A Rate Hike For Australia

Front and center this morning is the fact that the NY boys and girls didn’t like the Greek bailout one iota yesterday, sending the single unit below 1.32… When the traders in Asia and London returned last night and this morning, they too did not like what they saw and sent the euro (EUR) even lower.

The euro’s problems are beginning to really be a drag on the other currencies, which had resisted the drag previously, but are now succumbing to the drag. To me, this just simply illuminates the Blue Light Special light, for such commodity rich countries like Australia and Canada… But, like I said, that’s just to me…

Speaking of Australia… The Reserve Bank of Australia (RBA) did hike rates last night, as I suspected long ago, that they would… The RBA lifted rates 25 BPS (1/4%)… More on this in a bit…

Getting back to the euro’s problems… I’m reminded of March 2008, when Bear Stearns hit the skids and had to be rescued… This followed what was a liquidity crunch here in the US that began in August of 2007… And from there, the wall came crumbling down, as we all know too well… I’m reminded of this because of the problems the European Central Bank (ECB) is going to have to face, if they want to “save” the euro… The ECB is going to have to provide liquidity so that the likes of Greece & Spain (among others) do not, ever, feel the strains of a liquidity crunch like we saw here in the US.

This will be a real difficult thing for the ECB to do, and not because they don’t know how… The reason it will be difficult is that it’s really against the ECB’s rules to deal with country by country. But, better to have broken a rule or two, than to lose the currency…

I don’t like any of this, folks… I didn’t like it when the US went through it, and is still dealing with it, as the Fed’s balance sheet continues to grow… But this is about the Eurozone, not the US… And I don’t like it… But… We haven’t really seen the ECB at work just yet… So, it remains a question as to what they will do. I personally do not believe the ECB will stand idly by while the euro gets punished. The single unit’s loss to the dollar this year has been 9%… That’s a long way from the 50%+ the euro gained versus the dollar in the last 8 years, but 9% is significant… There’s no two ways about it.

One currency that bucked the trend yesterday was the Brazilian real (BRL)… Again, the 3/4% rate hike by the central bank last Thursday is fueling a monster… And that’s just 3/4% of a percent, folks… You may recall me telling you a few months ago that I believed the Brazilian Central Bank would raise interest rates at least 3% this year! So, there’s more where that 3/4% came from.

Is the Brazilian government happy with this strong move in the real? NO! Not one bit! But… The move in the past week since the rate cut has had a governor placed on it, by central bank intervention… That’s what a currency trader that wants to move a currency higher wants to see… They want to see the central bank come out early and often in their attempt to weaken the currency, for their pockets will run dry long before those of the markets. So… In my opinion, the way to deal with the real going forward is to look to move into the currency on dips, which are caused by central bank selling.

The other “currency” to buck the trend yesterday was gold… Yes, gold added another $4 to its price… And why not? I think I talked about this last week, folks, but still a reminder is a good thing, as long it doesn’t become nagging, eh? Anyway… Gold, began going higher last week, while risk aversion was all through the markets… This was contra to what we had seen in the past couple of years… And here’s the skinny… The US has problems, the Eurozone has problems, Japan has problems, and the big 800 lb. gorilla in the corner (China) is seeing some problems… With all these problems comes uncertainty… And gold IS THE UNCERTAINTY HEDGE!

Gold is nearing $1,190… That’s a greater-than-5% gain versus the dollar in the past month! Annualized that would be 60%, and in price that would be a whole lot closer to what I personally believe gold should be trading… But, that’s dreaming… I always get a kick out of guys on TV trying to sell something and talk about “annualized” returns.

OK… We’re finished dreaming now, right? OK… I always check the currency returns on my screens just to get a feel for the trends. And this morning, I was surprised to see the 1-month returns with New Zealand dollars/kiwi (NZD) at the top of the list… Seems that more than just little old me (yeah, right!) is thinking that the Reserve Bank of New Zealand (RBNZ) is nearing the time they will wet their powder, and hike interest rates.

Yesterday here in the US data prints were very strong, and surprising… One that wasn’t surprising to me, but disappointing nonetheless, was the Personal Spending, which was more than double the Personal Income in March… Here we go again, folks… Spending more than we make!

The data print that was really surprising was the ISM Index (manufacturing), which printed at 60.4, the highest figure this index has seen since June 2004! WOW! This is the 9th month of increases in manufacturing, and securely places manufacturing in the expansionary mode. I’m going to have to go back and re-think this increasing manufacturing… Maybe I have had the blinders on too long, here… But, this is a good report for the US economy… It’s still a long, very long way from the go-go days of a decade ago, when ISM was over 80… But, from where it came from, it has come a long way…

Construction spending here in the US was up 0.2% in March, and was positive for the first time in 5 months… So, again, that’s a good print, only if April’s number adds to it… Otherwise, it was simply a blip…

Today, we get Factory Orders for March, and Pending Home Sales…

And now, back to Australia… Usually, a rate hike would be signal for a rise in a currency… Unfortunately, even after singing the praises of the Australian economy, and the prospects for better times, the RBA caught the markets off-guard with this statement… “As a result of today’s decision, rates for most borrowers will be around average levels.”

That’s central bank parlance for… The rate hikes are over for now… And that sent the Aussie dollar (AUD) to the woodshed… I know, exactly what the RBA was doing here, folks… They were throwing the markets off the scent of future rate hikes, and keeping the Aussie dollar from going to the moon! We may have seen the highs for the Aussie dollar for now, given this statement, but, I do believe that the RBA will be back to the rate hike table later this year… So… Better to be in the markets buying before that time comes.

Then there was this… That was quite the scary situation in Times Square this weekend, eh? Apparently, a suspect has been caught attempting to leave the country last night. I shiver with fear when this stuff happens… And… Again, there should be no question as to why gold continues to move higher.

To recap… The Reserve Bank of Australia hiked rates 25 BPS, but apparently put a lid on rate hikes for now, causing the Aussie dollar to lose ground. The euro continues to get battered even with the bailout of Greece now looking as though it will sail through the German Parliament. Data was strong in the US yesterday, and gold continues to book profits versus the dollar.

Chuck Butler
for The Daily Reckoning