ECB Turns Into the Fed

The big news this morning is all about the European Central Bank (ECB) and their LTRO (long-term refinancing operation). I told you the skinny on what was going on yesterday, so I’ll give you the results today. Yesterday, I told you that if the eurozone banks requested around 400 billion euros (EUR) of loans, that would be bullish for the euro. And if they asked for more than 500 billion euros, it would be bearish. Well, they allocated 6.5 billion for three-month loans and 529.5 billion for three-year loans.

And the euro has seen some weakness from the results. Now, some view this as a “good thing,” as they think back to the US a couple of years ago, and banks got to dump toxic waste bonds at the Fed as collateral for loans that shored up the banking industry (or did they?). Those viewing this as a good thing like the fact that the ECB has become the lender of last resort, like the Fed in the US. I always thought more of the ECB.

So there’s enough of the “good thing” investors out there to keep the euro from getting hammered. And in fact, after the initial barrage of selling after the LTRO announcement, the euro held ground and gained a bit back, remaining well bid above 1.34.

I saw a blurb this morning that a chartist at Bank of Tokyo-Mitsubishi UFJ Ltd. Believes that the euro’s five- and 21-day moving averages are pointing up, signaling a bullish trend for the euro, and that if the euro can climb to 1.35 in the near term, it most likely will rise to 1.3722.

OK, that’s chartists’ stuff. You know me, I’m a fundamentals guy, but every now and then, the charts interest me, but let me remind you that the trend is the thing that allows assets to move in a general direction, not charts.

And this reminds me of what I said in the first Pfennig of this year, and that is that I wouldn’t be surprised to see the euro fall to 1.18, nor would I be surprised to see it rise to 1.40 in 2012. Right now, the single unit is defying gravity.

There was a brief period of euro weakness yesterday, when Ireland announced that they would put the European Stability Treaty to a public referendum. I told the boys and girls on the trading desk that this is scary, because historically — when it comes to Irish votes on eurozone stuff — they have voted “no” the first time through. So as I said yesterday, just when I talk glowingly about Ireland, they throw this cat among the pigeons!

As I look at the currency screens that I have at home, I see that the Aussie dollar (AUD) has climbed past $1.08 this morning. That’s been a nice recovery for the A$ this week, after getting sold earlier this week on the leadership vote uncertainty. The thing that really put the wind in the sails of the A$ overnight was the news from China that the People’s Bank of China (PBOC) set the renminbi’s (CNY) reference rate at the strongest level on record!

So the Chinese economy may be moderating, but the PBOC is still comfortable, allowing the renminbi to appreciate. I can hear the echoes in the halls of the PBOC, with members yelling, “Take that, US lawmakers!”

And speaking of a HUGE rally. Yesterday, gold and silver put on a very impressive rally. Recall that yesterday, I highlighted silver and talked about it moving past what some observers thought was resistance at $36. I didn’t think that held much water, and preferred to go with another observer’s call that the “past to least resistance will be higher” (thanks again, Scott!), and right out of the starting blocks, silver started moving higher. First through $36, as if it were nothing, and then to $37! At $37, it saw some profit taking, and it bounced back and forth around the $37 figure the rest of the day.

Gold also saw a flood of buying, and by midmorning, gold had taken out its so-called level of resistance at $1,785. My friends over at The 5 Min. Forecast reported yesterday that their friend at GoldSwitzerland, Egon von Greyerz, said in an interview that, “I think this move will continue, and we should see at least $2,000 by the end of March.”

Let’s move on to something else that’s maybe not so depressing. Something like the results of the latest consumer confidence number for the US. Absolutely embarrassing to my fellow Americans, I must say. Consumer confidence in January didn’t just rise; it soared! And with all this going on. A wise man once told me that consumer confidence is nothing but a gauge on the pulse of the stock market. And with US stocks doing Jedi mind tricks on Americans right now, consumer confidence is strong.

But even that soaring confidence report couldn’t put legs under the dollar. Maybe because at the same time the confidence report was a hootin’ and hollerin’, US durable goods orders were printing, and did they ever disappoint! New orders for durable goods plunged a larger-than-expected 4% in January. I guess new aircraft orders couldn’t help this month. I also read where durable goods haven’t posted a positive number in the first month of any quarter in the past three years! I don’t know where that takes us, but thought it was interesting!

And US homes are still searching for a bottom, folks. The S&P/Case-Shiller home price index for December showed that home prices fell to their lowest level since the housing crisis. So all that hootin’ and hollerin’ about the recovery in home sales isn’t being matched by a rise in home prices. And won’t, not as long as the long list of foreclosures waiting to happen this year remains hanging over home prices like the Sword of Damocles!

We have a plethora of Fed heads speaking today, including Big Ben Bernanke, and then later today the Fed’s Beige Book prints.

The price of oil, although a bit weaker, is still well above $100, and that continues to underpin the petrol currencies. And now even the Canadian dollar/loonie (CAD) is playing catch-up!

I know I kind of went out on a limb yesterday and didn’t put in the disclaimer that I had made back in December when I first made the call that I saw the center holding in the eurozone, and that we would begin to see some stabilization, on a temporary basis. I say that because there’s so much going on that we just don’t know everything that’s going on behind the scenes. For instance, the rumor has it that Germany is conducting meetings on Greece’s exit from the eurozone.

Let me say this… and I’ve said this before: I think it would have been better to have let Greece default a year ago, kick them out of the euro and let them go back to their drachma. They could then devalue the hell out of the currency in order to pay their debts. Yes, Greek bonds are denominated in euros, but a conversion could be worked out, just like it was when they went into the euro.

To me, it’s the slowest buffalo theory. The slowest buffalo gets killed, but its death allows the herd to move faster. Greece leaves the euro, and eventually the euro is allowed to move freely about the country without Greece holding it back. On a sidebar, I’ve often used this theory to describe beer and my brain cells!

So stabilization is happening, but is not the “end-all” for the eurozone, or Greece… or Portugal. But I can tell you this: As long as the US continues to build up their unsustainable debt, there are going to be questions about which currency is uglier. That’s where you make the call.

And my thought yesterday about the number of people that do not use their company’s 401(k) program didn’t mention a portion of those people deciding to not have funds tied up in retirement plans that they feel may one day be confiscated by the government to fund its debts. In those cases, that’s understood, to a degree. But for the millions of others that think that it’s better to have the disposable cash now and not worry about the future, I worry.

To recap: The ECB’s LTRO was larger than I expected and caused some worry for the euro, but that soon changed to a feeling that it’s all good, as the ECB is becoming the Fed. I don’t share that view that it’s good to be like the Fed, but the markets are taking the ball on this. And US data were weak, with durable goods plunging and home prices falling to their lowest levels since the house crisis. Consumer confidence — or should we say the stock market pulse — soared higher!

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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