ECB Interest Rates, Nothing New, No Problems

By: Axel_Merk

After raising interest rates by 0.25% a month ago, the European Central Bank (ECB) left interest rates unchanged at today's meeting of its Governing Council. The press conference that followed was held in Helsinki; Finland just elected a new government that may block the aid package put together for Portugal. Adjusting to the Nordic spirit of not wasting time with small talk, ECB head Trichet was very much to the point with his answers:

"Nothing New, Nothing Special." Trichet's succinct explanation that no special programs are needed to support Portugal. The ECB is working with an established framework. To this point, Merk Senior Economic Adviser and former St Louis Fed President Bill Poole, recently pointed out, "stressful periods are less stressful if sound institutional arrangements are in place in advance."

"Not a Problem." Trichet's comment on whether the ECB could stomach any losses on its own balance sheet should Greece default on its debt.

"Absolutely Not." Being asked whether ECB policy takes into account the fragility of peripheral countries in setting policy. The ECB focuses on the eurozone as a whole with over 300 million citizens, not on potential issues in any one area.

When asked whether he takes the rising euro into account in setting policy, Trichet agreed it was one of many parameters the ECB looks at. He then went on to read U.S. Treasury Secretary Geithner's and Fed Chairman Ben Bernanke's recent comments in support of a strong dollar policy. Trichet called those comments "important."

Trichet emphasized that all countries must live up to their responsibilities, both weak countries in implementing reform, as well as strong countries in offering support. The press conference was a good example of how to deflect politically sensitive questions; Bernanke may want to watch a replay, given that press conferences may still be a novelty for him.

The euro initiated a sharp selloff as soon as Trichet started speaking, possibly because the ECB did not indicate another interest rate hike was imminent. However, it should be noted that the ECB Governing Council is going to have eight new faces on its 23 member panel in the coming months, with a significant shift towards a more hawkish composition. There will also be a new ECB President later this year, who will have to prove his inflation fighting credentials; a German tabloid recently embraced the most likely candidate, Italian Mario Draghi by depicting him with a Prussian helmet. Combined with inflation indicators that continue to tick up, and it appears that more tightening is, in our assessment, quite likely. For now, however, the market appears to have embraced profit taking with regard to the euro.

To be updated as this discussion evolves, please make sure you sign up to our newsletter. We manage the Merk Absolute Return Currency Fund, the Merk Asian Currency Fund, and the Merk Hard Currency Fund; transparent no-load currency mutual funds that do not typically employ leverage. To learn more about the Funds, please visit www.merkfunds.com.

By Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

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This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

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