07/05/11 St. Louis, Missouri – First of all… The markets overseas were open for business yesterday, as we enjoyed our holiday, and the action was muted, but had a “buy dollars” bias… That bias, though, seems to have faded this morning.
Sweden’s Riksbank hiked rates this morning 25 basis points (1/4%) to an internal rate of 2%… But the Riksbank statement afterward really left the markets feeling as though this could have been the last one in this series that has seen internal rates rise to 2%… So… With that feeling, the krona (NOK) was unchanged on the rate hike… Pretty strange, but, when a central bank disses their own move, it’s pretty difficult for the markets to move past that…
While we’re on central bank meetings… The Bank of England (BOE) and the European Central Bank (ECB) both meet this Thursday… The BOE is going nowhere with rates… But this is the meeting at which, as I told you last month, the ECB would push rates higher… So, now we’re down to the wire, and I still believe the ECB will hike rates this Thursday… Even with the latest data that showed manufacturing slipping and today we saw Eurozone retail sales add to April’s weakness with a 1.1% drop…
You see, to the ECB is all about providing price stability… And inflation is running at 2.7% in the Eurozone… That’s too high for their taste…
OH! And the Reserve Bank of Australia (RBA) also met last night, and they kept rates unchanged, but did maintain their interest rate hike bias… So, the Aussie dollar (AUD) has that going for it!
S&P threw a cat among the pigeons this past weekend when they warned the French and German banks that any “extension” or “rollover” of Greek bonds would force them to call that a default… So, that really throws a spanner in the works, eh? Someone from France and Germany needs to take an S&P official “out to dinner” and charm them, so that the S&P changes its mind on this…
It’s funny, though… Because now we could have some saber-rattling going on… The International Swaps & Derivatives Association (ISDA) apparently carries the most weight with the markets, and an official at ISDA stated that the French Plan is a “voluntary rollover” and therefore would NOT trigger a default…
So, as usual, the euro (EUR) went back and forth, up and down, and all around with every piece of news like this… And the high yielders always get sucked into this too, as it draws back on the risk taking…
But all this talk of whether the French and German plan to rollover the maturities is a default or not, has got to weigh on the Greeks… They may be left with no other choice, if the ISDA doesn’t win the markets’ favor, than to leave the euro, and go back to the drachma… They could devalue the heck out of the currency and pay back their debts with cheaper drachma… Yes, all their bonds are denominated in euros, so there would have to be an “initial conversion” and then the devaluing would begin…
Does any of this sound like it could happen here? You bet it could, folks… And yes, I know we have the reserve currency, and a printing press, and the world’s largest financial market… But… We’re headed there… No question in my mind! I say this because of the direction of the debt in the country… Have you ever seen a graph of how the debt has accumulated in this country? The direction is not good, and more recently it has taken off higher and higher… And all this saber rattling in Washington DC over spending cuts is just that – saber rattling… I just don’t believe that lawmakers have the will to make the cuts that need to be made…
And as the debt goes higher, we have to find financing for it, which means the Treasury auctions get larger and larger… I had this thought this past weekend… Ever heard of someone “living paycheck to paycheck”? Well… The US is now doing the same, but only their phrase is living “auction to auction”…
OK… Enough of that! I see the New Zealand dollar/kiwi (NZD) has booked another post-float high, this morning… Not sure what excites traders and investors about kiwi… It used to be one of my faves, but then the New Zealand government allowed their debt to get out of hand… At one time their debt-to-GDP ratio was around 8%… And I used to tell people that I couldn’t bang on the US about their debt if I turned my back on New Zealand’s debt…
But after reaching 83.30 overnight, the profit-taking set in, and kiwi is back below 83-cents…
The US and dollar received some good news on Friday… The ISM Manufacturing index bumped higher, after posting losses in the index number for consecutive months… Could this be a turnaround for manufacturing here in the US? I doubt it… In fact, if I’m right, this data will have turned out to be a dead cat bounce… (Don’t worry, no animals were hurt)…
And on this Friday coming up, we’ll see the latest employment data for the US… Yes, it will be the Jobs Jamboree, and if last month’s ugly turnout is any indication, this month should show more of the same… A weak jobs market…
And gold… Hmmm… Back to $1,500 this morning… After spending most of last week below that figure… It just looks to be forming a nice strong base here, folks… I could be wrong, but that’s what it looks like to me!
To recap… The currencies slipped back on Friday, and yesterday, but that dollar bias seems to have faded with the new day… S&P says the bond “rollover” plan for Greece is a default, but the ISDA doesn’t agree… And the euro has been held hostage by these comings and goings for Greece…
Chuck Butler
for The Daily Reckoning
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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100% correct Chuck, any deficit reductions agreed on would be just more smoke and mirrors, much as the current US budget with the cuts set down in it. Our ability to print our own money will be one of our greatest enimies if the powers that be decide to continue their policy of more is better. How can a group of such smart people be this stupid. Makes one think that there is another agenda at work here. Maybe I am just paranoid but this whole mess has the stink of a setup, and no matter what, guess who gets to pay in the end?!