The Euro Collapse that Won’t Happen

What a strange pattern we seem to be in the past few days of trading… It used to be the overnight markets would run the currencies up versus the dollar, and the US session would knock them back down… That’s reversed these days. Yes, the overnight markets have been pushing the currencies down, and the US session has been picking them up…

Yesterday, I finished the Pfennig with the euro (EUR) trading down 2-cents… But then along came the consumer confidence report in the US, which along with the PPT (in my opinion) reversed the over 200-point loss in stocks… And with risk assets getting bought again, the currencies rallied alongside.

This morning, the euro is off by about 1/2-cent from yesterday afternoon’s level… Italy approved $30 billion worth of budget cuts. I have to say that given the arrows it had shot at it, the Eurozone is doing a great job of cutting budget deficits… They have lined up, taken their shots, and then gone about doing the right thing. It may take some time for these measures to be seen in the numbers, but, don’t you think that it would be far better to recognize a deficit problem, and then address it with cuts, than to not recognize it, in fact, ignore it, and go about adding to it?

I do, and that’s why I truly believe that those calling for a euro collapse are on the wrong bus… The need to be on the one that takes them to Washington DC!

OK… I’ve had quite a few readers ask me why I haven’t been talking about the Swiss franc (CHF) lately… Hmmm… Good question… I guess I just get so caught up in what Bloomberg TV calls the “Euro Crisis”… So… With no further delay and excuses… The Swiss franc has really suffered alongside the euro recently. There are rumors almost daily about the Swiss National Bank (SNB) intervening to help make the franc weaker. The SNB is cognizant of the fact that there are a ton of geopolitical problems in the world these days, and that normally means a flight to francs… So, by selling the franc, and weakening it, I think the SNB does a fair job of putting fear in investors that would normally flock to francs.

I think the SNB is so wrong here… They are falling into that trap that Japan fell into a decade ago… The Japanese were looking at a semi-strong yen, and a decade of deflation, and thought that if they got their currency weaker, inflation would set in, and they would rid themselves of deflation…

Well… We all see how well that’s worked for the Japanese, eh? So… A memo to the SNB… Don’t go down that road! Deflation is far better than inflation!

I see where Germany auctioned some government bonds this morning, and ran into a buzz saw… The auction was covered, but not by much… Portugal auctioned some government bonds this morning too, and their auction was better covered than the German auction… Of course, Germany’s yields are at least 150 BPS lower than Portugal’s.

And that leads me to this… The US is auctioning another round of Treasuries in the coming week… $42 billion 2-year, $40 billion 5-year, $31 billion 7-year… That’s a total of $113 billion… I know, there will be those that say, “So what? Everyone wants Treasuries these days.” And while that is true, it doesn’t diminish the fact that we as a nation have added another $113 billion to our deficit… And… It doesn’t diminish the fact that the debt service (interest payments) on these bonds will be a HUGE burden of taxpayers.

At the beginning of the year, I wrote an article in my (paid for) newsletter, The Currency Capitalist, and outlined what the markets would look like on a day when a US Treasury auction would fail… I, for one, thought we would see that sometime this year… But, the current debt problems in Europe are taking the heat off of the US and causing another flight to safety, similar to 2008… So… I don’t think we’ll see a Treasury auction problem this year… But, Shoot Rudy, all we have to do is think about next year’s deficit spending and Treasury issuance.

You know… I’ve been a little hard on the Beaver (US Treasury Secretary Geithner) the past few days… But it’s so easy! Anyway… I said yesterday that Geithner needed to go back into the room and remind the Chinese that he wants the renminbi to get stronger versus the dollar, not weaker as it had done the previous night… I guess he got his message across correctly this time, as the renminbi (CNY) gained versus the dollar overnight… I see the Beaver is in the UK now, spreading the gospel…

I’ve been hearing rumors that the Chinese will do a one-time revalue of the renminbi this year… But on the other side I’ve been hearing rumors that the Chinese economy is a house of cards and will overheat this year… So… What’s it gonna be boy? The Chinese wouldn’t or couldn’t allow the renminbi to rise versus the dollar with a one-time revaluation, if their economy is about to go into the dumpster… So.. You have to pick a side to be on, and hope it’s the winning side!

Me? I’m going to be the referee… I’m not going to pick a side, because, I don’t believe in a one-time revaluation, instead thinking that when the time is right, the Chinese will return to allowing a slow, general appreciation of the renminbi versus the dollar.

In the South Pacific, Australia and New Zealand continue to fight for ground that had already been gained. The Aussie dollar (AUD) has bounced over 1-cent from yesterday’s low, while kiwi (NZD) holds steady. Commodities continue to be soft, and when the problems of Europe are added, these two currencies are doing quite well, considering the mounting pressures on them.

I think that the selling in the Aussie dollar is overdone by quite a bit… But, doesn’t that represent an opportunity to buy on the cheap? Folks… These Eurozone budget deficit problems are not on the same level as the financial meltdown of 2008, so there’s no reason to treat the Aussie dollar like it is!

Speaking of commodities… Gold is bucking the price trend of commodities once again this morning adding $9… I think the geopolitical pressures finally set in and gold really had a strong day yesterday, moving back above $1,200… The below $1,200 opportunity to buy gold, came and went very quickly, didn’t it? You know… Back when gold was less than $1,000, I used to say that I believed it was a bargain below $1,000, and that we should look to buy the dips below $1,000 and then when it rose to $1,100, I said that it was a bargain below $1,100, and that we should look to buy the dips below $1,100… I guess what I’m saying is that if we see another drop below $1,200 I’ll be pulling that “dips” line out again.

The data cupboard today has April’s New Home Sales, and April’s Durable Goods Orders… Durable Goods Orders are expected to reverse March’s -1.3% decline, and New Home Sales are expected to be strong… Again, the new home tax rebate ended in April, so these figures will include the rush to get government money in them…

Then there was this… has learned that 32 states have run out funds to make unemployment benefit payments and that the federal government has been supplying these states with funds so that they can make their payments to the unemployed. In some cases, states have borrowed billions. As of May 20, the total balance outstanding by 32 states (and the Virgin Islands) is $37.8 billion.

The state of California has borrowed $6.9 billion. Michigan has borrowed $3.9 billion, Illinois $2.2 billion.

And… Investors “flock to this safe haven”?

To recap… A new trading pattern has developed where the overnight sessions sell off risk, and the US session buys it… Italy has announced $30 billion of budget cuts this morning, as the Eurozone states recognize and address their budget deficit problems, which is far better than what’s going on here! The Swiss National Bank continues their attempt to get the franc weaker to introduce inflation to their economy, and the Aussie dollar looks oversold to me.

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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