Fed Gives Parameters for Additional Stimulus

Good day. Boy, did I ever “hit the wall” yesterday! I got home and collapsed in my recliner, and immediately fell asleep. It had been a whirlwind three weeks, and then I “hit the wall.” It looks as if the risk assets have “hit the wall” too yesterday afternoon, which has carried through to the overnight markets.

Yes, yesterday afternoon, the currencies and metals — and even stocks — began to slip, and that has really gained momentum in the overnight markets. It all began, I do believe, with the Fed’s FOMC meeting minutes. The minutes indicated that the support for additional stimulus has faded (however, you wouldn’t know it by Big Ben Bernanke’s press conference after the meeting), and they laid out the scenario from which they would be steered to additional stimulus. Either of these two scenarios will trigger more stimuli, according to the minutes…

1. If the economic recovery stalls.
2. If inflation remains low in the medium term.

This really allowed the dollar to kick sand in the face of the currencies and metals, and as I said, it has carried over to this morning.

Then to add salt to the euro’s (EUR) wounds from the FOMC minutes. The Spanish bond auction this morning, the first one since their new budget, was not well received. I told you yesterday that everyone is focusing on Spain now, and that was seen in the weak demand for new Spanish debt this morning. Spain sold 2.59 billion euros of bonds, which is far less than what they wanted to sell. The maximum target was 3.5 billion euros of bonds.

Because of the Good Friday week, the European Central Bank (ECB) will move their regular Thursday meeting to this morning. But don’t expect any real news to come from the meeting, as rates will remain unchanged, and ECB President Draghi will hold a press conference afterward.

There’s some troubling news coming from Norway this morning. Norwegian leaders are contemplating the implementation of a “cap” for the krone (NOK) versus the euro, much as the Swiss did back in September last year. The Norwegian government is very frustrated with their inability to get the krone weaker in the cross to the euro. They’ve cut interest rates, they’ve jawboned in an attempt to get the krone weaker versus the euro, but it’s just not happening. And now they are looking at what the Swiss National Bank (SNB) did, and contemplating using that type of line in the sand for the krone/euro.

I say this is troubling because, as we learned with the Swiss franc/euro (CHF) cross, when it got weaker, it carried over to the franc’s value versus the dollar.

So I guess it doesn’t pay to have the best surplus of any AAA-rated nation in the world — no debt, and an economy that will most likely expand 3.25% this year, and a banking sector that’s very strong. You know, people/investors want to own currencies from countries like that, and the countries should welcome currency strength to help fight inflation, which is exactly what the strong krone has done, as Norway’s inflation is less than half of its 2.5% target for inflation!

Wait, Chuck! What the heck are you saying? That we can no longer value currencies as the stock of a country, for that country could simply decide to place a “cap” on how strong the currency can be? I sure hope that’s not what I’m saying! Maybe calmer heads will prevail here and the government leaves the currency alone, except for their rate cuts and jawboning in hopes of keeping the currency from the outer atmosphere.

The “new Swiss franc,” as I’ve called it, and others. The Australian dollar (AUD) has really fallen on difficult times recently. The A$ fell overnight to a level it has not seen since last October, at $1.0257. First, this week, we had the Reserve Bank of Australia (RBA) express a willingness to cut rates going forward, and then, last night, Australia posted an unexpected trade deficit of A$480 million. OK, that seems like chicken feed compared with the size of the trade deficits posted in the U.S., but given Australia’s size, and the fact that the experts forecast a $1.1 billion surplus for February, this caught the markets off guard.

I think that this trade deficit for Australia in February is something that we might see more of in the coming months, given the “moderation” of the Chinese economy.

Speaking of China, the Chinese leaders continue to take steps to open up the Chinese economy, which will lead to a greater distribution of the renminbi. (CNY) Yesterday, Chinese Premier Wen Jiabao said that, as Bloomberg put it, “China needs to break a banking ‘monopoly’ of a few big lenders that make easy profits.” Also that “some successful recent financial reforms in the city of Wenzhou, in Zhejiang province, would be expanded nationwide.”

Then overnight, the Chinese more than doubled the amount foreigners can invest in Chinese stocks, bonds and bank deposits. The amount increased to $80 billion, from $30 billion. And now there are rumors that China may, even as soon as today, lower either its interest rate or reserve requirement.

I told you all last year that China was shifting away from the export-driven economy to a domestic demand-driven economy, and while the change is nascent at best, it is going on. And soon enough, it’s economy will be more diversified. China is already the second-largest economy in the world. Imagine it as a 50% domestic demand-driven economy.

Yesterday in the U.S., the data cupboard yielded February factory orders, which reversed January’s -1.1% decline with a rebound of 1.3%. So for the first two months of the year, factory orders were basically flat. U.S. vehicle sales also printed, and while they are impressive (goes back to that consumer spending I talked about yesterday, eh?), the vehicle sales did not meet the expectations in March…

From here on out to the end of the week, we’ll see employment reports that lead us into the April Jobs Jamboree. For instance, today, we’ll see the ADP Employment Change, and so on…

Then there was this, from The Washington Post:

“The chief of the General Service Administration resigned, two of her top deputies were fired and four managers were placed on leave Monday amid reports of lavish spending at a conference off the Las Vegas strip that featured a clown, a mind reader and a $31,208 reception.

“Administrator Martha N. Johnson, in her resignation letter, acknowledged a ‘significant misstep’ at the agency that manages real estate for the federal government. ‘Taxpayer dollars were squandered,’ she wrote.”

A couple thoughts here: 1) They all promise change, but soon fall into the same spend, spend, spend habit. “At the start of Ms. Johnson’s tenure, in February 2010, she called ethics ‘a big issue for me,’” the Post tells us. And then 2) How can we get this to happen to all the Congressional lawmakers that continue spend what we don’t have?

To recap: It’s definitely a risk-off day, as the risk assets, even including stocks, began to slip yesterday afternoon and carried over the selling in the overnight markets. The selling began when the FOMC meeting minutes printed and were different than what Big Ben had to say a couple of weeks ago about further stimulus. Norway is contemplating using a “cap on the cross to the euro, like the Swiss did. UGH! And the Aussie dollar gets hit again when an unexpected trade deficit printed.

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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