Eurozone Confidence Rises

Front and center this morning, I have to tell you that we’ve had a HUGE currency rally overnight, and the rally still has legs through the European session, for I saw the euro (EUR) inch higher as I booted up my computer! What’s got the currencies, led by the Big Dog euro, so wound up this morning? Ahhh grasshopper… Come, sit, and let me tell you the story of an ancient warrior, no wait, let me tell you about the rally!

First things first… We’ve got a huge shift going on right here in front of our eyes, folks… The momentum has shifted toward selling dollars, based on the fears that the US nascent recovery is failing… Of course, you, being a well-informed Pfennig reader, already knew that… And when I told you a couple of months ago that the euro’s bottom would be around 1.20 (it was actually 1.1877 on June 6th), you were all over that like a cheap suit, and now that everyone else is joining our bandwagon, you are smiling like a Cheshire Cat!

Then there were two pieces of data in the Eurozone that really got things going for the Big Dog euro… First report was that Eurozone confidence in the economic outlook rose to the highest level in more than two years this month… And the second report showed that German unemployment fell to its lowest level since November of 2008. (Remember November 2008? It appeared the sky was about to fall, with credit default swaps imploding, and Lehman Bros. no more, etc., etc.)

Drum roll please… The euro is trading around 1.3085 this morning… But it’s not just a euro story… We have the other “little dogs” joining the Big Dog in getting off the porch and chasing the dollar down the street. For instance, the Aussie dollar (AUD) recovered from the blow of a soft CPI print and went right back over 90-cents. And the Canadian dollar/loonie (CAD) is back above 97-cents this morning… So, the rot on the US economy’s vine is being exposed for what it is, and suddenly Europe’s problems don’t look so bad any longer…

And gold? Well, even with the recent trading theme of selling gold when the euro rallies, is on hold this morning, with gold rising a bit…

Yesterday, I talked to you about how gold had been whacked by over $20 on Tuesday. Yesterday, I did some additional research and saw this piece on Ed Steer’s newsletter about gold and silver… Here’s Ed…

“Yesterday was options expiry in the over-the-counter market… and today is options expiry in the Comex futures market.  So what are the odds that yesterday’s take-down was engineered for the benefit of the bullion banks so that another big whack of call options would expire out-of-the-money?  No odds at all dear reader, as what you saw yesterday was pure collusion on the part of the bullion banks… with the CFTC and your gold and silver companies looking the other way.”

Now… I’ve told you for quite a few years that I believed that gold and silver prices were manipulated by the Big Boys. The list of people who believe that is growing by large numbers every day, but yet the CFTC (regulatory body) drags its feet… It disgusts me to no end…

While I’m disgusted, I might as well talk about our deficit. In our monthly newsletter to clients called The Review & Focus, I call our deficit “An Inconvenient Debt.”

Well, there’s no lack of people screaming from the rooftops about our debt these days, but I doubt there are more than a handful that have been screaming as long as I have… But yesterday it was the Congressional Budget Office (CBO) with this little ditty…

“Further increases in federal debt relative to the nation’s output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades.

Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels.”

And to add to that… Bill Gross of PIMCO fame has this to say about the deficit, “Deficit spending by governments that seek to maintain artificial levels of consumption can be compared to flushing money down an economic toilet.”

Let’s go back to the euro for a minute… You know what? The last time the euro was above 1.3050 was the morning that we found out that there would be a 1 trillion euro Eurozone bailout… The date? May 10th…

The euphoria of that morning didn’t last long, and soon the euro was losing ground again, every time a ratings agency announced a downgrade or there was insurrection in the Eurozone streets… Just two weeks ago, the euro was 1.2585… As I said a week or so ago, the rise has been quite quick and strong… That scares me a bit, as the markets always seem to get ahead of themselves too quickly, but with the momentum shift in focus going to the US these days, maybe the rise is warranted.

I’m one who believes that a euro above 1.30 doesn’t do the Eurozone economy much good at this time… When the economy is roaring, sure a stronger euro helps fight inflation, but when the Eurozone economy needs exports to feed its economy, a stronger than 1.30 euro doesn’t help…

I told quite a few people in Vancouver last week that I truly believed that until fundamentals creep back into the markets, I saw the euro range trading… Above 1.30 is outside the “range”… So, watch for that today…

Let’s talk about something else… How about the Reserve Bank of New Zealand (RBNZ)? The RBNZ did, as we expected, raise rates 25 BPS last night, and it also did what I expected it to do, which was to talk dovish in their statement, thus watering down the affect the rate hike would have on kiwi (NZD). Without the RBNZ turning yellow-belly, I suspect kiwi would be trading above 73-cents… So, thanks RBNZ… NOT!

And remember yesterday, and plenty of times in the past, when I told you that the RBNZ doesn’t do kiwi any favors, attempting to talk down the currency every change it gets… Well, here’s the RBNZ Governor Bollard who said, “The New Zealand dollar has appreciated in recent weeks. This appreciation is inconsistent with the softening in New Zealand’s economic outlook and moderation in our export commodity prices.”

Shame on you, Mr. Bollard… If you don’t like your currency, it will come back to haunt you one day, when you’ll be begging for foreigners to buy the currency… And I hope they shove that statement and the others that you’ve made about kiwi in your face!

Tomorrow, besides being a Friday, the Friday before my summer vacation begins, and a payday Friday, will also be a big day for economics here in the US, as the first print of second quarter GDP will probably show that the US economy grew at a pace that’s not going to help the unemployment problem for sure… The forecast is for a 2.5% growth rate… My suspicion is that it would be between 2 and 2.5%, so, a little weaker than forecast. You can attribute that to me not wearing a rose-colored moniker!

But, before we go there tomorrow, we have to deal with the usual fare on a Tub Thumpin’ Thursday, and that is the weekly initial jobless claims, which continue to add over 400,000 newly unemployed each week… Last week it was 464,000, and this week is expected to be 460,000… OUCH! And the continuing claims, something that I keep an eye one but don’t always talk about are a very awful looking 4,500,000… UGH!

Then there was this… The US Office of the Comptroller of the Currency is billing an “investor round table” on mark-to-market accounting rules as a chance for investors and regulators to share their views. As it turns out, the only investors allowed to participate make up a small group invited by the government. Others won’t even be allowed to listen in, according to The Wall Street Journal.

Yeah… Chuck here… I bet you can figure out who that “small group” is, right? Let’s see… Goldman Sachs, Citigroup, JP Morgan, (remember Goldman became a “bank” during the stimulus handouts)… Like these guys have any idea what it’s like to be a “community bank” or even a small “regional bank”…

That’s like lawmakers creating financial regulation. They aren’t in the trenches, and anything they write won’t take long before those who are in the trenches find loopholes. That would be just a plain, outright silly thing for lawmakers to do, right? Oh Wait! They already did that!

To recap… The currencies are in the middle of a strong rally led by the Big Dog euro, who saw Eurozone confidence rise and unemployment in Germany fall this month. There seems to be a huge shift in what investors are focusing on, shifting from Europe to the US, and that’s not good for dollars. The RBNZ did raise rates 25 BPS, and also talked down the currency, and Aussie dollars bounced back above 90-cents after falling to 8910-cents the day before due to a soft print of inflation.

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.

Visit: EverBank

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