ECB May Weaken The Euro Soon: Watch HICP

Includes: DRR, ERO, EUFX, EUO, FXE
by: Larry Trefz

New numbers show that the Eurozone's economic situation is worsening more rapidly than expected. As we are aware, 2012 was a bad year in the eurozone, but the end of the year showed a steepening decline. Overall GDP fell 0.5% for the year.

A major contributing factor to this deterioration has been the relative strengthening of the Euro currency over the last few months. Two of the biggest reasons for the Euro's fairly rapid appreciation are the aggressive actions taken by the Federal Reserve and the push by Japan's new leader to dramatically weaken the Yen.

The Euro has gained about 12% against the US Dollar since July 2012.

The bigger currency story is that the Euro has gained about 35% against the Yen over that same six month period. The Group of Twenty Finance Ministers and Central Bank Governors (or G-20) met this weekend and agreed not to seek a competitive edge in the process of weakening currencies. However, there was no criticism of Japan's new push to aggressively weaken the Yen.

Less noticed, but not helping the Eurozone's currency condition, is the British Pound. It has weakened about 10% against the Euro since July 2012.

The European Central Bank (ECB) has a specific mandate of price stability. "Price stability is defined as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%."

The Harmonized Index of Consumer Prices (HICP) is currently at 2% and has been trending downward for over a year.

The peripheral countries in Europe continue to experience extreme hardship. In the fourth quarter of 2012, Spain hit a new high unemployment rate of 26%. Unfortunately, it is not news that the peripheral countries also continue to have contracting GDP numbers.

What may force the ECB's hand to weaken the Euro is the fact the countries at the center are starting to be negatively affected. Germany's GDP declined 0.6% in the fourth quarter of 2012, from the third quarter of 2012. This follows three consecutive quarters of growth. Similarly, France's GDP declined 0.3%, following three quarters of growth.

Addressing lawmakers in Brussels on Monday, ECB President Mario Draghi said, "We will have to assess in the coming projections whether the exchange rate has had an impact on our inflationary profile, because it's always through price stability that we address issues like that."

The case is becoming more urgent for weakening the Euro as the controlling center countries are starting to experience contractions. An opportunity to short the Euro currency may present itself soon. Watching the Harmonized Index of Consumer Prices (HICP) could be key to an understanding of impending ECB action. (Link to the HICP release schedule.) Should the trends continue and inflation drop below 2%, the ECB will have a much clearer path toward more monetary easing, according to its mandate.

Some of the ETF/ETN products that can be used to play the Euro currency are:

(NYSEARCA:FXE), (NYSEARCA:ERO), (NYSEARCA:DRR), (NYSEARCA:EUO), (NYSEARCA:EUFX). Please keep in mind that levered ETF/ETNs are very risky and are meant for very short term trading.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.