Draghi Throws the Euro Under the Bus

And now… today’s Pfenning for your thoughts…

Good day. And a Happy Friday to one and all!

So. Yesterday, I told you that the European Central Bank (ECB) meeting had the conn on the direction of the day, and brother did they and their president, Mario Draghi, get things rolling! And not in the right direction for the euro I might add! So, here’s the skinny…

Basically, Draghi, set in motion, greased the tracks, and alerted the markets that unless the Eurozone economy has a miraculous recovery in the next six weeks, December is doing to be the meeting that the ECB will announce additional stimulus in the form of more Quantitative Easing (Q/E).

This announcement sent the euro to the woodshed, and not just the little woodshed, but the BIG woodshed where major whackings take place! I made fun of the euro traders who threaten Draghi with the thought that they would push the euro stronger if he didn’t at least sound dovish, so with the euro getting hammered because he did sound dovish and more, imagine how strong it would have been this morning if he had sound more like the guy who a couple of years ago said that he would do everything to protect the value of the euro!

But he didn’t, and the euro is down more than two cents from earlier this week. But, the euro has carved out a small gain this morning, so maybe a tourniquet has been applied here. It certainly looks that way!

Yesterday, I made the comment that:

…exports throughout the Eurozone have been picking up, manufacturing is stronger across the board, and inflation is inching higher. Makes you wonder why the markets would be playing hard ball here for more stimulus doesn’t it? Sounds to me as though the economy is in recovery mode, and to go back to the well here and add more stimulus would be a push that could really upset the applecart. You know Too Much of Something is not good.   

But apparently, Draghi, and his fellow ECB members don’t feel this way, and certainly don’t see the Eurozone economy in recovery mode.  Hmmm… On one side of the Atlantic we have a Central Bank that doesn’t see a recovery that’s going on, and on the other side of the Atlantic we have a Central Bank that sees a recovery that’s strong, that isn’t.  And the markets put all their faith in these Central Banks.. Makes sense to me… NOT!

And to prove my point about how there is a recovery going on in the Eurozone economy, the Eurozone “flash PMI’s” printed this morning and remained encouraging to me. For those of you new to class a PMI, is short for a Purchasing Manager’s Index, which is what the Manufacturing Indexes are called throughout the world (except here in the U.S. where we changed the title to ISM)  and a “Flash” report is what it sounds like.

This is the “draft” if you will of the actual report that will print later in the month, but gives us a real good indication of what the National PMI will be in the Eurozone. And this month, the PMI for the Eurozone remained at 52. A good number, not falling, and keeps the economy on the rally tracks.

The euro has Cousin Eddie following it around, but that doesn’t mean bad thing for the other currencies. In fact, what Draghi did yesterday, is basically tell the markets that the euro is good to go for the financing side of the Carry Trade.

What he didn’t have to tell them was that the currencies like the New Zealand dollar/kiwi, Australian dollar (A$), Russian ruble, Indian rupee, and Brazilian real, you know currencies with a positive interest rate differential to the euro, are the currencies to purchase on the other side of the Carry Trade. And those currencies are all sitting with gains this morning that started being carved out yesterday and have carried over to this morning’s session.

And one more thought on the ECB meeting yesterday and particularly on Mario Draghi — longtime readers might recall that I was not happy about the placement of Draghi, the former head of the Bank of Italy, as the ECB President, as I was not happy about the former ECB President, Claude Trichet, when he was placed as president of the ECB, years ago.

These were not guys from “prudent Central Banks” and I worried about their overall stance toward providing price stability in the euro. Trichet turned out to be just fine, much to my surprise, and Draghi, has been somewhat OK, and then not somewhat OK. But I’ll tell you one thing about Draghi, that he has mastered better than any other Central Banker, and that he gets the maximum effect with his words, without actually having to take action.

OK, let’s move on from the ECB and the euro for now, I’m beginning to develop a rash on all this talk. So, let’s move along down the road and see what’s going on elsewhere.

Well, I did tell you that the currencies that enjoy a positive interest rate differential are rallying this morning, so that’s a good thing for them. Especially the Indian rupee, which hasn’t been able to mount much good lately. Again, I’m still keeping that light on for Indian PM Modi to unlock the Indian economy using innovative reforms, but that light is beginning to grow dim.

China was in the news yesterday, and not because of anything going on new in China. ECB President, Draghi, mentioned the recession in China three different times yesterday as he attempted to throw the markets off the scent of his problems and get them thinking of China’s problems. I found this “deflection trick” to be artful. And reminded me of the Jedi mind tricks that we accuse the Big Boss, Frank Trotter, of pulling on us through the years.

But wait! This just in! China cuts their internal rate by 25 Basis Points and lower their Reserve Ratio again!  I told you all that we would continue to see rate cuts and reserve ratio reductions from China, and here we go! But isn’t it nice that a country has interest rates to cut when they need to stimulate their economy?  You bet your sweet bippie it is!

In Canada, where Draghi didn’t make any mention of their September GDP will print, and while it’s old news at this point, it’s still important to see if the summer months recovery in economic growth in Canada sputtered out in September or kept going. Canada’s GDP gets shuffled a lot because their dependence on energy so much.

So, if you take out energy, you really don’t get a real picture of the Canadian economy. I think when it’s all said and done today, the year-on-year increase for GDP will be 1.1%…  Nothing to write home about, but. better than those nasty prints we saw last year in Canada!  The Canadian dollar/loonie, which last week had jumped up to a strong 77-cent handle, is holding strong with a 76-cent handle this morning, after dealing with the deficit spending new ruling Party was elected in Canada.

The Canadian dollar/loonie is going to be our next currency of the month, because of all these changes going on in Canada, and will be in your email box in a couple Sundays from now. Yes, the whole process takes a couple of weeks!  Same with the Review & Focus that’s sent monthly to clients of EverBank World Markets, and is always chock-full-o-great-stuff, I must say! HA!

Gold sure liked what Draghi had to say yesterday. Sure if one of the world’s top 3 economies says that things are so bad that they will need to add to QE/bond buying then it makes sense that gold traders began to mark up the shiny metal and its kissin’ cousins, silver, platinum and palladium. I’ll have more on gold later.

The Singapore dollar is stronger this morning, and since they certainly don’t have a positive interest rate differential to anyone, except the negative deposit rate countries, so it must be something fundamental, and looky there, it is! Singapore CPI, when adjusted for the removal of healthcare which was cut by the government earlier this year, and is being removed permanently, eventually from the calc, was up 0.7%.

That’s a strong number for a small country like Singapore, and therefore whenever inflation begins to move higher, guess what else does? That’s right if you’ve paid any attention over the years to what I say about Singapore, you know that the Monetary Authority of Singapore (MAS) uses the Sing dollar (S$) as their main tool to combat inflation, and they do that by allowing the S$ to get stronger, which it is doing this morning! I know, a long explanation to say the S$ is stronger this morning. But, it is what it is…

Well, next week, the FOMC will meet. Yes, I guess you had either probably forgotten about that, or just didn’t care to know, so sorry for bringing it up.  There’s little fanfare going into this meeting like there was last month’s meeting where the Fed was supposed to be hiking rates, but chose not to, adding to their non-moves in March and June, which were also supposed to be prime meeting months to hike rates.

You know, my spider sense is tingling here. I can easily see the Fed doing something like hiking rates 10 basis Points at this meeting, since no one and I mean no one is talking about this meeting. Yes, I’m quite well aware of the fact that I’ve said the Fed won’t hike rates this year or next year, but what I’m saying here, is that I wouldn’t put it past them to do something like that to “surprise” the markets, but given them a bone of a rate hike. 10 Basis Points is not really a “rate hike”, it’s more like an attempt to save face with the markets.

The U.S. Data Cupboard goes back to being pretty bare today, with only the Markit PMI for this month. Recall that Markit is a non-government unit that prepares economic reports. They are NOT the national report that the markets go ga-ga over, but still the Markit reports are useful and looked at as indications.  Well, the Markit PMI (manufacturing Index) is forecast to drop this month, and that would be keeping with the trend for the U.S. PMI, which has dropped nearly every month for 13 months now.

OK.. I told you earlier that I would have more on gold later. But I really don’t. What I do have is something on silver! I found this on MarketWatch here.

And basically the article talks about how silver coins are scarce and that certain countries have set limits on the amount they distribute, but that the prices for the metal haven’t budged much from their recent 6-year low. You know that’s something I’ve been talking about for a long time now, so it’s nice to see MarketWatch get on board.  Here’s a quote from the article:

Silver is experiencing an “unprecedented industrywide phenomenon,” with strong demand for the physical metal prompting mints in certain countries to put silver bullion coins on allocation, according to The Silver Institute. In recent history, allocations have only been put into practice occasionally by the U.S. Mint.

And with that, I need to get off the bus today, and send you on your way to having a FantasticoFriday!

Regards,

Chuck Butler
for The Daily Reckoning

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