World Currencies React to US and Eurozone Debt Problems

Well, one day’s rally doesn’t make a trend, and so it was for the euro (EUR), and the rest of the currencies. Yesterday, we saw the euro trade to 1.4125, but overnight the euro’s rally was undone by the rumors that the Greek government was calling for a snap general election. Of course, if traders would have just looked “under the hood” on this rumor, they would have found it to be completely unfounded. The only way the Greek government is going to call for an election is if they are assured that their platform will pass… And since nothing in Greece is “assured” right now, traders should have seen this for what it was…an unfounded rumor.

But they didn’t… They took the bait hook, line and sinker. And the euro fell to 1.4011, in the overnight markets… The single unit has rallied back after some traders looked “under the hood”, but is still struggling to get past those unfounded rumors.

I was looking over the currencies this morning, and noticed that the Canadian dollar/loonie (CAD), has backed off to March levels of $1.0220… I find this to be strange in that the price of oil remains around $100 (currently at $99.25)… I think what has pushed the loonie lower is the whispering campaign going on about the next interest rate hike… I’ve said that I thought the rate hike would come in July… But the whispering campaign is pushing the next rate hike in Canada to September, with rate hikes following at the final two meetings of the year, pushing the internal rate to 1.75%… This would be far and above what the US dollar has to offer… And unless the ECB gets some religion, their interest rate won’t be 1.75%!

So… That’s why I’m thinking that the loonie is getting to a level that represents a buying opportunity. The data in Canada has been mixed, but…for the most part, has been good with rate hike implications… I don’t like it that the Bank of Canada (BOC) is pushing off their rate hike until September, but, if that means they push hard to the finish line this year, then that’s OK…

Another currency that has seen better times is the Aussie dollar (AUD)… The Aussie dollar has pulled back to levels last seen 6 weeks ago… Here’s what’s happening to the Aussie dollar (in my opinion, that is)… First of all, as I’ve told you all for years now, Australia is the proxy for global growth. When Australia’s economy is hitting on all 8, global growth is either hitting on all 8 too, or is about ready to. Well, the goings on in the Eurozone and US are really putting a damper on global growth prospects… And that’s what I think is dragging the Aussie dollar lower.

I would have to think that these goings on in the Eurozone and US are going to hang around for some time, so… Maybe, just maybe, the Aussie dollar has seen the highs for this year already. But then, you never know, and with an interest rate that’s higher than any other industrialized nation in the world, it should underpin the Aussie dollar… So, no need to panic here…

The Swiss franc (CHF) is taking advantage of the goings on in the Eurozone and US, which makes sense, in a way… It makes sense if you buy into the thought that the Swiss franc is a “safe haven” currency… I’ve said this for years now… The Swiss franc is “perceived to be” a safe haven currency, and we all learned years ago that something is what it is perceived to be… I don’t agree that the franc “should be” a safe haven… But it is, and that’s that!

Speaking of the goings on here in the US… In a recent poll by The Washington Post, nearly half of the respondents said they “are alarmed by the prospect that the US debt could raise above the current debt ceiling of $14.3 trillion.”… OK… I’ve got two things to say when I read that… 1. Apparently they didn’t ask Pfennig readers, and 2. Where have these people been?

In addition… If these people are “alarmed by the prospect that the US debt could raise above $14.3 trillion,” imagine what they’ll be when the baby boomers (like me) really begin to stress out the debt by drawing on entitlements…

And then we’ve also got to deal with the unemployment problem here in the US, which apparently just won’t go away… Now there are reports that the 2012 budgets of US state, county and city governments will eliminate 450,000 jobs. (Most budgets begin July 1st)… That’s another nearly half a million jobs lost that’s coming to a theatre near you! I don’t mean to make light of that, but seriously… Two rounds of QE and we have nothing, absolutely nothing (say it again!) to show for it!

Oh! Forgive me, for I forgot… We do have stronger stock prices… So, you’re rich, right? Please keep an eye on your portfolios, folks… For when the stimulus stops, the trap door will get sprung on stocks… But, I’m not even your last choice for a stock jockey, so take that with however many grains of salt you wish!

And then to finish out – today’s list, that is – the goings on in the US… Reuters reported that bank profits rose substantially in the first quarter and institutions reported their best quarterly results since the second quarter of 2007, the Federal Deposit Insurance Corp. said Tuesday, even as the industry still is experiencing troubles as the number of problem banks in the US continue to rise.

That last sentence was most troubling to me… Good thing EverBank isn’t on that list of banks experiencing troubles…

The data cupboard will yield Durable Goods for April for us today… The forecasts are for a weak number to print… We’ll also see the March Home Price Index, which will also print negative… So, the data in the US continues to be weak, with no reprieve…

The price action in silver and gold yesterday brought back memories of a couple of weeks ago, before the CME decided to raise margin requirements three times in one week… Silver was up over $1 on the day, and gold reached another new record level versus a currency – this time not dollars! Silver is up another 50-cents this morning, so maybe the buyers are dipping their toes back in the water…

And then I just had to comment on this… Every morning when I turn on my Bloomberg screens, there’s a saying of the day… Most days it’s not worth reading, but today caught my eye… For when reading it, I immediately thought of Japan and the US… Japan had implemented QE for years now, with no good results, but the US went ahead and did 2 rounds of it anyway… The saying today is: “learn to see in another’s calamity the ills which you should avoid.” By Publius Syrus…

Pretty apropos, eh?

Then there was this… Did you see the news yesterday that the European Parliament’s Committee on Economic and Monetary Affairs (ECON) announced that they would now allow gold as collateral? WOW!

Talk about “real collateral”! Why not use “real money” as collateral? Why didn’t they think of this before? I mean Greece reportedly has about 111 tons of gold, Portugal has 382 tons, and so on… They could sell the gold and pay down their debts… Or, better yet, hold onto it, and just allocate it as collateral!

Now… Do the Eurozone peripheral countries still have a debt problem? Yes, they do! But do they have a way to deal with it, so that lenders feel like they won’t get left holding worthless paper? Yes they do!

To recap… The one-day rally in the euro and other currencies ended last night, as rumors circulated that the Greek government would call for a snap election. Those rumors were unfounded, and the euro has spent the morning attempting to rally back the lost ground. The Aussie dollar and loonie have seen a lot of selling pressures lately… They both seem to be in search of a bid… The Eurozone and US goings on have really weighed on these two…

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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