Rates to Remain Near Zero

I nailed that FOMC statement yesterday… WOW! You might begin to think that I have some inside info on the Fed Heads the way I’ve been able to basically call every move they’ve made since the beginning of this whole meltdown in August of 2007! But that’s not important here… The important thing is that the Fed said that “economic growth is not enough to hike rates,” and therefore they will keep interest rates at near zero for an “extended period”…

Hmmm… Where have I heard that before? Anyway, I thought that by continuing to use the words “extended period”, that the dollar would get pummeled… And momentarily, it looked as though it might, as the offset currency to the dollar, euro (EUR), raced to trade above 1.49… But a funny thing happened on the way to the forum, and the invisible hand reached down and reversed this move in a NY Minute! The work of the PPT? Probably… The Plunge Protection Team probably stepped in to keep the dollar from a free-fall… That’s my take on it anyway!

With interest rates remaining at near zero levels here in the US, I thought it to be appropriate to pull out this new nickname for Big Ben… “Zimbabwe Ben”… (Thanks Ty!)

The rate hike decision ball gets thrown “across the pond” to the Bank of England (BOE) and the European Central Bank (ECB) this morning for their versions of: Leave rates at present levels, but try to sound upbeat… I think you’ll have the “tale of two central banks” here this morning. While both will keep rates unchanged, I think you’ll see the BOE opt for more bond purchases in an attempt to shore up Britain’s banking system. The ECB will NOT be making any such announcement.

In fact, I believe we’ll hear ECB President, Trichet, announce that the ECB is moving closer to withdrawing stimulus from the economy! So, those of you who have the ability to go long euros versus sterling (GBP), this would seem to me to be the “trade o’ the day”… But what do I know? I’m not a short term “cross trader”!

So… With the FOMC finished and the two European Central Banks on the docket today, somehow the risk aversion has crept back into the markets.

I received an email from a reader the other day, asking me why I prefer Australian dollars (AUD) to New Zealand, as the kiwi (NZD) had outperformed its kissing cousin across the Tasman from 2002 to 2008…. Well… New Zealand enjoyed a wider yield differential than Australia during that time period, as it posted the highest interest rates in the industrialized world… Now that’s saying something right there, and a good reason kiwi outperformed the Aussie dollar…

But times have changed… And a very timely talk by Reserve Bank of New Zealand Governor Bollard yesterday, helps explain why Aussie dollars are now over kiwi… Here’s Governor Bollard…

“Both countries have survived the crisis well, due to a mix of strong institutions and stimulative policies. However, their immediate prospects are different. Australia has avoided negative growth, and its prospects are driven by strong terms of trade, vast mineral deposits, the Chinese market, and rapid population growth.

“New Zealand has had a recession, and the pick-up is slower and more vulnerable – a difference financial markets do not appear to appreciate.

“Australia is a lucky country, but we could be a lucky neighbor.

“Australia is entering a new minerals boom, investing heavily and encouraged by new finds, re-opening markets, bottlenecks and strong prices. Strong investment and export growth would mean big challenges for Australian policy. This all means an economy that looks less like New Zealand.

“However, Australia’s potential raised the prospects for New Zealand’s manufacturers and services, which have a bigger share of exports than the same sectors in Australia.”

OK… So Australia is a “lucky country” but New Zealand could be the “lucky neighbor”… Makes sense to me!

The Brazilian real (BRL) rally took a walk on the wild side yesterday, gaining 2.5% versus the dollar in one day! But that’s relatively tame for some of the wild moves we’ve seen in recent times with the real… As long as you are not watching the currency like a hawk, and sweating out each pip move, this is no biggie… Keep your eyes on the horizon.

I find it somewhat humorous that the Brazilian government officials have tried and tried to throw down roadblocks for the real, and the investors just keep coming in droves… The 2% tax on capital inflows did nothing to slow down the real’s move versus the dollar, except for the day it was announced… After that, it was Wayne and Garth playing street hockey once more… “Game On!”

OK… I had a few callers and emails yesterday telling me that I was wrong about the gold sales to the Reserve Bank of India (RBI), saying that it was done in SDRs… I think the confusion exists in the fact that the gold sale kept getting reported as $6.7 billion worth of gold… But to put these questions to rest… Here is a report from the Economic Times of India (their leading financial newspaper).

The purchase was in SDR 4.8 billion worth.

Today in the US we’ll see the Weekly Initial Jobless Claims data, which will remain above 500,000 per week… And the ICSC Chain Store sales figures, which if consumer spending has gone back to “pre-cash for clunkers” levels, would mean these figures would be soft… But I don’t think this data gets much playing time with traders, so we’ll just carry on.

And then there was this… OK… So… Some people chastised me yesterday for saying that the government can’t prove the 650,000 jobs they claim they “saved”… Well… Here’s a ditty for you! Did you know that the government is claiming that by giving a person that already has a job, a raise, it constitutes as “saving” that job? Want more funny accounting? Stay tuned, same bat time, same bat channel!

To recap… The FOMC left rates unchanged and said they would remain there for an “extended period of time” this sent the dollar to the woodshed, but reversed on a dime… PPT at work? The BOE and ECB meet this morning to discuss monetary policy. Expect the BOE to announce more bond purchases, and expect the ECB to announce a move to withdraw stimulus. We learned that New Zealand is not Australia, but lucky to be Australia’s neighbor! And try as they might to keep the real from gaining versus the dollar, the Brazilian government’s moves have not worked.

By Chuck Butler

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