of asset classes.
Interested in learning more about how rates help determine currency values? Stock prices? Commodities? Then check out my educational course “How to Profit from Changing Interest Rates.” That’s just one of the many important things you’ll learn, and you can view Module One for free just by clicking here. Or call my staff at 1-800-291-8545 so they can take care of you.
Until next time,