Falling Euro Set to Boost European Exports

The hits just keep coming for the euro (EUR)… As often as the Beatles put them out from 1963 to 1970, or Elton John put them out in the ’70s…

Well… It’s the same for the euro… Just when it looked as though the euro might survive a day without being taken to the woodshed… The Eurozone officials just couldn’t stand the prosperity! (And I use that word loosely!) German Chancellor Angela Merkel made some proposals to gain control over “destructive” financial markets… Her first move was to place a ban on naked short-selling.

Now… On the outside that sounds like it would help, right? Well… If history proves anything to us – and I truly believe that it does every single day – this would be a bad move. On September 8th 2008, the US banned naked short-selling… Need I tell you how badly stocks performed from that date to March of 2009? I don’t think so… You know, if you were in stocks at that time, about the collateral damage that ban on short-selling did…

The news “rocked” the euro, and European stocks… Then that news was followed up by an announcement by the Bank of Italy, that BANKS WILL NO LONGER NEED TO ACCOUNT FOR CAPITAL LOSSES ON EU GOVERNMENT BONDS… Hmmm… Where have I heard that type of talk before? Oh! That’s right, I’ve heard it right here in this country, when it was announced over a year ago, that banks would no longer have to “mark-to-market” their bond positions.

The euro is back below 1.22 this morning, touching on 4-year lows again… The problem with the Big Dog euro having such a rough row to hoe these days, is that on the crosses, the other currencies get dragged through the mud, whether they are fundamentally sound or not!

As a son of a truck driver, I look at these things and shake my head… The European Central Bank has lost its top of the house credibility in my book. Things are what they are… That’s something my dad used to tell me all the time… And, so it is that I look at all the negativity in the euro right now, and say… It is what it is… And there’s nothing I can do to change that.

But I’m going to go out on a big fat limb here, and tell you that I think that the euro is nearing its low point… The big fat limb tells me that 1.21 might just be the figure… I remember in 2008, when I was out on the road with the FX University people, and there was a guy that kept telling people that the euro was going to collapse… And I would then get up and tell them that was bunk, and that the euro would probably reach a low of 1.25 (it had fallen from 1.60 to 1.35 at that point)… And, by golly, that’s about the level that the euro turned around…

So, once again, here I am… The water is rising with people saying the euro is going to collapse again… And just like a springtime flood, the waters will eventually return to the banks.

The good thing about the euro’s weakness that nobody’s talking about, except me, (I mentioned it last week) is that as an exporting machine like the Eurozone, a weaker currency is like manna from heaven for the exporters. I saw a report that said the weaker euro would allow manufacturers to recover and add 1% to GDP this year… Germany’s economy is 50% larger than all the so-called peripheral countries (PIIGS or GIIPS if you want to be kind to pigs) combined, and it’s witnessing a strong manufacturing rebound…

As I said though, the bad thing is that it doesn’t just affect one currency, the euro in this case. Take fundamentally sound countries like Norway, Canada, and Australia… They have seen far too much damage to their currencies as a result of the euro bashing. I’ve got to think that this is just temporary for such fundamentally sound countries, and in a few months, we’ll look back at May’s levels and thank our lucky stars we took advantage of the cheaper buying levels!

OK… Enough on all that!

The other day, a long time reader forwarded me a story about the “Bond Vigilantes”, and how they had forced Greek bond yields so high that Germany had to step in to calm the markets… It was a great story about the “Bond Vigilantes”…

I responded to the long-time reader, and said, “So… I keep wondering to myself… When the bond vigilantes demand a higher yield on Treasuries?”

And then yesterday, another reader forwarded me a story with economist Nouriel Roubini, talking about the Bond Vigilantes… Mr. Roubini said that the Bond Vigilantes would demand higher yields on US Treasuries within 3 years…

I actually believe that it will be in the earlier part of that 3-year period…

Well, Japanese yen (JPY) is the dance partner to the “belle of the ball” US dollar these days… And so it goes… The two most indebted countries in the universe, are considered to be better to own than fundamentally sound countries of Norway, Canada, and Australia… Makes no sense to me, folks…

Of course, as I say that about Australia, they print a bad consumer confidence report that fell by 7% this month… Normally I think these consumer confidence reports are subject to so many things that they are skewered… But the Reserve Bank of Australia (RBA) has mentioned in the past that they follow the confidence reports as it gives them a good idea of what to expect in the business cycle.

In another report from Australia… Wages grew at the fastest pace in the first quarter… Wage inflation is on the rise in Australia, which gives the RBA a nice feather in their caps for raising rates during the quarter!

This doesn’t change a thing that I told you yesterday about when I expect the RBA to come back to the rate hike table… But it sure did smack the Aussie dollar (AUD) right between the eyes last night… OUCH! Now, that’s going to leave a mark! Hey! It’s not a laughing matter, but it certainly is a buying opportunity matter!

Today’s docket has the stupid CPI printing… And the Fed’s FOMC meeting minutes printing this afternoon. The markets will be looking for any change, be it minor or major, in the “extended period” language that follows the timeline for keeping interest rates at near zero… I don’t believe there will be any change in the language.

I say that the CPI is stupid for a number of reasons, folks, and if you’ve been a long time reader you know them all by heart, just like the words to the Beatles song “Michelle”… One of the most glaring things about CPI is how stupid the number looks, and that the government truly believes that we think there’s no inflation. For instance, today’s number is supposed to show inflation is contained, at 2.4%… And the media will point to the X-food and energy number of just 1%… Lies! And more Lies!

Well… I take a deep sigh… Gold is getting sold again this morning, taking another $19 off its price, all the way down to $1,206! This is getting a little out of hand, this selling… But… It is what it is… What will you do about it?

Then there was this… Did you know that it wasn’t just the Eurozone announcing measures to stop “destructive markets”? The US was at it too, but that didn’t get in the way of dollar buying… The Securities and Exchange Commission announced new measures Tuesday to avoid a repeat of the dramatic market swoon earlier this month, saying trading should be halted in any stock if its value dives more than 10% in 5 minutes. The new measures were taken because existing circuit breakers were outdated and didn’t work on May 6, when the Dow Jones Industrial Average fell 1,000 points in minutes.

Good luck with that… I think those new circuit breakers are going to get tested quite often very soon…

To recap… The euro got deep-sixed yesterday by German Chancellor Angela Merkel when she announced a ban on naked short-selling… The weak euro is dragging fundamentally sound currencies from Norway, Canada and Australia, down too… The weak euro is helping manufacturing in Germany and the exporters of the Eurozone, and could add as much as 1% to GDP. And Chuck goes out on a big fat limb with a thought on the low point on the euro…

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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