The Pressure is Back on the Euro

Yesterday, while we were honoring the fallen soldiers of today and yesteryear, the Europeans were knocking the stuffing out of the euro (EUR) once again… This time, it was a story that spread like wildfire regarding the Eurozone economy not being able to have strong growth, because of all their austerity measures. Now… Come on boys! First you slam the euro’s fingers in the door (OUCH!) for not cutting deficit spending in a few countries, and when they do show a willingness to cut deficit spending, you pull the ruler out and smack the euro right across the wrist!

This time, though, the euro is heading to 1.21 with a bullet! So… All the euphoria last week that we could return to fundamentally focusing on the deficit spending in the US which is a far greater number than the Eurozone states, looks to be all over… Which also means the other currencies have backed off against the dollar.

The other hangnail for the euro this morning is a story in Der Spiegel that the European Central Bank (ECB) is buying bad debt (bonds) not from Greece, not from Spain, and not from the other GIIPS, but from France! Uh-Oh! And then to add insult to injury… Germany’s Chancellor, Angela Merkel, whom we’ve admired from afar for her staunch support of strong fiscal measures, seems to be losing her political capital…

Yesterday, while the grills were getting hot, and the smell of charcoal filled the neighborhoods, Canada printed their first quarter GDP number… And boy was it something! Canadian GDP rose an annualized 6.1% in the first quarter, following an already robust 4.9% growth in the fourth quarter of 2009! I would say that it’s almost a “done deal” that the Bank of Canada (BOC) will now hike rates at their meeting tomorrow. This would be quite significant, for Canada would be the first G-7 country to raise rates… And it would also be quite significant that the BOC breaks rank with the Fed… Hmmm.

It’s not like the BOC is going to raise rates 2% or anything like it… They will slowly remove their hands from the stimulus lever with a 25 BPS (0.25%) rate hike taking their internal rate to a whopping 0.50%! But… It’s a start, eh? I personally think they should hike rates 50 to 75 BPS… Do it all in one shot! Get it over with, and don’t let inflation get its foot in the door!

Speaking of inflation… I read a very interesting story online last night regarding the Fed and how they view “full employment” which would signal rate hikes… Here’s the skinny…

The Fed thinks that around 5% unemployment is equal to “full employment” (now, ask yourself… Is that an oxymoron? You know, like “jumbo-shrimp” or “rap-music”) OK, back to the story… So, according to researchers, the Fed wouldn’t begin to raise interest rates to fight inflation until unemployment neared “full employment.”

However, a group of economists now believes that because of the financial meltdown the so-called “full-employment” rate has been pushed to between 6.3 and 7.5%… And if the Fed waits until the unemployment rate falls to around 5%, it will be too late, and inflation will have a strong grip on our economy.

Ahem… As I clear my voice so that you are sure to read this clearly (HA!) I will point out that “wage inflation” which is what we’re talking about here, is non-existent right now, and probably for some time… Because even the government with all their “ghost jobs” and hedonic adjustments have unemployment at 9.7%… And if we counted all the beans the way they should be counted it would be much higher… I can always count on John Williams over at Shadow Stats to give them the “real numbers”… And according to John, real unemployment in this country is around 22%!!

And here’s another nail in the US recovery coffin… Economic growth, which we already know as trumped up by government spending, is slowing again… And soon it will be heading toward the double dip that I’ve talked about for six months now…

And a reader just sent me a story that appeared on … It goes like this… “Think Greece and Spain are drowning in debt? Look a little closer to home. Seven US cities recently had their municipal bonds downgraded below investment grade. Their debt is now, junk, considered more worthless than that of the so-called PIIGS.”

For a list of the cities… Read the whole story here.

Let’s move on from this point to other things, eh? Like… The Reserve Bank of Australia (RBA) leaving rates unchanged at their meeting last night. I didn’t expect the RBA to raise rates at this meeting, due to the “events” in Europe since their last rate hike. RBA Governor Stevens said that “monetary policy was appropriate for the near term.”

So… The Aussie dollar (AUD) lost ground after the RBA announcement, and then slipped further when China’s purchasing managers (manufacturing) Index fell to 53.9 from 55.7 in April. Could be a “blip” for China, and one-off month, or could be what a lot of people have been talking about, and that is a collapse of the Chinese economy. I’m still in the camp that it will be the former thought.

OK… So… This morning, to start the month off, the ISM Manufacturing report for May will print, along with April Construction spending… I expect both to be “softer” than previous months, which would play along well with my “double-dip” scenario…

And then there was this… I heard the news today, oh boy… No wait! Actually I heard the news yesterday morning, that there were some tensions being raised in the Middle East (again!)… I immediately went to my computer to check out what gold was doing… The shiny metal did add $7 to its value yesterday, but that’s not what I was looking for… I was looking for an Albert Pujols, Waveland Ave. Moon Shot for gold… But, Hey! A $7 gain is better than nothing!

To recap… The pressure is back on the euro this morning, as it hit a new “cycle” low of 1.2110… The markets are punishing the euro for the austerity measures, that just a couple of weeks ago, the markets had demanded! UGH! There are rumors that France is getting help, and Germany’s Chancellor, Merkel, is losing her political capital. It all adds up to a bad day for the euro. Canada’s GDP was a robust 6.1% in the first quarter, which should lead to a rate hike tomorrow, and the RBA left rates unchanged yesterday.

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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