Chuck Butler

The currencies continued to push the envelope versus the dollar yesterday. The Aussie dollar (AUD) was really kicking sand in the face of the US dollar yesterday, gaining over 1 full cent on the day! So all those traders who sold their Aussie dollar futures in the past two weeks, are piling back in, I bet! The euro (EUR) stalled out just above 1.31. But the rest of the “little dogs” were off the porch and chasing the dollar down the street.

But that was yesterday, and some of the currencies are still gaining versus the dollar, and some have stalled out, for they need the Big Dog, euro, to run with them, and like I said above, the euro stalled out just above 1.31.

The Aussie dollar blew right through its 200-day moving average, yesterday, and touched $1.04 this morning — the latest push coming from economic news coming out of China. I told you yesterday that China’s third quarter GDP was due to print, and print it did! The Chinese economy expanded 7.4% in the third quarter versus a year ago. The consensus was for a 7.4% increase, but I was hoping for a little more as I told you I thought it would be around 7.8%… (And it was +7.8% “Real GDP”, whatever that is!) But that wasn’t all for China.

Chinese industrial production and retail sales also printed strong numbers for September, thus indicating that China’s economy has turned the corner on its government-generated slowdown. If you’re keeping score at home, Chinese industrial production gained 10% in September, and retail sales grew at a 14.2% clip. Now that’s strong! And if you only want to believe half of what the Chinese report, then a 7.1% increase in retail sales is still cooking with gas!

So… The risk sentiment is strong, except with gold and silver. These two have been left behind at the station, and the Love Train carrying the currencies has departed. This improved risk sentiment is not playing well with the US Treasury yields. The 10-year Treasury’s yield has risen to 1.80%… (Just a couple of weeks ago it was 1.64%). And remember, when the yield rises in a bond, the bond’s price goes down. But we’ve seen these moves higher in yields before, and every time the Fed steps in and squelches any attempt to take yields even higher. The bond markets used to be able to direct yields. But with the Fed buying as much as they can these days, remember they participated in 61% of the Treasury auctions last year, there’s not much the bond markets can do. Although I would still love to see them try!

In Sweden overnight, an article in a Swedish newspaper really threw cold water on the markets’ thoughts that the next move in rates would be down. Sweden’s central bank, the Riksbank (and the Riksbank Governor Ingves) was in the news. In the article, Ingves warned that household and corporate indebtedness must be considered when setting rates. These words were like a dagger in the heart of the rate cut campers, and the Swedish krona (SEK) rallied!

The Riksbank meets next week, and I would bet a dollar to a Krispy Kreme that the Riksbank would leave rates unchanged at that meeting. That would be good for the krona. But remember, the krona, the Norwegian krone (NOK), and Danish krone, all need the euro to push against the dollar for these to move higher. For now, that is. I keep telling you time and time again that one day the markets will wake up and smell the coffee. The coffee that says these countries’ fundamentals are not Greece, Portugal, and so on. But until then, they get tarred with the same brush as the euro.

Remember yesterday when I was talking about the Canadian dollar/loonie (CAD) and saying that the fundamentals there continue to be strong, and that’s why the markets keep the loonie above parity, even though the Canadian government and central bank don’t like it one iota? Well… More strong data has printed in Canada. Take Canadian Manufacturing, which rose at a faster-than-expected clip of 1.5% in August. And then here’s something that the Canadian government and central bank are going to have to stop and think about… Exports are up in Canada — even with the stronger-than-parity loonie!

Look… Let me set this straight for Mr. Carney (Bank of Canada Governor)… If you have items/stuff that other countries demand, the price of your currency isn’t the “all-in” of everything that goes into the valuing of the export. You can ask the Germans about this. Yes, they would love to see the euro around 1.20. But, when you make things of value, and they are in demand throughout the world, you can live with a stronger currency. There’s no need to go jimmying the currency’s value lower so your exports can be more competitive. This goes out to all the other central bankers that are trying this “debase your currency so exports are more competitive” game. HEY! Make something of value, and you don’t have to jimmy the price of the currency lower!

The news out of the Eurozone continues to have a calming effect. But an article in the Financial Times (FT) just might begin to stir things up. The FT reported that “plans to create a single euro-area banking supervisor (the European Central Bank/ECB) are illegal. The FT claims that they obtained a secret legal opinion for the European Union Finance Ministers. I would say that this probably has a lot to do with the stalling out of the euro this morning.

I think, as we go along here, that there will many of these seeming setbacks. But, as long as the Eurozone Leaders keep their heads down, and keep working toward a resolution of their debt problems and bond yield problems, that things on the “other side of all this” will be better.

At least they are trying something! And maybe they’ll be wrong, and have to go back to square one, but at least they tried! Here in the US it’s just carry on and keep piling up debt. I know you all are tired of hearing me harp on about our ever-increasing debt. But, unless someone does something about it, we have to keep this in our sights, so we aren’t standing there holding the bag, when the “you know what” hits the fan!

And with that. My “Then There Was This” story today is from our former General Accounting Head, David Walker, who has taken his thoughts across the country, and put them in a book. But, just for you, dear reader, we’ll have David Walker talk to us today. So, let’s go to the Big Finish!

Then There Was This… From Moneynews.com…

“The overwhelming majority of Americans feel fiscal reform should take priority this election season, though few expect it to happen, said David Walker, former Comptroller General of the United States and current CEO of the Comeback America Initiative, which promotes fiscal reform and responsibility.

“Walker recently concluded a ‘$10 Million a Minute Tour’ bus tour, named after the speed at which unfunded promises are climbing, and reached out to Americans in 16 states and the District of Columbia to convey to largely undecided voters issues surrounding fiscal reform in the country.

“‘We found out 97 percent of the people we interacted believe our fiscal challenge is a major challenge and should be a top priority for the presidential candidates as well as other candidates for office, yet only 8 percent have confidence in their ability to work together to get something done in 2013.’

“‘Eighty-five percent believe that it’s going to take a combination of spending reductions and additional revenues to get the job done. We talked about reforms in eight different areas, including social insurance programs, taxes, defense, budget controls, political reforms — the minimum support we got for the reforms was 77 percent.’”

Chuck again. OK. So more people in the country are realizing that going from $15 trillion in debt to $16 trillion in just 10 months is getting out of hand. But, I have to think that those calling for spending reforms are not the ones receiving the payouts from the government. And then the biggest thing here is the question, “Will lawmakers listen to the voters?” I doubt it. But there’s always a chance, right?

To recap… The currency rally continued throughout the day Wednesday, and in the overnight markets, but left some currencies behind, as their respective rallies stalled out. The euro stalled out, probably on a story in the FT about how a plan to give the ECB more power is illegal. Canada continues to print strong economic data, in spite of a stronger-than-parity loonie, and the Aussie dollar rallied back to $1.04 overnight, before giving up some of that gain this morning, probably on profit taking.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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