A Ray of Sunshine for Europe in 2013

EUR/USD 2013

EUR/USD 2013

After another year of crisis management in Europe for 2012, 2013 was the year where we finally saw more capital flows into the shared currency thanks to a stabilization in economic data, and an improving outlook from the ECB.

It wasn’t all sunshine and roses though; the year started out rocky as Europe was still in the final stages of ‘crisis’ mode.  Economic data was still weak, (sparking an announcement from the ECB announcing its openness to further easing) and we saw one last dramatic bailout, this time for Cyprus.  The battle for the Italian prime minister spot in February, which was hotter than a cat fight between Mariah Carey and Nicki Minaj, also shook up confidence in the euro.

In the spring, after all that drama–and a reassurance that the Cyprus situation will not happen anywhere else–the ECB started to change their tune on the economy.  In the summer, economic data finally started to turn higher (e.g., Flash GDP improved from -0.6% in Feb. to 0.3% in Aug.), and in August, Europe officially declared it was out of its recession!

But despite that awesome news, the growth was not even throughout the eurozone, so the ECB remained cautious through out Q3 and Q4 by expressing a tone of staying open to all options to help the economy (e.g., rate cut, LTRO, new banking unions, etc.) with their forward guidance rhetoric.  Also, falling inflation was a concern, which eventually lead the ECB to cut the key refinancing rate to a record low of 0.25% in November.

Again, it was another turn for the better for Europe (and maybe weak sentiment in some of the other major currencies), more euro bulls came out from their hibernation this year.  It wasn’t a rocket ride higher, but as we can see in the chart below, the euro looks like it’s going to end 2013 higher against its major trading counterparts.

Euro 2013 Overview

Euro 2013 Overview

As we close out 2013, economic data continues to be mixed and uneven in Europe, which means the ECB (and the markets players) will remain cautious for 2014, but his doesn’t mean the euro currency can’t have another positive year like in 2013.  Despite a rate cut and mixed fundies in 2013, the improving conditions of Europe makes European assets–and therefore the euro–an attractive place to invest with a lot of room to run.

What do you think?