Euro Rallies on Aid Package Announcement

Front and center this morning, we’re seeing some really big moves by the currencies, up and down… The euro (EUR) has gapped all the way to 1.3094, and then gapped back down to just over 1.30… But still, doesn’t that 1.30 look much better compared to last week, when we actually saw a 1.25 handle briefly? So… What put the tiger in the euro’s tank this morning?

The European Union agreed to a €720 billion bailout plan in an effort to stanch a burgeoning sovereign-debt crisis that began in Greece but now threatens the stability of financial markets worldwide.

The money would be available to rescue Eurozone economies that get into financial troubles, the diplomats said. The plan would consist of €440 billion of loans from Eurozone governments, €60 billion from an EU emergency fund, and €220 billion from the International Monetary Fund.

Now… That’s a LARGE bailout! I don’t know if you noticed or not, so I’ll make a point of the number and who it came from… €220 billion from the International Monetary Fund. That’s the IMF, folks… Do you know who funds the majority of the IMF? Yes… That’s the US. And what do I always tell you, besides be yourself? That would be the simple notion that the government doesn’t have money, unless they take if from us… So, in the end, who helped provide the parachute for the Eurozone countries that couldn’t help themselves and allowed debt to kill the Goose that laid the Golden Egg? That’s right, you, me, and all the other taxpayers…

That sure was nice of the government to allow that to happen and not tell us, or better yet… Ask us if that’s how we want to spend our taxes! Of course, that’s laughable, because they’ve never asked us… Did they ask us to bail out AIG, GM, Chrysler, Fannie & Freddie, among others? NO!

So… In the end… We just racked up another HUGE number to add to our national debt…

Speaking of which, I was talking to my oldest son, Andrew, this weekend. Andrew is a high school teacher (water polo and swimming coach too), and a couple of years ago, I gave him the DVD I.O.U.S.A. He now has a section of his curriculum each year on the US debt… I give him HUGE kudos for doing this… Sure, most of those teenagers probably don’t have any idea what this is all about, but Andrew tells me that there are some kids that get very upset, and mad about what all this debt will do to their futures… Hey! You gotta start sometime!

OK… Back to the European Union’s announcement… The EU has gone beyond what anyone thought they would do, with regards to the size of the parachute… The European Central Bank (ECB) also got into the act by announcing that they would intervene in public and private bond markets to ensure depth and liquidity in those markets, which are dysfunctional, and will be determined by the Governing Council.

Hmmm… I’m torn between two lovers on this, folks… On one hand, The EU and ECB have held off the wolves, with this aid package, and brought about some calm to the markets… On the other hand, it’s just not what I believe should be done… You know me, debt is debt, and although the EU was in a much better position to go into debt, it doesn’t make it completely right… And I do know that this is an aid package for “states”, not private corporations… There is a HUGE difference….

The move by the euro to higher ground, was emulated by the Scandis, (Norway, Sweden and Denmark) with all outperforming the euro… And the Canadian dollar/loonie (CAD) really received a boost, moving almost 2-cents higher this morning… Of course, with the volatility I’m seeing, and the gapping up and down, who knows where this all settles. It could be higher versus the dollar, it could be lower…

Last Monday, I said we would have to wait-n-see what the NY boys and girls thought of the then-proposed 110 billion euro package… You may recall they didn’t like it one iota, and took the euro and all other currencies (save yen (JPY), renminbi (CNY), and francs (CHF)) to the woodshed for the remainder of the week… Friday, we did see some healing, as there were rumors circulating that an aid package would be announced this weekend.

So… I’ve just seen the euro slip back below 1.30, but like I said, we’ll have to see what the NY boys and girls think of this aid package to get a final reading on the direction… And HEY! What’s not to like, given the calm the markets have come to this morning? And… Could you imagine the profit-taking, after a gap up to 1.3094?

Will this package allow the euro to eventually move back to its lofty levels of 1.40 and 1.50? I don’t think so… Will this package put a floor under the euro? I think so… But more importantly, and I mean to stress this point… Whether the euro gains or not versus the dollar is not the main concern… For the most part, the commodity currencies are where most of the action is these days… Come on… Let me take to where the action is! I can hear Paul Revere and the Raiders singing that!

Yes… You know me… I’ve long said that I prefer currencies from countries that 1. Have a surplus or are working toward a surplus, and 2. Have “something” that the world wants, and 3. Have a central bank that provides price stability.

Many years ago, I put together what then was considered the “Prudent Central Bank CD” that consisted of Aussie (AUD), kiwi (NZD), euro, and sterling (GBP)… Well… As time went on, sterling no longer was eligible, due to the quantitative easing the Bank of England implemented… And now the ECB is moving away from proving price stability… I’ve got to hope that they don’t abandon it altogether.

At least the Reserve Banks of Australia and New Zealand still have their eyes on the road and their hands upon the wheel.

The cartel… I mean the Fed Reserve… Announced that they were going to establish temporary US dollar liquidity swap facilities with the Bank of England, the ECB, and the Swiss National Bank… These swap facilities are used to improve liquidity, where US dollar funding is necessary.

You may recall that these swap facilities were in place right after the financial meltdown that was ignited by the collapse of Lehman Bros… And if the price action then, has any indication of the price action we can expect this time… It was pro-dollar… However, it remains to be seen just how much liquidity is needed, or if these central banks will even use the swap facilities… Let’s hope that they have no need for them at this time.

Then there was this… Last week, I went all “postal” on the ratings agencies, and wondered why they were being allowed to skip right through the financial meltdown… Well, The Wall Street Journal is reporting this morning that the SEC is “considering” taking action against the Moody’s for misleading regulators… Hmmm… You don’t think the SEC read the Pfennig and then decided to warn Moody’s, do you? Nah… I’m sure I was late to the party on this one… And that the SEC has been all over the rating agencies like a cheap suit, all along!

Speaking of Moody’s… The ratings agency that has tiptoed around the US debt picture for some time now, issued their guidelines for debt so that everyone would have a clear idea as to what Moody’s was looking at when making decisions about ratings.

Well… Under their new transparency… It looks like 2018 is the year that the US loses its AAA rating, for under the Congressional Budget Office forecasts, that would be the year that debt service (interest paid on Treasuries) would reach 18% of Federal Revenue. You may all recall that I told you that the Big Boss, Frank Trotter, usually points out on a slide that the year would be 2017… So… Either year, it’s not a good thing, folks…

But is also a scenario, with higher interest rates, that debt service could reach 22.4% of Federal Revenue by 2013!!

Here’s the point of this story that needs to be emphasized… Because debt levels and interest rates can’t be lowered overnight, the obvious way of staying with the AAA limits would be to raise revenue… What’s the government’s revenue? Taxes…

So… Finally, there’s someone going around screaming at the walls about the debt and what it’s going to do to the tax burdens of our grandchildren… Only now… It could actually begin with us!

I shake my head in disgust, folks…

Oh… Thanks to a reader for sending me that story…

Gold really got smacked with the aid package announcement… Which kind of makes sense, as the “uncertainty” level was certainly knocked down a notch or two… I did say on more than one occasion on Friday, when gold was up $21… That I wondered when the gold price manipulators were going to strike.

To recap… The EU announced an aid package for Eurozone states that surpassed any rumored amount, and included 220 billion euros from the IMF… This news pushed the euro and other currencies higher, and sold off dollars, yen and gold… And, our debt level is getting out of hand, folks, but don’t just take my word for it, Moody’s is projecting 2018 as the year the you-know-what hits the fan! But… It could be sooner than 2018…

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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