02/23/12 St. Louis, Missouri – The markets seem to be pushing the euro (EUR) past 1.33, this morning. And with the euro trading in a higher handle this morning, the rest of the currencies are reacting favorably. So the dollar is being chased to the woodshed.
German business confidence as measured by the think tank IFO rose more than was forecast this month and reached a seven-month high. I know that to eurozone members, a great weight has been lifted off their shoulders for now. But in reality, the Greeks have a very long road to travel, and one stumble could end up sending these confidence reports right back down, along with the euro.
The folks at the IFO institute say that German business confidence rose for a fourth consecutive month, to a seven-month high back to last July. And it plays well with my call last month that we would begin to see stabilization of the eurozone, as the “center holds”…
A dear reader sent me a note that blasted the ECB for what they did to Greek bondholders. But in reality, and not that it’s “right”… It’s the same thing the US government did to Chrysler bondholders in 2008… Don’t remember that? Ahhh, grasshopper, that’s exactly what the government would prefer you did — forget their moves, and they just have to abhor a smarty-pants like me that reminds everyone what went on… I told the Big Boss, Frank Trotter, the other day that one day, probably when I’m long gone, what I do will be twisted by the government to be considered “terrorist.” But for now, I don’t have to worry, although Big Brother is looking over my shoulder all the time!
Early this week, I told you that I thought the Japanese housewives were back… Uridashi bonds were flying of the shelves again, and guess what else is happening again? The carry trade! Yes, that trade in which an investor sells a low-yielding asset like a currency and buys a high-yielding asset/currency… They book the interest rate differential just as a bank does between deposit rate and lending rate… As long as the currency they sold (and probably sold short, without owning it) doesn’t rally, the trade looks like a real winner…
Remember in 2008, when all hell broke loose in the markets? There were more “carry trades” on the books than you could shake a stick at. With all the world collapsing around us, these carry trades were unwound… and yen (JPY) was able to gain, along with Swiss francs (CHF) and US dollars, which were the bellwethers for funding currencies (sell side) for the carry trade… and unwinding the trade meant those sold positions had to be reversed (bought).
So far, it looks as if Japanese yen is the poster child for these trades, as the dollar hangs on, losing ground grudgingly, and the Swiss franc continues to defy gravity. But remember, March is the Japanese year-end, and we always see some activity in March, as yen is repatriated home to shore up, clean up and close up the books. So this all-out weakening by the yen may have a stay of execution in March…
Speaking of Swiss francs… The floor level for the franc/euro cross is 1.20, as set by the Swiss National Bank (SNB) back in September. The cross rate this morning is 1.2057… We’re beginning to get to the cheese that binds for the SNB, folks. And with the franc rallying back to the 1.10 handle versus the dollar, it’s going to get very interesting to see what the SNB has up their sleeves… Whatever it is, it will be harsh toward the franc, as the SNB wants a weaker franc… I would be very careful here… Yes, the franc is rallying again, but remember how quickly the rug was pulled from underneath it last September… It could happen again!
So yesterday afternoon, I was reading my MarketWatch midday report, and one of the headlines read, “Gold Backs Away From Recent Highs.” I turned and said to Tim Smith, “See what happens when you put something down in writing about market assets?” I said that because while I was reading that headline, gold had mounted a rally and was up $12.50 on the day, only to end the day up $20…
I find myself kicking the trash can all the time when I see an asset moving in one direction in the morning, only to have it reversed, Shoot Rudy, sometimes before I get to the end of the letter! But I carry on despite my shortcomings….
OK, onward and upward… The Aussie dollar (AUD), while rallying this morning, is seeing the move tempered a bit by the political moves last night. The Aussie finance minister, Rudd, quit his post, thus pushing Prime Minister Gillard to call for a ballot within her Labor Party’s caucus. She has the votes to continue, but the brief uncertainty didn’t play well with the A$ rally…
You know the saying about everyone having an opinion, right? Well, everyone has an opinion on China, and most of them have been wrong… here’s the latest… The World Bank and a Chinese think tank believe that China could face an economic crisis unless it implements deep reforms, urging China to scale back its vast state-owned enterprises and make them operate more like commercial firms.
Hmmm… Sure, that would probably work… but an economic crisis? I’m not buying it! Instead, I’ll stick to my call — over two years ago — that the Chinese economy would not collapse, but moderate. We’re still seeing signs of this moderation, with GDP growth expected to narrow to 7.5% this year from 8% last year and the 8% average from 2005 to 2011… China continues to shift the economy’s drivers to domestic demand, and that will bring about more moderation. But does it stop the Chinese from their slow, steady appreciation of the renminbi? I don’t think so…
Did you see that the ratings agency Fitch cut Greece’s credit rating yesterday from CCC to C, which was bad enough, but Fitch went on to say that “a default is highly likely in the near term.” Hmmm… I guess the bailout funds — which, along with the austerity measures, will bring Greece’s debt down from an unserviceable 160% of GDP to a barely serviceable 120% of GDP by 2020 — didn’t impress the folks at Fitch…
I say that sarcastically, which, if you know me and have read this letter a long time, you read into that, and I didn’t have to tell you, right?
Here’s the thing that gets me banging on the keyboard… by 2015, just three short years, the US debt will be around 140% of GDP. What’s Fitch going to say about that? Probably nothing! They are like the wannabe bully that picks on only kids they know can’t fight back…
I told you earlier in the letter that gold rallied about $20 yesterday. Apparently, the technical buyers were out in force, as they believed that gold had hit a technical indicator. Hmmm… I’ve got an idea for these guys… Just buy gold, and be happy… don’t wait for an “indicator,” because that indicator came long, long ago, when the US began building up debt, followed by the Europeans… I have a bumper sticker by my desk of my friend the Mogambo Guru, and the bumper sticker says, “What would Mogambo Guru buy?” and then the answer, “Gold, Silver, and Oil, moron.”
OK, I’m not calling anyone a moron… you have to know the Mogambo Guru… he’s not calling anyone a moron, either. He’s just saying that after all this debt accumulation, what else is there to buy?
I haven’t talked to the Mogambo Guru in a long time. I did receive an email from a JMR (Junior Mogambo Ranger) the other day. All this Mogambo talk has me queuing up an email to him!
Anyway, gold is trading at a three-month high this morning. Silver is, too, and oil? It’s trading above $106 this morning…
Speaking of silver… Did you see that India imported 5,000 metric tons of silver in 2012? They imported 4,800 metric tons of silver in 2010… Here’s the skinny, folks… As I’ve written about here for a couple of years now, gold in India is very important… And is very important when two people wed… and this has fueled the gold imports in India. But gold has gotten very expensive, and with the fledging middle class in India not having a lot of disposable income, they have turned to silver…
Silver, as I wrote in a magazine article a year ago, has become the new gold, with mom and pops able to buy lots of silver versus gold…
Then there was this… Since I’m talking about silver so much this morning… Silver guru Ted Butler recently wrote to his readers about the upcoming decision by the CFTC, in which they admit there has been manipulation in silver… Here’s Ted Butler:
“In the event that the CFTC does what is correct… and what is required of them to do by the rule of law, then you better own some silver. A sudden announcement that a US government agency found silver to have been manipulated to the downside would likely trigger off reactions from world silver producers, consumers and investors that are impossible to fully comprehend. Miners would be angry for having been cheated by artificially low prices. Industrial users and investors would rush to buy before others did so. This event alone could quickly spiral into the silver bubble I wrote about recently. The legal repercussions are also hard to fathom for a manipulation that lasted for many years. But the bottom line is that it would likely set off a buying wave never seen before. Please remember, this is a highly unique situation specific only to silver, as there is no gold or corn or crude oil investigation under way. Therefore, any price impact should be primarily confined to silver. This outcome is not the only reason to buy and hold silver, but it would be enough if it were the only one.”
Chuck again… You have to realize that a guy like Ted Butler (no relation that I know of, but with a last name like that, he must be one smart dude! HA!), has been called a loon by many people for what they called his “crazy conspiracy theories.” So to have the CFTC do the right thing would be a HUGE vindication for him. But the BIG item here is whether the CFTC does the right thing… In my opinion, they won’t go “all in” and will probably hedge their decision, so that no one knows for sure what just happened. That’s my experience with the CFTC…
To recap… German IFO business confidence hit a seven-month high this month, and this news has fueled a risk asset rally this morning. The euro traded to 1.3315, but since I’ve been writing this morning, has fallen back to below 1.33. The carry trade looks as if it’s making a comeback, but be aware that yen repatriation usually happens in March. And the A$’s rally is tempered as Gillard has called for a vote after the finance minister stepped down.
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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