Overnight Currency Rally Fades

The gyrations and volatility continue in the markets — one day up, the next day down. One day a piece of data matters; the next day it doesn’t. But we carry on in spite of these daily movements back and forth.

For instance, the euro (EUR) is rallying this morning, which gives all the other currencies a chance to spread their wings. Spain was able to auction their target maximum amount of euro bonds this morning, and while the yield rose from the last time 10-year bonds were auctioned, the fact that the whole allotment went off without a hitch is giving the euro some breathing room this morning.

For those of you keeping score at home, in January, Spain issued 10-year government bonds at a yield of 5.403%. This time, they had to sweeten the pie a bit for buyers to take a bite of the debt-ridden nation’s offerings. The current auction saw 10-year yields rise to 5.743%.

France also auctioned some debt issues this morning, and they, too, saw yields rise. As I keep telling you, and anyone in the U.S. government that will listen, this is what will happen to us someday: The markets will demand a higher yield to take on more U.S. debt.

This U.S. debt really gets me riled up, but the thing I keep coming back to is that most Americans have no idea the depth of the debt here in the U.S. I saw a story headline come across the Bloomberg this morning that said, “World’s Richest Worth $1 Trillion.” The story went on to say that the 40 richest individuals on earth are worth $1 trillion.

OK, think about that for a minute. If the 40 richest individuals gave everything they had to the U.S. to pay down the debt, it wouldn’t make a difference, really. In fact, it would take the current Congress about nine months, and they would go right through those riches. Does that help illustrate how bad our debt has gotten?

Or how about this: The total national assets are $83.3 trillion. The total U.S. unfunded liabilities are $118.5 trillion. If each taxpayer were to “ante up” and give the government money to pay off our unfunded liabilities, each taxpayer would have to put up $1,045,026.00. A million dollars! I don’t make these numbers up, folks.

I often give you a link to the U.S. Debt Clock. Here it is for you to look at.

OK, sorry I went off on that tangent with debt. But I’ve been banging this debt drum for over a decade now, and believe me now and hear me later, the debt was nowhere near where it is today.

Back to the currencies. The Bank of Canada (BOC) left rates unchanged the other day, and tried to throw the markets a bone by saying that stimulus could be removed sooner than later. But since then, the BOC has made an upward revision to their forecast for 2012 GDP from 2% to 2.4%. They also said that they believed the Canadian economy would hit its capacity limit in the first half of 2013, with economic growth then moderating the remainder of 2013.

OK, that’s all well and good, but what about now? If the BOC believes that GDP growth is stronger than they previously did, then why aren’t interest rates going higher right here, right now?

I’ve explained this before, but just to review, the BOC can’t wander too far away from the interest rates in the U.S., which we’ve been told by more than a handful of Fed heads that they will remain near zero through 2014. And I totally dislike the saying, “but this time it will be different.” I’ll just say that the BOC is going to have to wander from the U.S. near-zero rates, because inflation is going to be a real problem in Canada if they don’t!

Here I am, sitting here in St. Louis, Mo., and I see rate hikes in Canada. Where are all the “large research departments” with their calls for Canadian rate hikes? OK, Chuck, quit rubbing it in, these rate hikes haven’t happened yet, so you had better be careful calling out the “large research departments.”

I think we’ll see one rate hike of 25 basis points (1/4%) before year-end, bringing the internal rates in Canada to 1.25%. But in the first half of 2013, we could see the BOC really ratchet up the rate hikes. Can you say 2% by the end of 2013? And where will U.S. rates be? Still near zero.

But just keep the legal beagles happy, this is just what I see, it’s my opinion and I could be wrong.

The euro has sold off by one-fourth a cent since I came in, so the gyrations continue.

Over in Japan, I’m still not used to saying this, but Japan posted another trade deficit, although it was weaker than forecast (yen (JPY) 82.6 billion vs. forecast yen 223 billion). But still, no matter the size, it’s strange to report a trade deficit for Japan. The yen traded off, or sold off either one. Pick the one you like, but yen is weaker this morning on the trade deficit news. Apparently, the markets are like me, and seeing the Japanese trade balance in red still shocks them.

In Australia, things are getting pretty hairy regarding the May Reserve Bank of Australia (RBA) meeting. I told you earlier this week that the RBA tied their monetary policy to the outcome of the first-quarter CPI (inflation), which is set to print on April 24. But last night, Prime Minister Julia Gillard argued that the government’s plans to return to a budget surplus this year would give the RBA scope to cut rates.

Two things pop into my head when I read that statement by Gillard. 1) That she must know something about the CPI report next week, so she’s trying to persuade the RBA to look past the CPI report and to the plans for a budget surplus, or 2) She’s trying to apply pressure to the RBA to cut rates.

I have quite a few Aussie readers of the Pfennig, and they send me notes all the time telling me of their dislike for the PM. Hmmm… I now see why! The RBA used to be completely independent, but if they go ahead and cut rates next month, they are going to appear to be under the thumb of the PM.

The Aussie dollar (AUD) is weaker this morning on those comments by Gillard. When will government leaders learn to keep their hands out of the cookie jar? When will they ever learn?

And this just came across the screens. The Brazilian central bank (BCB) cut rates this morning 75 basis points (3/4%). That’s a shocker to me in that while I know that the BCB and the Brazilian government believe they are in a currency war and need to get the real (BRL) weaker, I really didn’t see them going to this length. But they have, and as I said the other day, I’m not sure the currency market guys are willing to fight them any longer.

I haven’t mentioned gold (and silver) for a couple of days. I can tell you that most observers of the precious metals — and not your Johnny-come-lately crowd — believe that gold is simply forming a base here before it moves higher once again. But the chart guys don’t see it that way. So you choose your sword here. Me? After all these years of reading and researching these two metals, I can’t change horses in the middle of the stream. My colors are still pinned to the mast of higher values for gold and silver. But remember, that’s just my opinion, and maybe the chart guys are right.

And the price of oil remains above $100. I see where the president is going to get his hands in the cookie jar. I have to say that all the things I’ve told you in the past about why oil prices are high are very important to keep in mind when you hear politicians spouting off about those “evil oil companies.”

The cost of getting oil out of the ground continues to rise. Think about that. Yes, we’ve found all sorts of oil deposits, but it’s not like we can go out and stick an oil rig in the ground and start pumping oil! Anyway, that’s just one of the things that keep the price of oil high. But it’s not manipulated markets, folks. There’s just too many trades going in and out of oil and no concentrated positions. This is not gold and silver, folks.

Yes, the price if high, and I don’t like it. But the price of just about everything these days is higher. Where’s all the complaining from the government that a beer at a ballgame costs $9? Don’t even get me started on this stuff. We could be here all day. I think you get my point here.

And that brings me to inflation here in the U.S. I’m not buying the story in Bloomberg today about how the Bureau of Labor Statistics has all these people around the country going out and checking the prices of items for the calculation of inflation. Yes, maybe they do that, but that’s just one piece of the puzzle, folks. I’ve told you for years about the “substitutions” that are made in the CPI calculation. I’ve told you about the adjustments that are made to the weightings of items, and I’ve told you about this whole housing thing. It’s in the calc, and then it’s not. Right now they use “owner’s equivalent rent,” which replaces the cost of owning a home with what it cost to rent it. How dumb is that?

So as I get ready to head to the big finish today, I want you to keep in mind a couple of things. That you don’t want to get mixed up in the gyrations. And that everything isn’t as it appears to be. You have to look closer.

Yesterday, I gave you a couple of items that scare the bejeebers out of me but forgot one that I was going to talk about. It goes like this:

The Wall Street Journal reported that the U.N. had agreed to send “observers” to Syria. How about you? Does the word observer when it comes to observing a war bother you? It does me. Vietnam comes to mind, and several places since then that the U.S. was just an “observer” in. And yes, I know it says the U.N., not the U.S., but do we really think there’s a difference?

To recap: The euro is leading a currency rally on the good news from Spanish and French bond auctions this morning. Both sold their maximum target of bonds, but both also saw yields rise. The Bank of Canada is greasing the tracks for a rate hike by raising their forecasts for GDP growth in 2012 and ’13. Aussie PM Gillard is doing her best to get on Chuck’s persona non grata list. And Chuck takes us on a ride to visit the Debt Clock.

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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