Chuck Butler

Good day… And a Wonderful Wednesday to you! A day off from the Nationals-Cardinals series, so a day to recharge the batteries, which is what I did yesterday afternoon. I had already seen the NY market participants and traders take down the currencies and metals, and I had seen enough!

So, yesterday morning, I told you I was watching the currencies ratchet higher, probably on the excitement of the Eurozone’s ESM opening for business. But that excitement didn’t have strong legs, and once the NY markets opened, they saw to it, that the excitement was a thing in the rear view mirror. So much for that! Right now, the euro (EUR) has bounced off the low of 1.2850, but it sure looks vulnerable to more takedowns.

Well, there were a couple of developments overnight. The Aussie dollar (AUD) is the best performer overnight. Aussie consumer confidence increased by 1% versus the previous month, and iron ore prices were up another 6%… The total increase in the iron ore prices since reaching a low in September is 35%… Remember that the selloff of iron ore this summer put a lot of pressure on the Aussie dollar, so, hopefully, we can count on the opposite to take place here. And if the price action from overnight is any indication, we don’t have to hope any longer! The Aussie unemployment data will be printed late this afternoon (tomorrow morning for them), and this data has really surprised to the upside lately.

The other thing we saw in the overnight markets was a strong Industrial Production report for August in Sweden. And Norwegian inflation was bang on with expectations. So, both of these currencies should find some good footing today. But then, that’s just me in my old frame of mind that currencies increase in value when they have strong fundamentals. Inflation in Norway is only 1.1%… Pretty impressive, as long as the Norges Bank (Norway’s Central Bank) doesn’t see this as an opportunity to cut rates again. But Norges Bank Governor, Olsen, has indicated that a rate increase could come as early as December, as he tries to throw cold water on the house price rally going on in Norway.

So, the euro… Yesterday it was all seashells and balloons for the single unit, until the NY traders arrived. What caused them so much worry that they sold euros versus dollars? Too many speakers. That’s what I think. The Eurozone has too many speakers, speaking what’s on their respective minds. And they give conflicting opinions, which just ruins the soup. As they say, too many cooks in the kitchen. And then there was German Chancellor, Angela Merkel, visiting Greece. To the Greek on the street, Merkel is not a nice person, for she is blamed for all their austerity and pain. But that’s apropos for today, given everyone’s — and I mean everyone’s — propensity to look to blame others. I could go on as to my opinion as to where this started, but I don’t have the time or space!

But seeing the Greeks protest was a reminder to the markets that while there hasn’t been anything notable to upset the applecart lately in the Eurozone, there are still problems. Which was my point yesterday, talking about the ESM. It doesn’t solve their debt problems, but it does give them some time to deal with them, without the markets barking in their ears.

Well… Japanese leaders are once again talking the talk, but not willing to walk the walk. Japanese Prime Minister, Noda, said yesterday to Bloomberg News that “the yen’s strength is a serious problem and is out of step with Japan’s economic performance, and when necessary, we will take decisive action.” Haven’t we heard all that before? Of course we have, but the Japanese leaders really have used all the arrows in the quiver a long time ago. All that’s left to them is to coordinate a massive yen (JPY) intervention, if they seriously want the yen to weaken.

But who would they recruit to participate in this coordinated intervention to sell yen? The US? Hardly. Think about it… The US needs the weak dollar, so why would they participate to strengthen the dollar? Same goes for the Eurozone, while they don’t want a weak euro like the dollar, they don’t want to argue with the fact that the euro is weaker than it was a couple of years ago, and that fuels their exports. So, why would they want to upset the export applecart? Without the US and Eurozone, Japan is left with the UK or they are left holding the bag of containing a stronger yen than fundamentals dictate.

And not to be outdone by Noda… The Swiss National Bank’s (SNB) Chairman, Jordan, wanted the markets to know that the SNB was going to defend its arbitrary ceiling for the franc (CHF) that has been in place for over a year now. Jordan said, “An appreciation of the Swiss currency at the current juncture would pose a serious threat and the SNB will not permit an appreciation.” So, I guess Noda can’t look to Switzerland for help with his coordinated intervention.

And the Brazilian Central Bank (BCB) will meet today to discuss interest rates. Most observers are of the belief that the BCB will keep rates steady. I on the other hand, have seen the BCB surprise the observers on more than one occasion during this rate cut cycle that has seen nearly 5% of rate cuts dropping to the floor. Therefore, I wouldn’t put it past the BCB to cut rates again, just for good measure. This rate would be smaller than their usual large cuts, so, I’m looking for 25 basis points which would bring Brazil’s internal rate to 7.25%…

The Brazilian government and BCB have done a masterful job of debasing the real (BRL). That’s not a complement for these two, folks. I find it to be very distasteful to watch a central bank debase a currency over and over again. Thank you, sir, may I have another? Pretty ugly in Brazil, and I really thought a couple of months ago that the BCB was near their end for rate cuts. I guess I was wrong.

The 10-year Treasury yield has gained 11 basis points in the past week. One of these days, that will be the sign, but I’m not so sure it’s the sign now… The sign that the Treasury bubble is about to pop. But still, if you had sold Treasuries in the past year, and bought gold, you would be looking like an investment guru! I saw a report that showed the interest expense lowered in 2012. Think about that for a minute. We issued tons of new debt, and still the interest expense was lower. Now, either the data was bad, or that’s the benefit of having yields so low. But what happens when yields rise? OK. Let’s not go there today, Chuck… you’re feeling pretty good this morning, just move along.

Well… As I go back through today’s Pfennig to see what I’ve written so far, I find the overarching theme that seems to exist is that currency debasement is all around us. And as long as that is the overarching theme, we should look to gold and silver. And what I’m seeing in gold and silver these days is that they are becoming mainstream. I still hear old-school investment people call the precious metals “alternative investments”. But, that’s just because they are old-school. I saw a great quote by the chief investment officer for Royal Bank of Scotland, who said, “Some clients ask where gold prices are going, and I say I don’t even think about prices. It’s a store of value.” Pretty good quote, I think.

Then There Was This… From Bloomberg

“The US Commodity Futures Trading Commission may decide as soon as this week to appeal a judge’s ruling against trading limits for oil, natural gas and other commodities, according to two people briefed on the matter.

“The five-member commission plans to vote following a recommendation from the agency’s general counsel’s office to appeal the ruling, according to the people, who spoke on condition of anonymity because the schedule is private. US District Judge Robert Wilkins ruled on Sept. 28 that the CFTC failed to assess whether the limits imposed under the Dodd-Frank Act were necessary and appropriate.

“The decision blocked rules scheduled to take effect Oct. 12 that were challenged by the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association Inc. The associations represent JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and other banks and energy-trading firms.”

Chuck again. Let’s hope that at least the position limits component of this legislature is approved, that would be a dagger to the heart of the gold and silver price manipulators, who have pushed hard for this ruling by the federal Judge.

To recap. The excitement around the opening of the Eurozone’s ESM was dropped like a bad habit once the NY traders arrived yesterday, and the things that go bump in the night in the Eurozone, came back to everyone’s minds yesterday, as the German Chancellor visited Greece with thousands in the streets protesting. Australia, Sweden and Norway saw good data but only the Aussie dollar was able to take the data and gain overnight. Look for Brazil to cut rates today, and the overarching theme of what Chuck was talking about today, is currency debasement, which should be good for gold and silver.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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