Elections Throw Euro Under a Bus

Last Friday, I sent you into the weekend talking about the elections that had held the euro (EUR) hostage, which would be held in France and Greece. France got their Socialist leader — good for them. I hope they have fun with that. And Greece got a government — no wait, no they didn’t. You see, the Greeks tried to vote in anti-euro leaders, but couldn’t get enough to form a government.

Both of these elections couldn’t have gone any worse for the euro. France’s new leader, Francois Hollande, ran on an anti-austerity platform, and for now, that will carry a lot of weight with traders and investors as far as wanting to take on euro exposure. Of course, history tells us that eventually Hollande will see things along with the Germans. But maybe, and here’s that phrase I dislike, “this time’s different.”

Greece still hasn’t formed a government, so talk about a screwed-up country! Sorry, I don’t mean to insult anyone that’s Greek, but come on, the country had a government that was doing the right things, bringing their excessive deficit spending down, but the pain apparently was too much for the citizens. I’ve got news for them: That pain was nothing compared with being bounced out of the euro!

With the Big Dog (euro) getting hung out on a line, the footing for the currencies has been very slippery. And with the proxy for global growth, Australia — seeing their central bank debase the Australian dollar (AUD) — the rest of the commodity currencies are also in search of terra firma.

Gold and silver have really seen heavy selling, but by whom? We’re not seeing it here on our metals desk, but we’re not a “bullion bank” or big-swinging metals dealer, so maybe they’re seeing something different.

U.S. stocks are getting their due, too, dropping four days of the last five. This has people running to U.S. Treasuries again. Oh, by the way, the U.S. Treasury will auction $72 billion worth of new Treasuries this week. The U.S. government is doing their best to provide job security for the Treasury people. In the first six months of our fiscal year 2012, the U.S. government has spent $1.84 trillion.

For comparison of numbers purpose only, for the entire year of 2001, the U.S. government spent $1.86 trillion, which happened to be an all-time record at that time! But this current group will double that all-time record of 2001 this year.

Speaking of 2001, I gave a presentation this past weekend to a group of people who had no idea who I was! Give or take a couple of current Pfennig readers, it was a new group that would hear things they hadn’t heard before. A lot of them signed up to read the Pfennig, so welcome to you!

The thing I was going to talk about, though, was I showed them the U.S. Debt Clock of 2001, when our national debt was $5.7 trillion, and then showed them the Debt Clock, circa 2012: $15.7 trillion! The U.S. government has increased the national debt by $6.7 trillion in the last five years, but the previous five years weren’t exactly good, as the debt increased $3.3 trillion.

I also told them that in 2001, Chuck had more hair, less weight and few believers.

OK, I’ve got to go on to something else before I explode here and begin throwing things! How could we as a country allow our leaders to do this to us, our kids and grandkids?

But right now, everyone wants to take pot shots at the eurozone debt crisis, and not pay any attention to the U.S. debt crisis. Look, the eurozone, as a whole, and the U.S. each contributed about 20% to the global GDP last year, so it’s not like we’re comparing apples to oranges here. Both of these problems are nothing to ignore.

The brightest shining star of the eurozone, Germany, saw their industrial output jump 2.8% in March from February, which was three times the consensus forecast. And February’s -1.3% decline was revised upward to finish at -0.3% — much better — and suggests to me that Germany probably skirted by the recession gauntlet.

It looks like Australia is going to turn their modest budget deficit of $44 billion into a budget surplus next year. And with that news, the Aussie also announced that bond sales would decrease by 80%!

Remember when I told you that I had the feeling that Australia was becoming the new Switzerland? Well, if they can pull this off at a time when a lot of countries are finding it difficult to live within their means, then a big feather will be in their cap! And think about this: Reducing their bond sales will make the rest of the outstanding issues more valuable. Or at least that’s what I learned from the guy that taught me all about bonds, my friend, Ed Bonawitz.

Now Australia’s kissin’ cousin across the Tasman, New Zealand, is going in the opposite direction with their Budget. The New Zealand budget deficit widened in the nine months through March, to NZ$787 million. Of course, NZ$787 million isn’t exactly $1.2 trillion, but New Zealand is much smaller than the U.S. So that goes back to my thought on comparing the U.S. to the eurozone.

The New Zealand dollar/kiwi (NZD) has really shown some weakness lately, as it no longer can cling to the coattails of the Australian dollar. And now this budget deficit isn’t going to sit well with traders.

But hey! The Japanese yen (JPY) is securely back on the rally tracks! See how mixed-up the investing world is these days? Japan’s debt is beyond the atmosphere, the U.S.’ debt is up to its eyeballs but investors seek out these two when the risk takers head for the hills.

The Chinese renminbi (CNY) has been bouncing back and forth in a very tight range lately. Today, the renminbi is a bit weaker, but that’s a tiny move in the renminbi world. A week has gone by since the U.S. Treasury Secretary Geithner was in China to urge them to do things more like the U.S. Hopefully, the Chinese will continue to ignore the calls by the U.S. to do things more like them.

Years ago, when it was fashionable to kick the Chinese for our trade deficit, when all they did was sell us stuff that we ended up buying. I told you all that the currency level of the renminbi was not going to correct our trade deficit. Our financial meltdown took that task on and reduced it by a large amount, but the trade deficit remains a problem. Why? Oil. Go ask the OPEC members how many dollars they have in reserve from their oil sales.

Why doesn’t the U.S. Treasury secretary sit down with the OPEC members and see if he can get them to change the way they do things? He’s tried it with China on numerous occasions.

I don’t mean to kick sand in the Treasury secretary’s face. I’ve talked enough about his past at the New York Fed before and after the financial meltdown that I won’t bore you with repeating all that.

The Singapore dollar (SGD) continues to remain strong. The Monetary Authority of Singapore (MAS) gave the wink and nod for further S$ strength, so when the Chinese renminbi decides to stop trading in a range and get back on the rally tracks, the S$ will follow along.

I see the British pound sterling (pound) continues to surprise me with its strength. Remember, I told you that the U.K. had gone for a double-dip recession. The Bank of England (BOE) had decided to add to their bond buying (stimulus). But the pound hangs tough. I guess right now it’s good to not be the euro.

The U.S. data cupboard is pretty empty today, so there’s nothing to look for to drive the markets this morning. I guess they are on their own!

Then, in keeping with what I talked about above, regarding history with French and German leaders, German Chancellor Angela Merkel told reporters ahead of a meeting that she’ll have with France’s new leader, Francois Hollande, that the fiscal pact is not up for renegotiation (from AFP):

“Merkel said Hollande would visit the German capital shortly after his inauguration as president, expected to take place on May 15, without giving a date for the much-awaited meeting.”

“The German chancellor irked Hollande by openly campaigning for his rival, Nicolas Sarkozy, who comes from the same conservative political family as Merkel.

“During the campaign, Hollande won few friends in Berlin by criticizing Merkel’s insistence on austerity as the way out of the eurozone debt crisis, seeking to shift the focus to growth.

“But Merkel told reporters that both budgetary consolidation as well as growth was necessary in Europe and reiterated that the EU’s fiscal pact — aimed at reducing ballooning deficits — was not up for discussion.”

This is not what the euro needs right now — or the eurozone, for that matter! They need a united front to implement austerity measures to get deficit spending under control.

To recap: The risk takers have all headed for the hills. Stocks, currencies, commodities including gold, silver and oil, are all down. And U.S. Treasury yields are falling again. German industrial output was very strong in March, and February’s number was revised upward, thus suggesting that Germany will not go into recession. Australia announced that they will have a budget surplus next year and reduce bond issuance by 80%! And the Japanese yen continues to run alongside the dollar.

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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