08/23/10 St. Louis, Missouri – So, it looks to me that all my warnings about the euro (EUR) not being out of the woods just yet, were bang on… You see the “heat” is back on the Eurozone’s debt problems, which is strange in that there were two successful bond auctions by member countries last week… You see, to me this is nothing more than the old saying about when the US sneezes the rest of the world gets a cold, is coming into play right now.
Everyone was just fine with forgetting about the Eurozone debt problems, and focusing on the US economic problems… But then a funny thing happened on the way to the forum, and suddenly, the US’s economic problems got too big, and nasty… So the mental giants of the markets decided that if the US is going back to a recession (I say they never left it!) the rest of the world is going to have problems too, and… “What about those deficit problems in the Eurozone?” See, how their minds work?
So… It’s back to the same old grind… Buying dollars, Treasuries, Japanese yen (JPY), and Swiss francs (CHF)… In the last go-around gold was also bought with the “safe havens” (I call them the “NOT-SO SAFE HAVENS”)… But not this time, so far that is… As gold is down a buck this morning… No biggie, but still… Japanese yen is booking some good gains not only against the dollar, but the euro this morning, and Swiss francs have passed Canadian dollars/loonies (CAD) once again, in this back and forth game of: it’s your turn to be the better performer now.
Speaking of Canada… Traders that just a couple of weeks ago, were betting on another rate hike from the Bank of Canada (BOC) are now of the opinion that the markets will have to wait for that next rate hike from the BOC. You see, Canadian consumer inflation printed softer than expected in July, and that has most people throwing in the towel for a rate hike at the BOC’s next meeting on September 8th… But… And you knew you could count on me to go against the grain here… I’m still keeping a light on a rate hike on September 8th… If the BOC hikes rates on 9/8, expect them to sound like they didn’t want to, and that things are worse than before… In other words, jawbone down the affects of the rate hike on the loonie.
One thing keeping the loonie in play and not allowing it to be drug through the mud like the other commodity currencies this morning, are the goings on with Potash Corp. (NYSE:POT), a Saskatoon-based fertilizer giant… The world’s largest fertilizer producer, I must add! Well, it received a $30 billion offer last week, and the thought that someone might need to buy that much in loonies to close the deal, has put a floor under the loonie for now…
In Australia this past weekend, an election was held… A bad political move in retrospect… You see, Australia had a PM, Gillard, but she was so convinced that she would win an outright election, so she called for one… Unfortunately, she didn’t prove to be as popular as she thought… I had sent a note to Chris on Friday, too late for the Pfennig, so I’ll use it here… “Chris, one of the reasons the Aussie dollar is getting hammered is that there is so much uncertainty about the election”…
You see, investors, traders, etc. do not like uncertainty… And that’s what we had on Friday… And guess what? We still have it this morning, as there was no clear winner of the election! The outcome might not be known for two weeks, folks…
Reminds you of our election in 2000, eh? I would have to say on scale of 1-10 for election uncertainty hurting a currency… The US election in 2000 was a 10, and the Aussie election this past weekend was a 5…
Back to the Eurozone for a minute… Eurozone manufacturing dipped a bit in July… The Euro-area purchasing managers index (manufacturing) dipped from 56.7 to 56.1 in July… I don’t think that to be a biggie… Nor do I think it’s a reason to sell euros this morning…
Not that I want to jump ahead in the week, but for the most part the data cupboard will be producing some very minor economic data this week… That is until we get to the end of the week (see where I was going with that intro?) First, on Thursday, we get Home Price data for the second quarter… And the Initial Jobless Claims, which really threw a spanner in the administration’s claim that the economy is recovering, last week… Then on Friday, the second reading of second quarter GDP, which previously was “supposedly” at 2.4%… I told you at the first print that it would be revised down, and that’s exactly what I expect for this Friday… So, let me crawl out on that limb right now, and say that I think the revision will be less than 2% growth.
Since I brought this back to the US, we might as well talk about a couple of things on my mind this morning. I was reading a story online last night that really got my blood boiling… The writer acted as if he had uncovered the mysteries of the world, in talking about how the buying appetite for 10-year Treasuries had grown so much that “experts” are “starting” to worry about a Treasury Bond Bubble…
Hey dude! I’ve been calling for that one some time now, you probably should sign up for the Pfennig!
The other thing I was reading about last week is the fact that individuals are pulling out of their IRAs taking “hardship” withdrawals… And this is not so that they can invest the money in bonds! It’s so they can pay bills, and keep a roof over their heads!
If this isn’t a sure sign of problems for consumers going forward, I don’t know what is!
OK… Let’s go elsewhere; I really don’t want to begin the week by putting away the sharp objects…
There are rumors in Japan that the Finance Ministry and the Bank of Japan (BOJ) talked last night, and it is being speculated that they talked about currency intervention. I’ve told you that Japanese leaders are very upset with the strength of the yen, and with this renewed flight to safety going on, yen is set to strengthen even more… I would just say this to those thinking that yen is a ONE-WAY Street… Japanese intervention to weaken the yen is hanging over you like the Sword of Damocles…
Then there was this… I was asked a dozen or so times last week, what I thought about the GM IPO… Now, this isn’t a letter on stocks, so I don’t want to spend time talking about stocks, but this is a biggie, and since I was asked so much about it, I’ll tell you that I think GM’s IPO is being rushed to the markets due to politics… The administration wants it done before the November elections… That’s what I think… Why else would they want to do an IPO when the CEO was just changed, and the company doesn’t even have one year’s worth of earnings data?
To recap, the focus has been shifted back to the Eurozone’s deficit problems, as the US economic data had become too frightening! The Aussie election is too close to call, and could take two weeks to know the complete outcome. Canada printed a softer than expected inflation report, and most traders have ditched their thoughts of a rate hike at the BOC’s next meeting on 9/8… Of course, I took a different view of that, and still believe the BOC will hike rates on 9/8.
Chuck Butler
for The Daily Reckoning
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. 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 and 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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