2-Year High for Oil Pushes the Loonie Higher

Well… As I expected, the euro (EUR) really ran up on Friday’s trading, as shorts were covered and trading books were squared for year-end. I truly believe that this euro-buying could be reversed as we go through the first month of 2011… The reason I say that is I truly believe that the euro will come under pressure, as the Eurozone gets probed to come up with better solutions to their periphery countries’ problems. I expect Germany to balk at many things, and when they balk, the runners get to move up…the runners being the dollar, and gold…

Eventually Germany will come up with a solution that’s agreeable by all parties (except Italy; they always whine), and that’s when we’ll see the euro come back… At least that’s my thought for the first part of 2011…

Now… All that could change in a NY minute, if…the markets don’t want to probe the Eurozone for better solutions, and instead take their fight to the US dollar… Which, in my opinion is the way it should be, with the Eurozone’s debt problems taking third, behind Japan and the US.

The euro ran up to 1.34 and change on Friday, but has given back about 1-cent of the ground gained in the last two days of trading in 2010. The Aussie dollar (AUD) is off by about 1/4 of a cent this morning, and gold is flat… Not everyone around the world is back to work today, but I am…so, let’s get going!

Let’s see… Oil is trading at $92… I don’t want to see this happen, but it sure looks like oil is going back to $100 again, doesn’t it? The only thing good about $100 oil is the benefit the Canadian dollar/loonie (CAD) receives by the high priced oil. And that’s exactly what we’re seeing now, and most of the latter part of 2010 – oil’s price moving higher, and dragging the loonie along for the ride… Oil is trading near a 2 1/2-year high, and so is the loonie! I saw some pundits’ forecasts for the loonie, and they have the currency trading between $1.01 and parity in 2011… Hmmm, that seems awfully tight! Tupperware like! I’m just not buying that tight range, not with the way currencies as a whole have traded in the past two years, with wild swings, and lots of volatility. So… I’ll go out on a limb and say that if oil goes to $100, the loonie will break higher than the $1.01 cap others have put on it for 2011.

Well… The euro may be off by about 1-cent this morning, but it’s not because of fundamentals. Eurozone manufacturing rose more than forecast in December, with their manufacturing index (just like ours), rising to 57.1 from 55.3! WOW! That’s a huge move for one month, and that’s in the face of a strong euro throughout December. Now, of course, Germany is the star performer for manufacturing in the Eurozone, but most of the other countries of the Eurozone showed some improvement, except Greece…

On Friday, Germany’s Chancellor, Angela Merkel, must have been making her New Year’s Resolutions, because she was talking up the euro like I’ve never heard her talk it up before… She was actually sounding emotional about the single unit/euro… She even mentioned that “we have to strengthen it”… Hmm… I guess she finally realized that the common currency for the Eurozone is what’s needed. Now… If only she would agree that a common bond issuance is also needed, we wouldn’t have to worry about “strengthening the euro” as it would take of that in a heartbeat!

Gold is flat so far this morning, and begins 2011 trading at $1, 420.10… That’s pretty incredible, folks… But, like I told the audience that tuned into my interview on WAAM radio 1600 AM, yesterday… “Gold is a rarity… It’s not like miners can just make gold appear for them.” I used to give this fact at my presentations (I’ll have to have someone research it to see if it needs to be updated), but you could put all the gold that’s ever been mined in two Olympic-sized swimming pools…

Silver is outperforming gold today, just as it did throughout 2010. Silver is trading above $31… WOW! I’ve already told you about what I think here with silver, so I won’t go into that again, but… I do want to point out that NewsMax is going to be running an article this month where I discuss how I believe silver is the new gold…

And the Brazilian real (BRL) continues to be one of the better performing currencies, overall. When you include interest paid, the real is up 39% in the past two years versus the dollar…and then add in the interest…pretty impressive! And that’s with the Brazilian government doing everything they can to stem the real’s strength. I’ve said this before, but you have to make certain that you only use your “speculative” money that you allocate in your investment portfolio, when it comes to reals…

Then there was this… Well, you know how I’ve tried to point out the debt problems of the US… Well, there’s a great story on the Bloomie this morning about Illinois, and how their budget deficit is at least $13 billion, and they have $4 billion in missed payments or underfunded state pensions… Illinois lawmakers meet this week and will attempt to come up with a solution to this mess… Good luck with that! You see, this deficit didn’t happen to show up one day… It’s been building to this crescendo for some time. Illinois shares the same credit rating (the lowest) as California, and Moody’s has assigned Illinois a negative outlook… Look, if these lawmakers don’t do something about their deficit spending, the total State’s deficit will be $15 billion by this time next year! And the markets think Greece or Ireland is a larger problem? They had better think again…and soon!

To recap… The currencies and precious metals rallied strongly on Friday, as expected, with position squaring and the closing of books for 2010. The currencies are weaker though this morning, with gold flat and silver up slightly. Angela Merkel was talking up the euro on Friday (must be a New Year’s Resolution for her!)… And oil is at a 2-year high, dragging the loonie along for the ride higher…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning