Bundesbank Balks at ECB Plan

Friday, we saw a lot of dollar buying to end the week. The currencies held the baton, orchestrating a gain for the week, until the dollar snuck up behind and snatched it away to end the week. The University of Michigan confidence report for the first two weeks of August showed an increase, and so did leading indicators for July. But I think it would be a stretch to think that those reports were the main reason the dollar rallied on Friday. Instead, I would think the reason could be placed squarely on the shoulders of book squaring. But the data didn’t hurt!

This morning, the euro (EUR) is a bit stronger, as most of the currencies are versus the U.S. dollar. The euro is getting a boost this morning from the rumors going around that someone’s underground and — no, wait! Darn it, Chuck, stick to the story! Well, the rumors this morning center around the ECB bond buying program, that just last week Angela Merkel said that Germany didn’t have any problems with what just might take place.

The reports/rumors are talking about how the European Central Bank (ECB) is going to set limits for eurozone debt yields and pledge an unlimited amount of bond buying to maintain those limits. Whoa, there, partner! I sure hope they don’t make that announcement in public. Because I see all kinds of problems that could come of that! It’s far better to keep things like close to the vest and let the markets figure it out on their own.

And Germany’s Central Bank, the Bundesbank, has opened up a line of criticism of the ECB, saying that “The Bundesbank holds to the opinion that government bond purchases by the Eurosystem are to be seen critically and entail significant stability risks.”

Now, in the old days before the euro and the ECB were established, the Bundesbank was the cat’s meow. They controlled the monetary policy of the largest economy, and other central banks followed so closely to the Bundesbank that they could tell you what flavor gum the Bundesbankers were chewing! Holland, Denmark, Austria and others had their central banks in the shadow of the Bundesbank. But I’m afraid that’s all in the past. The ECB has the reins now. But any kind of public debate will not be good for the euro.

We have a couple of weeks before any decision is made there, as the ECB governing council will meet in September and discuss this program. But for now, the markets like what they’re hearing. And the best-performing currency overnight has been the Australian dollar (AUD). And after a week that saw the A$ lose ground on statements by the Australian Treasurer about the currency being overvalued, the A$ fights to gain that lost ground back. The Reserve Bank of Australia (RBA) meeting minutes will print tonight, so the markets will be going over them to see if the RBA mentions the A$ strength.

A senior currency strategist at Westpac Banking Corp. in Sydney had this to say about the A$: “While the Aussie might still be a little bit pricey at $1.04, I don’t think you want to be aggressive about short positions. I think the news out of Europe is getting a little better.”

This is a big week in the eurozone, as the German Chancellor Merkel and French President Hollande will meet this week to discuss Greece. This meeting will come after both will have had separate meetings with Greek Prime Minister Samaras. There is no revealing of Greece’s progress in cutting deficit spending/debt this week. That has to wait for the September publication of the Troika report on Greece’s progress. Remember that if the Troika doesn’t believe that Greece has done enough, they will hold back the next scheduled tranche of bailout funds for Greece.

In addition, for those of you new to class, the Troika, is the name given to the members of the European Central Bank, the European Commission and the IMF. I know it might sound as though the rest of the eurozone is ganging up on Greece and being unfair to them, but this framework was agreed to by the Greek leaders in return for the second bailout funds.

There’s not a lot of “meat” in the way of economic data reports this week in the U.S. We will see some housing data and durable goods later in the week. The biggest banana in the data bunch this week will be the minutes of the last FOMC meeting. Yes, all those notes will be stale but will at least give the markets an idea of the frame of mind of the Fed heads.

A dear reader sent me a note the other day asking, “If U.S. Treasury yields are rising, isn’t that good for the dollar?” Yes, and no. Yes, the dollar gets to fight with the other countries for yield differential trades. But there’s a lot of trepidation here. How many false dawns have we seen in the past few years? Too many. Too many times we’ve seen yields rise only to be knocked back down again. And the markets are very well aware of that. So they have not jumped in with both feet here… yet. But if they do, they could give the dollar some love with the higher yields in Treasuries. But let me remind you what’s in the back of the minds of the market participants. The Fed participated in 61% of the Treasury auction last year. And they could turn the printing press on and step up the buying at any time. (And for those of you that are going to throw a dart at me here, Yes, I know there’s no actual printing press. It’s just a better way of describing the creation of dollars for the Fed to use to buy the Treasuries.)

I had another dear reader send me a note and to tell me how the Colombian economy is booming and wanted me to list some Latin currencies in the currency roundup. Hmmm… if I keep adding currencies, that list is going to get pretty large and I’ll spend all morning, checking currency prices, instead of writing! But we’ll add them to the Review & Focus currency dashboard. So if you get the R&F, you’ll see them there starting in October (we’ve already sent the September issue off to the printing press). But I agree with the reader, Columbia has been on my list of countries that I’m watching for over a year now. The currency is just so limited and fairly illiquid. But that won’t stop me! I have a new MarketSafe CD coming out soon, get ready!

The Japanese yen has been losing some ground in the past week. As I told you in a Pfennig last week that the so-called “safe haven” destinations for money, that include yen (JPY) and Treasuries, were getting sold. Longtime readers know that I threw in the towel on Japanese yen, as I kept saying that it was overvalued and needed to weaken, and instead it would just get stronger versus the dollar. The Bank of Japan (BOJ) passed on their latest call for more stimulus at their last meeting, which didn’t help the yen. I just think there are better currencies in Asia than yen. For the longest time — and I mean going back 20 years — when someone said they owned an Asian currency, you pretty much knew it was Japanese yen. But it doesn’t have to be that way any longer!

In that same vein, going back quite a few years, when someone said they owned a foreign currency, you pretty much knew they owned Swiss francs (CHF) (that was unless they recently took a trip to Canada or Mexico! HA!) Swiss francs were the bee’s knees. But then, Switzerland was dwarfed by the eurozone and soon it became all about the euro. And the Swiss National Bank (SNB) decided to hurt investors with a huge devaluation a year ago, and since then we don’t get many people looking to buy francs.

And then, I see where Bank of Canada (BOC) Gov. Carney will speak to Canadian Auto Workers union this week. You can bet that there will be calls to weaken the Canadian dollar/loonie (CAD). But there’s not much the BOC can do. The loonie is stronger due to investors buying up Canadian bonds as safe havens. Now, in my opinion — which you know could be wrong — Canada represents a safe haven much more than the Japanese yen or U.S. Treasuries! Yes, I truly understand that the size of the Japanese and U.S. bond markets dwarf Canada’s. But given the strong banking sector in Canada, the strong domestic demand of the economy (we’ll see proof of that this week when retail sales prints) and the steady government, safe haven is written all over Canada. Again, that’s just my opinion!

The price of oil continues to climb higher, trading into the $96 handle this morning. There is talk now about the U.S. government releasing some of the oil reserves in an attempt to dampen the prices and prevent high energy costs, which could wipe out any gains the economy has made.

Then There Was This, from Moneynews.com:

“The U.S. government’s debt held by foreign entities hit a record $5.2923 trillion in June, CNSNews.com reported, citing Treasury Department data.

“In January 2009, the U.S. government owed $3.0717 trillion to foreign entities, the news service added.

“China was the top creditor to the U.S. government, though Japanese entities were a close second.

“‘Although the Chinese maintained their place as the top foreign owners of U.S. debt in June, they are not the top owners of U.S. debt in the world,’ CNSNews.com reported. ‘That distinction belongs to the U.S. Federal Reserve, which, according to its July monthly report, owned $1.667 trillion in U.S. government debt in June.’”

I don’t know what scares me more, having so much of our debt held by foreigners or by our own central bank! I hear you saying, Who do you want to own our debt, Chuck? I don’t want debt to have to own! Knowing that’s nearly impossible, I don’t know. I just don’t know. It’s like we’ve painted ourselves into a corner. If we step to the right, it’s bad, and if we step to the left it’s bad. But then, I began warning about the growing debt in 2001.

To recap: The currencies folded like a cheap tent on Friday to the dollar. Some second-tier economic data were good for the dollar, but there had to be more than that driving the dollar higher. This morning, the currencies are attempting a move back at the dollar, as the ECB plan to buy bonds is gaining traction, except with the Bundesbank. The Aussie dollar is stronger this morning, and the RBA meeting minutes could give us a clue about the RBA’s feeling toward the strong A$.

Chuck Butler
for The Daily Reckoning