A Currency Selloff as Fitch Downgrades Italy

Good day… And a Marvelous Monday to you! Today, actually is a Bank Holiday! That’s right… We celebrate the guy who discovered the West Indies, or something like that! Columbus Day is one of those “soft holidays”, where banks are closed and there’s no mail delivery. So… I forgot to mention that we would be “closed” when I signed off last Friday… So, for that I apologize…

So… I wasn’t sure I would get up and write this morning… but when I had to get up to make Alex some breakfast and his lunch, since my beautiful bride is still in New York city, I thought… Shoot Rudy, let’s get a short note out to everyone, even if it is a holiday! This will be short-n-sweet… I promise!

And, that brings me to this… Last Friday’s Jobs Jamboree surprised to the upside for the first time in what seems to be a month of Sundays… But job creation of 103,000 isn’t going to drive an economy forward, folks… But! At least it was in the right direction, right? And the Birth/Death Model didn’t add any, so… Unless there were “other reindeer games” played by the BLS/government… 103,000 was it… The unemployment rate remained at 9.1%… I say hogwash to 9.1%… It’s more than 20%, at least!

So… The currency traders were in a good mood right after the Jobs Jamboree, and the thought going around was that if the US wasn’t going into a recession (remember, I believe we never left the first one), that global growth wasn’t going to collapse, and the currencies rallied… Yes, that’s right… The dollar got sold because job growth was up… I told you that fundamentals haven’t played into currencies or stocks since pre-2008… This is a great example of that!

Talk about a road block popping up from the underground… That’s what it looked like on Friday…

We were going along just fine on Friday… The euro (EUR) had climbed to over 1.35, the Aussie dollar (AUD) was nearing 99-cents, and gold was up… And then Whack! Wait, what’s that sound? Everybody looks what’s going ’round… It was yet another ratings agency, this time Fitch, that decided to throw a cat among the pigeons, by downgrading Italy’s rating, and sticking a “negative outlook” on them…

The risk takers ran for the hills, and before you could bat an eye…the euro and Aussie dollar had lost 1 full cent! And gold dropped $20 like nothing… Was it the Fitch downgrade that sent the markets tumbling? Hmmm… What pushed Fitch to come out with this announcement on a day when Risk On was driving the markets? Why didn’t Fitch announce this earlier in the week, when S&P made their downgrade of Italy public news? I’ll tell you why… Because, just like every other time we seem to get moving with the risk assets again, a roadblock gets thrown in our path. I call these circuit breakers… and just like a circuit breaker at home, everything gets turned off, until the switch gets thrown back to on… Someone controls those circuit breakers… Can you say, the PPT? I knew you could!

And then this morning, the switch got turned back on because, yesterday, German Chancellor, Angela Merkel, and French President Nicolas Sarkozy announced that they would deliver a plan to help banks… Remember, I told you roughly10 days ago about the whispering campaign that was beginning at that time to recapitalize European banks… Well, it looks like the Big Dogs, (Merkel and Sarkozy) are behind this idea now, and soon… European banks will receive the help they need.

Then this morning… Outgoing European Central Bank (ECB) President, Trichet, said in a speech that the euro was here to stay, and reminded his friends in the US that “the euro was built to last”… When I heard that I thought he was talking about Chevys or something! HA!

So… After all this “talking” the euro is back above 1.35 this morning, and moving toward 1.36, and the Aussie dollar is well over 99-cents again! I had a reader ask me why I almost always mention the euro and Aussie dollar… Well… That’s because the euro is the Big Dog, and the Aussie dollar proxy for global growth… But beyond there’s no other reason…

This week marks the 20th anniversary of the Maastricht Treaty — the backbone of the European Union and euro… Sort of like our Constitution used to be, before people started ignoring it… But I’m not here to talk about that, so much as I am about the 20th anniversary of the Maastricht Treaty… I remember in 1998, I was in London for a conference, and the first speaker asked to see a show of hands of people who believed the euro experience would die before getting off the ground… Well… Yours truly raised his hand… Because, I just didn’t see how sovereign nations would go for losing their sovereignty…

In 1998, I was a foreign bond/currency trader for Mark Twain Bank… And I used to talk to bond guys all over the world… Spain, Germany, France, the UK, Australia, New Zealand and more… And the gut feeling I had after many discussions with European bond traders was that they would fight to the end to save their sovereignty… Well, I was proved to be wrong…. And here we are… The euro got off the ground, and initially could not find terra firma, but eventually gained the confidence of traders and soared…

So… Once again, if asked… I would say that the euro is not going to break up… But having been proved wrong on the existence of the euro… I’m not one to use as a hook to hang your hat on!

And with that… We’ll head to the Big Finish!

To recap… The Jobs created in September were 103,000 better but not what will be needed to drive the economy. Currencies rallied on the news, but then were stopped at the border, by the ratings agency Fitch, which downgraded Italy, and caused a 1-cent sell-off of the major currencies. But, this morning, the currencies are back on the rally train, after Eurozone leaders announced the pledge to help Eurozone banks…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning