Spain Debt Downgrade: Is This the End of the Euro?

No amount of soothing words from Germany was going to stop the tailspin of the euro (EUR) yesterday, after S&P downgraded Spain’s debt, now… It’s a European debt pandemic according to the people selling the euro like funnel cakes at a State Fair.

The euro states have to feel like they are getting treated like a red headed stepchild by the ratings agencies (OK, it’s just a saying, folks)… The PIIGS (Portugal, Italy, Ireland, Greece and Spain) are falling like dominoes that were all lined up…

Do you remember the last time the euro was going through times like this? It was after the financial meltdown of August 2008, and for the next 6 months, everyone and their brother thought the euro would collapse, and the dollar would once more be king. Well… We all know what happened there…

But how about the time before, in 2005, when the homeland reinvestment act, brought back over $300 billion of profits earned overseas at no tax penalty… The euro fell in value for most of that year, and once again, people said that the euro would collapse…. And that didn’t happen either…

So… What I’m getting at here, folks, is that we’ve seen all this before… Could this be the time that the dollar really takes hold for more than 6-9 months? Or… Will all this pass by like a long summer day, and by the end of the year, everyone jumps back on the euro’s bandwagon? Well… That’s up to you to decide… I can’t do it for you, because if I were to be wrong, you would blame me for your losses… Hey! Don’t laugh, or chuckle, I’ve seen it happen!

I keep getting emails from people that believe that I’m barking up the wrong tree comparing the euro states’ debt problems with the debt problems of US states… Saying, that the US states can’t leave the US. Hmmm… I guess they’ve never heard the folks in Texas talk about such a thing! I Just don’t see that as being a fly in the ointment… The Eurozone states aren’t going anywhere either!

OK… Enough of that… Besides! Risk is back on this morning! Maybe not so much with the offset currency to the dollar, the euro, but with the higher yielding, commodity and emerging markets currencies… What brought this about late yesterday afternoon and then carried into the overnight sessions?

Ahhh grasshopper… Come, sit… Let me tell you a story about a cartel, I’m sorry, I mean a central bank that is doing what they believe to be the right thing to keep their economy from falling off a cliff, but what they are really doing is simply making things worse for the future… By bloating their balance sheet with toxic waste bonds… By pumping the money supply pipeline all day and all night… By keeping interest rates at near zero for far too long… And the list goes on… It’s not a fairy tale, folks… This is a real central bank, and it’s OUR central bank! The Fed!

Yesterday’s 2-day FOMC meeting came to an end, after all the board games of Sorry, Candyland, and the high tech games of Battleship were put away… The Fed Chairman, Big Ben Bernanke then gave the statement, which said… the US economy continues to strengthen, but that the slack left over from the recession is still so large that it expects interest rates to stay near zero for an “extended period.”

Hey! Didn’t I tell you that’s what they were going to say? I don’t know how… But ever since the liquidity crunch of August 2007, I’ve been reading the Fed like a book! I can see their actions coming from a mile away… They are so predictable… And wrong! So, I simply think of what a dolt would do to an economy, and then apply it to the Fed…

One Fed Head, KC’s Hoenig, was the lone dissenter… So kudos to him for finally waking up and smelling the coffee! I’m reminded of a song here… Too much, too little, too late…

So… The commodity and emerging market currencies took this news that the Fed was keeping rates at record lows for an “extended period” and ran with it! Interest rate differentials came back into play, and the rally in these currencies like Aussie dollars (AUD), kiwi (NZD), Canadian dollars (CAD), reals (BRL), pesos (MXN), rands (ZAR), has been quite strong overnight and this morning… Looks like the little dogs are outrunning the Big Dog this morning…

New Zealand dollars/kiwis, have rallied overnight even with the Reserve Bank of New Zealand (RBNZ) keeping interest rates unchanged… The RBNZ made that announcement yesterday afternoon… RBNZ Gov. Bollard, had this to say… “On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection. Annual CPI inflation, which has been close to 2 percent for the past year, is expected to track within the target range over the medium term.

“As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.”

So… To the markets… That was sort of like Tom Burdette, keeping the light on… The markets want to see the RBNZ join Australia with rate hikes, and Bollard was simply keeping those hopes alive with his comments… I still say that I expect the RBNZ to hike rates at their next meeting, and not wait any longer…

And gold… The shiny metal is very close to that level of resistance I told you about yesterday, trading right now about $1,168, and change… Again… Folks… I’ve long called gold the “uncertainty hedge”… And what, with all the debt pandemic taking on Japan, Europe and the US, does that lead to? Uncertainty, that’s what! Faster than a speeding bullet, more powerful than a locomotive, able to leap tall buildings in a single bound… Look! Up in the sky! It’s the Uncertainty Hedge!

Then there was this… From the Bloomie this morning… The Federal Reserve Bank of New York’s hiding of crucial information about the bailout of American International Group for more than a year could end up in criminal prosecution of those involved, said Neil Barofsky, special inspector general for the Troubled Asset Relief Program. “We’re either going to have criminal or civil charges against individuals or we’re going to have a report,” Barofsky said. “This is too important for us not to share our findings.” He declined to say whether his investigation targets US Treasury Secretary Timothy Geithner.

To recap… Spain was added to the list of euro states receiving downgrades, and that added to the euro’s woes yesterday. However, overnight, the commodity and emerging market currencies (higher yielding currencies) have pulled a reversal act, and are rallying into this morning because the Fed announced yesterday that they were keeping rates at historical lows for an “extended period”… Rate differentials are back in play this morning…

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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