10/04/10 St. Louis, Missouri – Just Friday, Chris Gaffney said to me, “it’s about time the Eurozone GIIPS deficits get back in the news to stop this euro rally”… And so it was to be last night… The euro (EUR) actually traded over 1.38 last night, to 1.3807… But then, Nobel Prize winning economist Joseph Stiglitz came out and said, “the euro’s future is looking bleak”… Stiglitz is concerned because countries such as Germany have trade surpluses, while the GIIPS (remember, it’s Greece, Italy, Ireland, Portugal, and Spain) have trade deficits…
OK… So, it’s Germany’s fault that these countries didn’t see that the way to make a wealthy nation is to make things, produce things, invest in those manufacturers, and export? Anyway… We used to see that way here in the US, but those days are gone with the wind, and Rhett Butler riding off into the sunset!
Well… Since I arrived this morning, the euro has rallied back from 1.3660 to 1.3690… So, maybe the Stiglitz bomb from left field, won’t be that damaging…
The news that pushed the euro over 1.38 came this weekend in comments from the Chinese Premier, Wen, who said, “I have made clear that China supports a stable euro. We will NOT reduce the holdings of European Bonds in our foreign exchange portfolio. China has already bought Greek bonds, and China commits very positively to buy new bonds to be issued by Greece.”
Talk about a boost for the euro! But again, Stiglitz turned the lights out on the rally that came about from comments by the Chinese…
Well, folks… As I said on Friday, I’m 2/3rds toward the Reserve Bank of Australia (RBA) hiking rates this week (tonight for us, tomorrow for them) after all the things we talked about last week… But there was one more clue for us on Friday…
You see, Australia tracks the prices of their commodities… Not all commodities, but the ones that are Australia’s, like iron ore, coal, and others. They put their commodities into a Commodity Index… And guess what the index showed last week?
The August Australian Commodity Index went up 1.5% in September! That puts the index at a 52% increase this year, and is now actually higher than the peak it reached in 2008!
So… Why has this moved me to believe the RBA WILL HIKE RATES now? Well… The Official Cash Rate (OCR) in Australia back in 2008 was… 7.25%, now it’s 4.5%… Guess what needs to go higher to fight inflation from this commodity boom? You got it! The current Aussie Official Cash Rate!
Don’t expect their OCR to go back to 7.25% in the near future… But 4.5% is going higher, and if not tonight, then the next time the RBA gets together!
OK… Here in the US the debate about when and how much Quantitative Easing (QE) is going to be administered by the FOMC is dominating the news wires, and TV talking heads. The New York top Fed Head, William Dudley, is convinced that more QE is on the way, unless “the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
I guess, the “too long” leaves the door open to wonder how long the FOMC will wait… Well, the FOMC next meets the first week of November, so they’ll get to see 1-month’s worth of data here in the US. And at the end of this week, the first of those pieces of data that will move the FOMC will print… This Friday will be a Jobs Jamboree, with the September labor numbers printing… Right now, the “experts” believe the overall job creation for September will be flat, and may even show a net loss of jobs.
I would have to say, that if we show a net loss of jobs from September, that the FOMC would most likely begin their process to implement more QE… So, this Friday is HUGE on the data scale… Oh, there will be other data this week, but none-so-important as the Jobs Jamboree on Friday!
The FOMC is just looking for an excuse to begin implementation of their next round of QE… And a less-than-stellar result for September employment could very well be the thing the FOMC is looking for… Look folks, the FOMC said in the statement following their last meeting that inflation was too low… Then we had Fed Heads talking all around the country, and all of them were concerned about inflation being too low…. So, in case you missed that, I think it’s central bank parlance for “we going to implement QE and get inflation moving higher again”…
Now… The dollar has already been sold on the QE implications, but what happens when the FOMC actually pulls the trigger? Well… I personally feel that when the FOMC pulls the trigger this time, it will be HUGE! The amount they announce will be so large, that everyone will believe the FOMC really means it when they say that inflation is too low! And the mere size of this next round of QE will “surprise” the markets, and that will cause some major dollar selling… Just my opinion, folks…
On Friday I talked briefly about the latest run-up in the price of oil… Well, the price of oil is still moving higher, reaching $81 this morning. And that, as long time readers of the Pfennig know, underpins the Canadian dollar/loonie (CAD). The loonie is rising again, getting close to 98-cents. So… What are your thoughts for the price of oil? Because if you believe that oil prices will continue to be high, or even go higher, then you’ll want to look to buy loonies… If you don’t believe in the strong oil prices, then you’ll want to look to sell loonies, and take your profits…
Yes, loonie has other things going for it, like a positive yield differential to the US dollar, but, right now, oil is ruling the roost.
I see that gold and silver have sold off a bit overnight, with gold down $3, and silver down almost a dollar… You would expect to see some profit taking after a week of record setting trading in gold, and so it is overnight. But, if the US data this week is weaker and shows more uncertainty… Well, you know the routine…
Lets go back to Friday’s data… Remember, it was the Personal Income and Spending day? Well… Personal Income out-lagged Personal Spending for once in August, as Income was up 0.5%, and Spending was up 0.4%, and the PCE Deflator that I made a such a big deal out, and even sang “Puff the Magic Dragon” to, was a non-event… The U. of Michigan saw their Consumer Confidence Index come in flat, and the ISM Manufacturing Index was also flat in August…
There’s two ways you can look at those “flat” results… Either they are going to slip badly, or they are forming a new base to move higher… Well, since data isn’t like the markets, I would say they are getting ready to slip badly.
Then there was this… Well… I really stirred up a hornet’s nest with my talk about how close the states were to a Constitutional Convention (35 states are “in” 38 states are needed)… Look folks… I was just stating my opinion; I would love to see Senators go back to the way they were assigned by each state. I would love to see income tax revised, and I would love to see the end of the Fed/Cartel… That’s what I meant when I said repeal 1913, for all of those were put in place in 1913, by Woodrow Wilson… But again, it’s just my opinion, if you don’t agree, that’s fine, just say so, there’s no need to call me a “nut job” or other things…
To recap… The currency rally of Friday was initially added on to overnight, as China’s Premier Wen, voiced confidence in owning European Bonds. But that rally ran into a roadblock put up by Joseph Stiglitz’s comments about the euro. However, since early this morning, the euro has rallied and gained some of its lost ground back. Fed Head Dudley had plenty to say about inflation being too low, and the need for more QE should the economy not turn around… In other words, more QE is coming! The Jobs Jamboree this Friday should be the keymaster for the gatekeeper… In other words… The FOMC will be looking for any sign of weak data as an excuse to implement QE…
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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we know you’re not a nutzo, chuck!
compared to bernanke, geitner, and prez0, tho, you ARE a wee bit different!
Don’t take any comments personally, Chuck. When you write for a blog – and DR is a blog – you’re going to attract a ton of loose lipped, ill thought out and rude responses from some who read you and disagree. Mostly those who name call have no valid reason to disagree so they rant instead!
Just smile and keep on doing what you’re doing..
The Germans are making money but more of their euro members are losing money. Can the Germans’ incoming outpaces the rest of euro members’ outgoing. Obviously, what is the future for euro? You may hoard all bonds of euro issuance. Unless you are able to take over the sovereign or else you have to rely on the quality of paper.