Canadian Finance Minister Talks Up the Loonie

As I turn on the currency screens this morning, I see that the euro (EUR) – which remained well bid on Friday, thus losing that trading pattern we talked about, of overnight rallies for the euro and daytime sell offs – has backed off Friday’s high… The German IFO Business Confidence was responsible for the euro’s strong bid on Friday… Last night, the euro backed off a bit… The single unit actually traded above 1.36 on Friday afternoon, when the volume was thinning. This morning, the single unit is below 1.36 at 1.3575, as I type…

Friday’s move higher for the single unit, was impressive… And it suggests to me that traders, investors, etc. are beginning to believe German Chancellor Angela Merkel when she says that Germany will do whatever it takes to save the euro. That, and the bond auctions last week, that all went relatively smooth, with yields falling across the board. But that was last week…and this week, things could be completely different.

Take, for instance, all the rosy forecasts for the US economy, which seem to be taking over the newswires… I’ll admit that there are quite a few things that are looking better… But as I said to the desk the other day… “If the government truly wants to see unemployment drop like a rock, they would drop the Health Care stuff.” Look, I’m not talking politics here, I’m simply referring to the statements that US businesses keep repeating, which is that they can’t hire people until they know the true hit to them from health care… So… I say, call their bluff! Drop the health care stuff, and watch unemployment drop.

I’m strictly talking about adding jobs here, folks, based on what the businesses are saying… I’m not even going to touch that health care stuff with your ten-foot pole! Could the businesses be wrong in their assessment? Yes… But it’s their business, and neither I nor anyone else should pretend to know their business better than they do!

OK… The big news this past weekend – besides the Steelers and Packers reaching the Super Bowl – was the collapse of the Irish coalition government, which will result in the election date being brought forward from its current schedule of March 11. Here’s the cheese that binds, folks… A prerequisite of Ireland receiving bailout funds is that they pass a 2011 budget… So the budget for 2011 has to be on the books when a new government takes over… I don’t think it will be a big deal to get the budget passed… But the new government is going to have to embrace the budget immediately!

In Canada on Friday, they printed a very stale November retail sales report, which was much stronger than thought… Which, to me, is quite surprising, as the “experts” had two months to figure it out, eh? Anyway… I still think it’s good confirmation, for I had thought that Canada’s economy was stronger than the markets were playing it out to be. Speaking of Canada… I saw this on the Bloomie, and then a reader, Scott, sent it to me… So since both of us thought it was Pfennig worthy, here you go!

Canadian Finance Minister Jim Flaherty said he “doesn’t expect a major weakening of the country’s currency, whose gains reflect the strength of fiscal policy and commodity prices.” And then went on to say… “We’re done with the Canadian peso.” Adding that there are “lots of good reasons for people to have confidence in this country.”

Quite interesting stuff from the Finance Minister, eh? I also find it interesting that the price of oil has slid back down in the past week, and the Canadian dollar/loonie (CAD) is still trading at parity.

OK… Gold and silver got whacked again on Friday… And at one point I said that it was quite strange seeing the euro so strong against the dollar, but gold is not participating… Well… This morning, gold is up $4 but, recently, we’ve seen gold up in the morning, and then sell strongly in the morning. On Friday, I talked about the huge slide in silver from the previous trading session on Thursday. I said that traders were calling it backwardation… I researched this further after signing off, and found that the scenario of backwardation doesn’t happen very often in the precious metals… It’s happened as recently as January 2009, but they must have called it something different… Anyway, January of 2009 followed the sell off with weeks of strong rallies, leading to a 40% move higher in a matter of weeks! Could this happen again? Of course it could! But then it might not…

The well respected, James Turk, who contributed, along with me, to the story “Is Silver the Next Gold,” that appeared in the January edition of NewsMax, had this to say about the backwardation…

What this backwardation shows is that there is a disconnect between the physical and the paper markets in silver. As I said previously, the silver shorts simply cannot hold the paper price down here any longer without seriously discrediting the paper silver market as a price discovery mechanism.

Gold is not in backwardation, nevertheless the demand for physical gold is extremely intense. With the sentiment indicators at very low levels, it suggests we are about to see a stunning short covering rally in gold.

Shifting gears here… Remember when I kept telling you that the Brazilian interest rates were going to go higher, even though the Brazilian government was doing everything they could to keep the currency from gaining in value versus the dollar? I’m sure a few of you thought I was ready for the loony bin, but… There it was on Friday… The Brazilian Central Bank (BCB) hiked rates 50 basis points (1/2%)… If the Brazilian government really wanted to keep their currency from gaining further, they would stop raising interest rates… But they can’t! And here’s where I kept getting my stamina to remain out on the rate hike limb…. Inflation is Brazil is very strong… Very strong… And the BCB and the government would be insane to ignore that… I’ve sent them quite a few memos, telling them to embrace the strong real, and use it alongside high interest rates to fight inflation…

The Producer Price Index (PPI) in Australia was weaker than expected, as fourth quarter wholesale inflation rose only 0.1%, putting year-on-year wholesale inflation at a 2.7% increase. The expectations were for 0.5% and 3.1% respectively. The floods in Australia have really brought the country’s economy down… But these are resilient people in Australia, and they will pick themselves up, and get back on their collective feet, and come back stronger than before!

The data cupboard here in the US this week is chock-full-o-data, but none will be printed until tomorrow… We’ll start tomorrow with the S&P/CaseShiller Home Price Index for November, and follow that up with consumer confidence for January. Wednesday, the FOMC will meet…and here’s where the bones are buried, folks… No, I don’t believe the FOMC will stray from previous statements about the economy and the need for stimulus… But, this will be the first month that two avid hawks (Fed Heads Fischer and Plosser) are now voting – both of whom have recently stated that they see no need for QE2… I would like to be a fly on the wall in the room where the FOMC meeting takes place tomorrow…

Then there was this… This is taken from Bob Chapman’s International Forecaster

The denigration of the American middle class began three years ago and it is still just getting underway and the public hasn’t a clue as to what is happening to them and what is going to happen to them. An indication of that is this past Christmas spending. At the upper end, sales rose 9% and at the lower end only 1.5%. There is no question that austerity is starting to take hold in America’s lower and middle class. What we see over the horizon is going to take its toll on US GDP. Even with $2.5 trillion in net spending GDP growth in 2011 will be 2% to 2-1/4% down from 3% to 3-1/4% yoy. In addition what the government finally has to admit is that CPI and unemployment figures are totally bogus and GDP figures are substantially lower than stated. We can promise you in time this will all come out in the wash. We can also throw in that debt to GDP is not 80%, but 115% on a par with other failing nations.

To recap… The sell off in the dollar lasted throughout the Friday session with the euro trading beyond the 1.36 handle. The euro has backed off a bit this morning, but the recent trading is leading me to believe that everyone is getting on board with believing German Chancellor Angela Merkel, when she says that Germany will do everything it can do save the euro… James Turk gives us his take on the backwardation in silver, and the FOMC meets this week with two new voting members that are sure to give Big Ben Bernanke a difficult time going forward.

Chuck Butler
for The Daily Reckoning