Chuck Butler

That darn Reserve Bank of Australia (RBA) really threw a cat among the pigeons last night, by not only cutting their interest rate, which was expected, but by cutting it by 50 basis points (one-half a percent)! While I had heard calls for such a deep cut, I really didn’t think the RBA would be so dramatic. The economy was not that slow, jobs were still being added and while China’s economy has moderated, it hasn’t fallen off a cliff!

Why, then, Glenn Stevens, did you decide that 50 basis points (BPS) were needed? We won’t know for sure until later this year, but maybe, just maybe, the RBA is getting ahead of the curve.

OK, I told you that the markets had forecast additional 25 BPS rate cuts the rest of this year, prior to the move yesterday by the RBA. So with a 50 BPS cut, maybe the RBA is bringing forward those additional rate cuts, and actually getting ahead of the curve!

Of course, that doesn’t help the Aussie dollar (AUD) now, for the 50 BPS rate cut was more than the markets had “priced in” to the A$. The surprise at the size of the move, and everything else — like the next rate cut coming in the fourth quarter — got taken to the woodshed. The A$ lost over one full cent, falling from $1.0425 to $1.0315 this morning.

A quick trip across the Tasman shows us that the New Zealand dollar/kiwi (NZD) has seen sympathy trading, and has lost about 1 cent alongside the A$.

The currencies, minus A$ and kiwi, have for the most part remained in the tight ranges they’ve been in for about a week now, and the bias to sell dollars remains as a weak bias right now. Gold has given back the $13 it gained last Thursday, and later, I have the response to the Barron’s article that I posted yesterday on silver. Stick around for that! HA!

Two currencies this morning are on my list of “currencies that should be losing value,” and both are NOT losing value! The Japanese yen (JPY) actually breached the 80 figure last night, but that immediately brought out the jawboning to get it weaker. That worked for a brief time, but the markets have taken yen back below 80 this morning. (Remember, yen uses the European-style pricing convention, so the lower the price, the greater the value versus dollars.)

The other currency on that list is the British pound sterling (GBP), or just the pound. Last week, I told you that the U.K. economy had gone negative in the first quarter, and now this morning, U.K. PMI manufacturing was very disappointing, printing at 50.5 versus the forecast for 51.5. Yes, it remains above the 50 level that is the line in the sand for expansion vs. contraction, but it’s moving the wrong way, folks. But the pound remains well bid at 1.6215.

Clearly, fundamentals are not working in the cases of the Japanese yen and pound sterling.

Speaking of PMI manufacturing indexes, the U.S. ISM (formerly known as PMI) will print this morning. Given all the weaker regional reports — like yesterday, when the Chicago ISM was weaker than expected — I think we’ll see some slippage in the U.S. manufacturing index. If fundamentals were to be in play, that would be dollar negative today.

In a case of you can’t win no matter which direction you choose to go, yesterday, I told you how the Canadian dollar/loonie (CAD) had lost some ground because the Bank of Canada (BOC) was contemplating hiking rates ( I still don’t believe they will. They should, but won’t).

And then on Monday, Canada’s February (I know this is old news now, but we carry on) GDP unexpectedly fell 0.2%. Then, the uber-intelligent currency traders sold the loonie, because now the GDP won’t lead to a rate hike! Strangeness, for sure!

Yesterday, the loonie was closing in on $1.02, but has slipped back to $1.0115 this morning on the weak GDP.

Yesterday, I mentioned how I thought Aussie bond buyers were the reason the A$ had gone higher in the face of a rate cut, and that got me thinking about 10-year bond yields around the world. Here’s a quick list:

U.S. 1.91%,
Eurozone 1.66%
U.K. 2.09%
Canada 2.04%
Australia 2.60%

I used only G-10 countries. I didn’t drill down to the Spains and Italys, for those would really blow this exercise out of the water.

I guess what I’m really trying to illustrate here, folks, is that yields around the world are pretty low, which is why the markets are fixated on higher yields, looking everywhere for higher yields, turning over every rock and checking under every bush.

When that happens, investors turn to riskier investments to provide them the yield they desire or require. On the Markowitz risk/reward yield curve, this would really be out there on the curve. So be careful looking for higher yields.

Yesterday’s data here in the U.S. brought us two of my faves to follow: personal income and spending. Instead of me going through this, my friends, Addison and Dave over at the 5-Min. Forecast, or The 5, did a great job of doing that, so I’ll let them take the ball here:

“It shows spending grew 0.3% in March, while incomes grew 0.4%. Which would be fine, except about one-fifth of the income growth came in the form of government checks.

”Meanwhile, the same report shows the Federal Reserve’s preferred measure of inflation — ‘core personal consumption expenditures’ — rose 2.0% year over year. That’s right in the Fed’s sweet spot. Any resemblance to your own cost of living is entirely coincidental.”

Thanks, guys!

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. (PIMCO) said yesterday that “the structural distortions brought by central bank credit expansion will limit future growth and induce the risk of inflation.” He went on in this Bloomberg story to say that “Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero bound yields that will likely continue for years to come.”

Commodities represent one of the holdings in an investment portfolio that PIMCO believes should be a part of the asset allocation. Interesting, eh?

So yesterday, I printed the Barron’s article in which the author blasted silver and the prospects of silver recovering. Today, I bring you the opposite side of that argument. The Currency Capitalist writer Evaldo Albuquerque opines on silver, so let’s listen in:

“About two months ago, I told you that the Fed and the European Central Bank’s monetary policies would help push silver higher this year. So far, silver has mostly moved sideways. But this may be about to change.

“Now there’s a chart pattern that indicates silver may be getting ready to take off. It’s still too early to be sure. But if this pattern develops the way in which I think it will, silver could rally 40% from here.

“The pattern I’m talking about is an inverse head-and-shoulders. This is a bullish pattern because it indicates a downtrend is turning into an uptrend. In other words, this pattern is usually followed by a strong rally. So it’s worth keeping an eye on it. “

Thanks, Evaldo. As I said yesterday, if the price manipulators would keep their hands out of silver’s cookie jar, the price of silver would be around $75 by now.

To recap: The RBA did cut rates last night, but went for a 50 BPS rate cut, instead of the 25 BPS cut I had thought they would go for. The A$ got taken to the woodshed for over a 1-cent loss. Kiwi sold off in sympathy trading. But the rest of the currencies pretty much range traded like they had for the past week.

Chuck Butler

for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

  • Michael

    Most Aussies celebrate at a rate cut, little do they know the RBA is defrauding everybody of their wealth when it cuts the interest rate (counterfeits money).

    Filthy sheisters, need to be banished along with the Fed.

  • John Jacobs

    Chuck, I thought silver was on its way to $75 just before it abruptly crashed last year. Hopefully the price of silver is poised for a 40% rally….Long overdue IMO.

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