Central Banks Get Weaker Currencies

The currencies are still in rut versus the dollar this morning. They haven’t lost more ground, just stuck in a rut. The euro (EUR) should have gained on the news that Spain was able to auction bonds this morning and meet their target, while France sold bonds and saw their yields drop. These two auction results should have eased the minds of those fearing the eurozone countries will struggle to finance their borrowings — at least for now.

I find this news very encouraging, in that the European Central Bank’s (ECB) 1 trillion-euro LTRO (three-year loan) is fading, and therefore, the demand you see for these bonds from Spain and France is “real demand” — not the kind in which yields were held low because they were previously artificially held down by EB buying.

But the euro is being hung out on a line this morning, waiting to hear what ECB President Mario Draghi is going to say in the press conference following the meeting in which he will announce no change in rates. Euro traders are waiting to see if Draghi pulls a rabbit out of his hat of central bank tricks.

For the euro today, it’s a case of you can’t do anything right as far as the markets are concerned. I am concerned about what Draghi has to say, for he has really thrown the euro under the bus, to promote growth, which is exactly what we all expected when a Club Med president (Italian central bank) was put in the position of ECB president!

In a case of “this should have been better for us than that,” the New Zealand dollar/kiwi (NZD) was the worst performer of the night, moving downward versus the U.S. dollar and the Aussie dollar (AUD), in response to a very weak labor report.

New Zealand’s first-quarter unemployment rate jumped to 6.7%, from the previous quarter’s 6.4% figure. That was not so good for kiwi, but in reality, I think it was a knee-jerk reaction to the number, for New Zealand unemployment has remained in a range of 6-7% for over two years now.

On the side of “this should have been better for the kiwi than the labor report,” the Reserve Bank of New Zealand (RBNZ) — who used to be what I would call a “prudent central bank,” but kind of lost their way — brought some of that prudence back last night when they introduced a number of prudential policy changes, based on lessons from the global financial meltdown, in order to further strengthen the New Zealand financial system.

For instance, the RBNZ — seeing that financial institutions are more vulnerable than previously thought regarding contagion effects from financial shocks, due to the likelihood of liquidity contraction — decided to “up the game on bank liquidity requirements,” including their Core Funding Ratio, and they also addressed the capital requirements under the new Basel III framework.

Another thing the RBNZ announced was a framework to remove the taxpayer-funded bailouts when banks fail, and there were more responses.

See? Now, isn’t insuring that their financial system will remain viable during the next financial meltdown better for the kiwi than a labor report? Or at least it’s a tie!

This is the kind of stuff that I really gets the hair on the back of my neck to stand up — central banks doing what they should be doing, and not financing 61% of Treasury auctions in one year or running the printing press 24/7 or implementing stimulus packages that have been shown to not really work in the long run (see Japan, circa 1995-2012).

The sun is rising on the ocean this morning. I’m sitting on a deck overlooking the ocean while I write the Pfennig. Now, this is the way to write! I have my iPod playing. I’m even drinking coffee while I write today. Normally, I wait until I’m finished writing before I partake in a cup of coffee, as I want what I write to be pure Chuck! But not today — I’m actually having a good time writing this morning!

Don’t you just love it when someone always has a better way to do something than what you’ve chosen? Or a better idea, or a better anything? Well, I do… and that is why I dislike any U.S. official that goes to China and tells them “how to do things better.” For instance, yesterday, U.S. Treasury Secretary Tim Geithner told the Chinese that “a stronger, more market-determined currency would”… blah, blah, blah. The thing that catches my eye is that Geithner tells the Chinese they need a stronger currency, when the one he is somewhat responsible for is worth about 3 cents and will someday trade to its intrinsic value.

If having a strong currency is so important, then why doesn’t the Treasury secretary go back to Washington and sit down with the president, “Big Ben” Bernanke and Congress. He’ll get about as much reaction to that thought as he did in China!

On sidebar, I participated in a CFA poll this week: 926 people responded, and 60% of them said that hedge funds’ impact on the financial system can best be characterized as destabilizing, 21% said immaterial and 19% said stabilizing. I voted destabilizing, as their use of shorting, leverage and derivatives cause an outsized impact on the financial markets. Size matters, and when large amounts of money come into a market, the market moves. That can be good or bad, depending on what side of the trade you reside!

Yesterday we saw another regional manufacturing index print weaker, and the New York ISM index printed at 61.2, falling from 67.4 in March. So once again I ask how can the national ISM print an increase when all the regionals have printed weaker?

The ADP employment change data that are supposed to give us an indication of the Jobs Jamboree, which will print tomorrow, showed that in April, the country added 119,000 jobs. That was much weaker than the forecast of 170,000. Today, we’ll see another labor report called the Challenger job cuts. Of course, none of this really gives us an indication of the Jobs Jamboree, because of all the “adjustments” the Bureau of Labor Statistics makes before printing.

And of course, with it being a “Tub Thumpin’ Thursday,” we’ll see the latest weekly initial jobless claims for last week. Look for 380,000

Gold and silver have traded down this week. I shake my head in disgust at the things going on behind the curtain with these two. The demand for the two metals remains strong. Last week at the Casey conference, every person that stopped by our table, eventually wanted to know about our gold and silver offerings. Eventually, the demand will win out over the price manipulators.

In the category of central banks that have deep-sixed their currencies besides the Fed and the dollar, we see the Brazilian real (BRL) and the Indian rupee (INR). Nasty moves these two have made in recent weeks, and it all comes back to the central bank’s moves to get their currency weaker. I told you a few weeks ago that it appeared to me that the markets had given up on the Brazilian real, and that has really played out since.

I had a Casey conference attendee stop by the table on numerous occasions last week and keep asking me if I was sure about the Swiss franc being pushed lower by the central bank. Seems the attendee only wanted to buy francs. I said, “That’s fine, but you need to be aware that the central bank did a de facto devaluation of 10% last September and is talking about more.” I probably said that about a dozen times last weekend!

Then yesterday, I talked about the future price of oil and said that well-respected analyst Porter Stansberry had forecast a $40 price of oil in the next year. I then went on to talk about what a great country we are and why that shouldn’t be something we can’t get to. I then talked about the CPA… what a dork! I meant the EPA!

A lot of you thought I was agreeing the Mr. Stansberry. Well, I wasn’t agreeing. I asked, “Why can’t we do that?” and then gave a few examples of why it will be difficult to get to. Marin Katusa over at the Casey Research team wrote a long article about how this will be difficult. You should to go to www.caseyresearh.com and find that report. Marin does a great job!

To recap: The currencies are stuck in a rut. The euro is being hung out on a line by the ECB meeting today, after seeing some very good results from bond auctions in Spain and France this morning. The New Zealand dollar/kiwi is the worst performer overnight, as their unemployment rate gained in the first quarter, and that has put the kibosh on the hopes of reversing the emergency rate cuts from last year. U.S. data continue to be weaker, except the national manufacturing data, which still is puzzling to Chuck.

Chuck Butler
for The Daily Reckoning