Canada is the First G-7 Country to Hike Rates

Yesterday, I told you that the Bank of Canada (BOC) would meet today, and raise rates… Well, I got that half right! UGH! The BOC did raise rates, but they did it yesterday! Yes, the BOC became the first central bank in a G-7 country to raise rates, 1 1/2 years after the financial meltdown. The BOC tried to play down the move, by saying that they were not entering a rate hike cycle that would yield rate hikes meeting after meeting… But, with GDP, as reported here yesterday, running at 6.1% annualized, there are more rate hikes to come… It just won’t be meeting after meeting… The BOC will sprinkle the fairy dust here, and a little there, some for themselves, and a little for us… A little more for them… HA!

Yesterday’s price action in the euro (EUR) and other currencies that followed was very familiar… When I signed off yesterday, the euro was beginning to rally off the overnight low of 1.2110… And that rally continued until about lunchtime. The single unit traded above 1.23 after the US ISM (manufacturing) Index reported stronger than expected manufacturing in May, even though it was weaker overall than April!

But, as the day went on, the euro lost that luster of 1.23 and change, and went about losing ground the rest of the day. The overnight sessions haven’t really moved things too much, so we’re about where we were yesterday afternoon right now…

The Japanese yen (JPY) is weaker this morning… As the Japanese Prime Minister, Hatoyama, has indicated that he will step down, thus joining a group of seven Japanese Prime Ministers that have quit in the last 10 years. I’ve told you many times in the past, that political questions weigh heavily on a currency, and even the Japanese yen is not immune to those problems.

And yen has to deal with another problem… The replacement for Hatoyama, finance minister, Kan, is rumored to be someone that is known to be in favor of a weak yen to introduce inflation to the Japanese economy. It remains to be seen just what will happen here in Japan, but for now, this is what’s weighing on the yen this morning.

Yesterday I told you about how the Reserve Bank of Australia (RBA) had kept rates unchanged at their meeting the night before, and how RBA Governor Stevens spoke words that would have the markets believe the rate hikes are over… However, let me make this perfectly clear to any trader or investor who believes the rate hikes are over… They are only over for the “near term” as Governor Stevens said! There may be a pause for a bit – three months – but the rate hikes in Australia are not over!

The New Zealand Commodity Price Index shot higher in May to a record level, led by rising milk and butter prices. This report is just another arrow in the Reserve Bank of New Zealand’s (RBA) quiver for their meeting that will take place next week. I would be very surprised to see the RBA not hike rates next week. The data for six weeks now has pointed to a rate hike… The only thing the RBA’s Governor Bollard has to defend himself against – should he opt for unchanged rates – is the Eurozone problems… But that’s a far stretch down here in the South Pacific!

Remember a month or two back when the problems in Greece began to weigh on the euro? I said then that I thought what would be best for Greece would be to leave the euro, go back to the drachma, devalue the drachma, and pay back the debts with a cheaper drachma… Then in a few years, after austerity measures have kicked in, they apply to rejoin the euro…

Well… It seems that I have some readers in the UK who agree with me! “The Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy.” per a story on the Business Times UK.

OK… While I’m not in favor of them defaulting on anything, as I’ve said before Greece is the like the slowest buffalo scenario… When the slowest buffalo gets killed, it allows the herd to go faster.

The Brazilian real (BRL) took a shot to the chin yesterday when it was announced that it would cancel the sale of its longest fixed-rate bond for the third time in the past month. The Eurozone debt problems have scared the bejeebers out of Brazilian authorities who fear that being an “emerging market” they won’t have buyers for their debt in these scary times…

That would be a problem for most countries these days… So it pays to be the US when you have to get people to buy your debt, eh? No matter how much of that debt they issue, and you hold.

Gold is $3 cheaper this morning…

Then there was this… As reported by the NY Times this morning…

“A federal judge said Tuesday that it was unfair to hold Moody’s Investors Service and Standard & Poor’s liable as underwriters on securities offerings that required their ratings.

“United States District Judge Jed Rakoff issued an opinion citing the reasons behind his March 31 dismissal of class-action claims against the credit rating agencies, and some claims against Bank of America, JPMorgan Chase and the ABN Amro unit of Royal Bank of Scotland.

“Judge Rakoff rejected the plaintiffs’ contention that the agencies should be treated effectively as underwriters because their ratings were ‘necessary’ to distribute the securities.”

OK… Back to Chuck… This news just made me go over to the wall and yell at it! I shake my head in disgust!

To recap… The euro’s rally yesterday was stopped short at noon, and has backed off to near yesterday morning’s levels again. The Bank of Canada raised rates 25 BPS, as I expected them to do, the Japanese PM has quit, putting pressure on the yen this morning, and rate hikes are not over in Australia, just on hiatus for a couple of months.

Chuck Butler
for The Daily Reckoning