Brazil Cuts Rates and Signals for More Cuts!

Yesterday’s price action left more blood in the streets, with the euro (EUR) losing the 1.24 handle, and the Australian dollar (AUD) reaching a 2012 low. The Brazilian government and central bank continue to do their best to unravel the markets, by cutting interest rates again this morning and crowing that there are more rate cuts to come.

Oh, by the way, the internal rate in Brazil was cut by 50 basis points (0.5%) to a record-low level of 8.5%. For those of you keeping score at home, that brings the total of rate cuts since August last year to 4%.

And there was nothing in the central bank’s statement to give anyone the idea that the central bank was nearing an end to the rate cut cycle. The central bank president, Alexandre Tombini, continues to point to the fact that industrial output has declined in eight of the last 12 months.

So they try to give the appearance of attempting to stimulate growth, when in reality, folks, they are debasing the currency so it can be competitive in the global exports game. Brazil was the first to say it was a currency war, and they have been one of the leaders of this war.

The euro is back above 1.24 this morning, but not by much. It received a boost when the latest polls show that Irish voters will approve measures to ease the eurozone’s debt crisis. I had read recently that the Irish president had appealed to the Irish people to vote yes, because more uncertainty in the eurozone is not what’s needed now. Good move on his part.

The euro’s decline in May alone has been 6% versus the dollar and 7.3% versus the yen (JPY). I find it very difficult to reconcile this. Yes, there are problems with debt in the eurozone, but have they not at least addressed it and attempted to implement measures to cut it off at the pass?

What have we done here in the U.S. to address our debt problem — which, I’ll add, stands today at $15,749,000,000,000 (that’s $15.7 trillion, folks), and the real debt called the “unfunded liabilities” is $119,084,000,000,000 (that’s $119 trillion, folks)? What has Japan done to address their government debt problem? Nothing, nada, nil, zilch, zero, a big fat goose egg!

But it’s a “euro” problem, according to the traders and hedge funds. I call it a circuit breaker. What am I talking about now? Ahhh, grasshopper, do you see those numbers above? Over $119 trillion in unfunded liabilities? Bonds will be issued when the time comes to finance this debt, and how will those bonds, which will have higher yields on them, get their debt servicing (interest payments) paid? We’ve been through this many times, but there are tons of new readers, so here you go.

The U.S. will be able to increase their revenue, which means higher taxes, or they can debase the dollar to a level that allows them to pay the interest on the bonds with cheaper dollars. Or as I’ve said many times, we’ll have to do both! And that’s why I fear what’s ahead for my kids and grandkids.

Anyway, whenever the dollar goes on one of these bear market rallies (see 2005, 2008, 2010 and now), I call them circuit breakers. You see, not that long ago, the dollar was teetering on the cliff, but not now — it has received a circuit breaker. And these are needed, because even if the U.S. government knows they need a much weaker dollar to pay back their debt servicing with cheaper dollars, they can’t have it fall off a cliff now, or any time soon. They need everyone to play this game with them for as long as they can keep it going.

OK, I’m not saying that the eurozone is devoid of problems, and the euro shouldn’t be weaker than it was. What I’m getting to is that this risk-on and risk-off stuff is giving me a rash! It’s all a bunch of dookie!

We need currencies, and other asset classes like stocks and commodities, to trade on fundamentals, as they did before the financial meltdown of 2008. If we were simply looking at fundamentals, and not all this risk-on, risk-off bull dookie, currencies like the Norwegian krone (NOK), the Swedish krona (SEK), the Canadian dollar (CAD) and a host of other good, fundamental currencies wouldn’t be getting caught up in the risk-off selling that’s going on right now.

It’s all about the flight to so-called safety. U.S. Treasury 10-year bonds hit a record low yesterday of 1.63%, and the Japanese yen is trading with a 78 handle again. I bet that ticks the Japanese government off to no end! All the trillions of yen they’ve spent to weaken the currency to no avail. Poor, poor Japanese government. Don’t you feel sorry for them? HA!

I told you near the top that the A$ dropped quite a bit yesterday. It felt the pull downward from the euro and their weak data that continues to pile up. Like last night’s printing of a report showing home-building approvals unexpectedly dropped in April. This got the rate cut campers all lathered up, and the calls for more rate cuts became shouts! And once again, bond buying in the A$ was strong, pushing yields of 10-year Aussie government bonds to a record low of 2.856%. It’s going to be difficult to reverse this move in the A$, folks. OZ, as we call Australia, has the Wicked Witch of the West flying overhead right now, and even though Glinda the good witch is there to protect OZ, everyone runs for cover. That’s what’s happening here.

The Chinese renminbi (CNY) continues to slide weaker every day. The renminbi has lost nearly 1.5% in May. So what gives here? The Chinese economy is moderating, and that means the Chinese government’s efforts to diversify their economy and gain more domestic demand runs into a roadblock. So to keep things going, China needs to ramp up the exports again. Uh-oh. global growth is slowing, so demand for Chinese goods is weaker… So the Chinese weaken their currency to make the exports more competitive and appealing in price.

And with most currencies weaker, at this point, the Chinese are just playing along with the games that countries are playing with their respective currencies. We’ll have to see just how weak the Chinese leaders are willing to take the renminbi…

Gold put in a strong performance yesterday, closing up $8, but it was up near $12 at one point in the day. The shiny metal looks strong this morning too, with it trading up $3 as I write. You know, I’ve gone on record as saying that this drop in the price of gold has been counterintuitive and just doesn’t make sense. Here’s something to think about, and I mean think about, folks: The U.S. (as reported in the WikiLeaks cable) fears that buying of gold and silver is going to replace the dollar, and they can’t handle that because they can’t print gold and silver. So when it looks like gold and silver are ready to really go mainstream last summer, along comes these afterhours takedowns of the prices of both metals.

You don’t think that… nah, that can’t happen. Or can it? I talked about this a bit above. The U.S. debt problems are astronomical and the eurozone and Japanese debt problems are nothing to laugh about. So the currencies of these countries should be weak and investors should be flocking to gold and silver. And the demand for these two is still good on a retail basis, but that’s not what moves these prices.

So it’s not all seashells and balloons for gold and silver owners these days. But as I’ve said before, I’m not selling, for I do believe that this will all be in the rearview mirror in a few years and those that sold will be scrambling to buy again.

The U.S. data cupboard is chock-full o’ data toay. Not all of it is first-tier data, but still the prints today would choke a horse. Some of the major prints include Challenger job cuts, ADP employment change, first-quarter final GDP, weekly initial jobless claims and the Chicago PMI manufacturing index. So we could see quite a few swings today with each economic data print.

Tomorrow is the Jobs Jamboree for May. Can you believe tomorrow we turn the calendar to June? OMG! So the ADP report today should be an indication of what the Jobs Jamboree will look like tomorrow. Right now, the experts are of the mind that 150,000 jobs were created in May. Hmmm, maybe they need to read the Pfennig, because I’m going to touch on this today!

Then from

“Small businesses hired fewer workers in May and cut hours for those on their payrolls, an independent survey showed on Wednesday, raising prospects of another disappointing employment report.

“Businesses added 40,000 new jobs, after increasing payrolls by an upwardly revised 60,000 jobs in April, according to Intuit, a payrolls processing firm. April’s job count was previously reported as 40,000.

“The survey’s findings contradict expectations of a pickup in job gains in the broader economy this month as the weather-related distortions that held back employment growth in March and April dissipate.”

Yes, there are a lot of economists making some bold predictions for the Jobs Jamboree tomorrow. I’ll wait until tomorrow to give my thoughts on the data, although it sure would help to know how many ghost jobs the BLS will add before making any forecast!

To recap: There was more blood in the streets for the currencies and stocks yesterday. Chuck goes ape over how the euro gets bashed because of the debt crisis when the U.S. and Japan have their hats in the ring for debt problems too! The A$ falls on fears of additional rate cuts after weaker recent data. Brazil cuts rates again. And the Chinese renminbi has lost 1.5% this month, and Chuck gives his thoughts on why that has occurred.

Chuck Butler
for The Daily Reckoning