Bundesbank Sends Euro Lower

Recall yesterday’s talk about the trading pattern that had existed for four consecutive days? Well, that was thrown to the roadside yesterday, as the US session went back to beating on the euro (EUR), and other currencies…

But this time, it could very well have been the euro’s “godfather” that caused the sell off… Here’s the skinny…

It seemed quite strange to me to read these words yesterday, but here they are, from the Bundesbank, Germany’s Central Bank.

The Bundesbank said, “While the euro’s decline has helped the competitiveness of the Eurozone exports, in the long-term view it must be viewed as still not universally favorable.”

In other words… They think that, for the euro to be competitive, it needs to be weaker versus their trading partners. But to hear those words coming from the Bundesbank was quite interesting. You see, years ago, before the euro, the Bundesbank was the Big Bad Bully on the European Block, second only in stature to the Fed. (And higher in stature to the Fed in my book!) And the Bundesbank made certain that when the Eurozone rules were being discussed that their mantra of providing price stability was included.

To provide price stability, you must maintain a strong currency, to eliminate importing of other countries’ inflation. I have to wonder just what the Bundesbank is smoking these days… For this isn’t the Bundesbank of Hans Tietmeyer from years past!

But guess what? The risk that was taken off the table in yesterday’s US session, was put back on in the overnight sessions! This is amazing to me, this back and forth, risk on, risk off stuff… What’s the general direction?

The currencies are running stronger this morning from yesterday’s US close.

Yesterday the euro was also pressured by a story that China, which boasts the world’s largest foreign exchange reserves, is reviewing its holdings of Eurozone debt in the wake of the crisis that has swept through the region’s bond markets.

Overnight, Chinese officials have denied any such review… Having the Chinese say that gives traders a warm and fuzzy about European Sovereign Debt… At least for now, that is!

I talked last week about wondering what would replace the euro as the offset to the dollar should that occur… I thought that gold could do the trick, but that seemed a bit far-fetched… But yesterday, I saw a headline story flash across the screen that said that gold was rising as investors demand a “euro” replacement… Hmmm… I thought of that last week, and this week someone writes about it.

And look at the price action in gold and the euro… Most of this week, the euro has been trending lower, and gold has been trending higher… But overnight, the euro rallies, and gold backs off… Hmmm… Maybe, just maybe, because you never know, there could be something to this gold and euro story…

However, if there is, it should be short-lived, for they are both dollar-alternatives, just fighting for the same non-dollar investors’ interest.

The BIG winner overnight is the Aussie dollar (AUD)… Which makes abundant sense to me! This fundamentally sound currency has been run through the wringer… I would think that it simply met oversold indicators and once the buying began, the Aussie dollar soared!

A currency that I expect to come out of the starters blocks like Usain Bolt this morning is the Brazilian real (BRL)… The high yielders of Aussie, kiwi (NZD), South Africa (ZAR), and to a lesser degree Norway (NOK), are all stronger this morning, and so one would expect that reals would gap higher on their open.

There’s that, and a new survey by analysts covering Brazil, and the consensus is that the Brazilian Central Bank (BCB) will raise interest rates at their June meeting from the current internal rate of 9.5% to 10.25%. The survey goes on to forecast a 2010 ending rate of 11.75%!

And in New Zealand… Good news and bad news… First the bad news to get that out of the way. The IMF said in a report last night that the New Zealand dollar/kiwi was 25% overvalued… Well… Thanks but no thanks, IMF… You’ve also been saying that the renminbi was 40% undervalued for about 8 years…

Now the good news… New Zealand registered its first annual trade surplus for almost eight years, at 161 million NZ$. The trade balance was also well in surplus for April, at 656 million NZ$… Seems that lumber and dairy products are booming!

I’ve long thought that New Zealand would be better thought of if they could straighten out their deficit problem… So, the first leg of that deficit problem is better… Hey! You’ve got to start somewhere!

Want some more proof that the US desperately needs a cheaper dollar? OK… Challenge accepted! US Treasury Secretary Geithner is in Europe, and is stressing to the Eurozone officials the need to “shore up the euro.” That’s right… He can’t have the euro taking a ride on the slippery slope, when it should be the dollar’s turn!

Yesterday, I told you about the Treasury auctions going on… Well, the auctions, as expected with the flight to safety going on, were well received and covered… Unlike a couple of months ago, when it appeared that we nearly had a failed auction… One of the things that has happened though, is just what I’ve said over and over again… Eventually the buyers of our debt are going to demand higher yields… Remember what the 10-year’s yield was earlier this week before the auction of $31 billion? It had fallen to 3.09%… This morning it sits at 3.28%… So, for those that bought at 3.09% they are taking on water right now.

Well, the US stock market closed below 10,000 yesterday… But stock futures this morning are up big, so the open should be strong.

Oil is bubbling up again… While I’m not a fan of high priced gas, oil prices rising does bode well for commodities, and the commodity currencies. I kept wondering to myself what the heck was going on with the oil price plunging… But that’s water under the bridge now…

Well… Did you see the data print from New Homes in April yesterday? WOW! New Home Sales jumped nearly 15% in April, which was the highest level since May of 2008 (before the financial meltdown and housing bubble pop). Pretty amazing what can happen when the government prints money and hands it out to people as an incentive to buy a house… Shoot Rudy, if I were in the market or just kicking around the idea of buying a new home, I would certainly move the timetable up to take advantage of the handout!

But what happens now that the handouts are over? I guess we’ll see at the end of June, eh? Actually, we’ll probably have to wait till July, because there will still be some New Home Sales that were in the pipeline when the cut off came about.

It’s Thursday, so that means the Weekly Initial Jobless Claims will print… I saw a report from an interview with the St. Louis, Fed Head, Bullard… And he claims that the US recovery is strong… Hmmm… Maybe it is, as long as the government is fueling the recovery… But when over 450,000 workers file for jobless claims weekly, it can’t be too strong!

We’ll also see the first revision to the first quarter GDP here in the US. The first print had GDP at 3.2%… Look for an upward revision, for I’m sure government accountants “found” some extra GDP… Wink, wink…

Then there was this… New Jersey Governor Christie, held a town hall meeting this week, and was confronted by a very upset citizen regarding cuts that were being made across the board in New Jersey… And the Governor replied… “Unlike the United States of America, New Jersey can’t print money.” Good for him!

To recap… Risk is back on this morning, with the Aussie dollar leading the pack versus the dollar. The euro was beaten down yesterday on words from the Bundesbank, looking for more competitiveness. Interest rates in Brazil are forecast to go up in June, further underpinning the real. And US Treasuries are giving back their gains from the flight to safety very quickly.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning