Currency Rally is Stopped by Slovakia Vote

On the Columbus Day holiday, the dollar got shellacked… But, that’s turning around this morning, as outgoing European Central Bank (ECB) President, Trichet, brought some pain on his own currency, the euro (EUR), by saying that the “crisis has reached a systemic dimension. Sovereign stress has moved from the smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.”

Just when the markets were getting a warm and fuzzy from the pledge by Eurozone leaders (read yesterday’s Pfennig) to recapitalize European Banks, they get this message from Trichet thrown at them… So… Yesterday, the euro traveled all the way to 1.3670, before slipping back to 1.36 this morning…

Another thing hanging over the euro like the Sword of Damocles this morning is the last Eurozone member to vote on the EFSF changes: Slovakia, which has previously balked at the changes in public… That vote is supposed to come today, so since they are half a day ahead of us in hours, they should have this vote finished in parliament by lunch time here in the US. The reports going into the vote were quite negative, so it’s anyone’s guess if the Slovakian parliament votes yay or nay… But, from what I read about this process… If the changes are voted down today, they’ll have a second vote that will be successful, followed by a dissolution of parliament. So, vote yes, and get the heck out of Dodge!

So… In my opinion, and of course I could be wrong, the euro weakness that will come — and it will come, folks — if the initial vote is no, would be short-lived, as a the second vote would happen in a matter of days.

We’ll see how the whole thing plays out… But could provide some cheaper levels for the currencies, but then if they vote yes, then the cheaper levels will not come about.

And if the top currency forecasters are correct, those potential cheaper levels will be looked on favorably as we journey through the fourth quarter… A report on Bloomberg says, “The most accurate foreign exchange forecasters say the dollar’s best quarterly rally since 2008 has no chance of continuing to year-end as a slow economy spurs the Federal Reserve to flood the world with more US currency.”

OK… Let me ask you this question… And first, let me tell you that I am not considered for that roster of “Top Currency Forecasters”… But here’s the question… Doesn’t that sound just like what I’ve been telling you all for months now? Are the Top Currency Forecasters all Pfennig readers? HA! They must be, because that’s almost word for word what I’ve been saying!

The one thing I may be early on is the timing of the Fed’s re-entry into quantitative easing (QE)… This past spring, and early summer, I said that I thought by the time the leaves turned colors, and we had to get the woolies out to combat the chill in the air, that the Fed would be implementing QE3… Well… I gave them much too much credit… I know that they are slow to move to things… And John Normand, the London-based global head of foreign exchange strategy at JP Morgan, said, “The Fed could start discussing the expansion of its balance sheet by the end of this year and begin with the asset purchases in early 2012. The bias will be for the modest retracement in the dollar from current levels. Investors are already extraordinarily long dollars.”

Mr. Normand sees the euro at 1.38 by year-end… Which isn’t too shabby for a currency that has had so many shots taken at it because of the peripheral countries’ debt problems… And if the euro is pushing to 1.38… I would think that the Aussie dollar (AUD) will be back to parity…

You know… I’ve kept the light on for a rate hike in Australia by year-end for a long time now… But, the closer we get to year-end, the more the light seems to fade… In fact, in research that I was reading yesterday, most Aussie analysts believe the Reserve Bank of Australia (RBA) will be cutting interest rates… A total of 50 Basis points (0.5%) by the end of next spring… Whoa… That was like a Home Alone moment, when Kevin applies the after shave… Rate cuts? When the recent data has been stronger than forecast? I don’t get it… But, just like the guy at Motel 6, I’m going to keep the light on…

The “slow economy” that the forecasters are talking about is really beginning to show signs of fatigue without stimulus help… I think we’ll see third quarter GDP print about 1.1%, and then the fourth quarter GDP fall to 0.5% ! And that’s when the Fed will panic… The problem with these reports though, is that they are so backward looking… But, the preliminary reports will be key…

Part of that “slow economy” is the labor market… Yesterday, I told you about the 103,000 new jobs created, and wondered if there were any new “reindeer games” played with the numbers by the BLS… And it appears there have been… Upon further review…. The data contained about 400,000 workers that found some kind of work… Not work in their field, but “some kind of work”… And of course something that I mentioned last month, that would be added this month, and that was the 40,0000+ Verizon striking workers that returned to work. So… Real jobs… Is the problem… But some kind of work, is better than “no work”…for sure!

And this is the problem I’ve had with the Jobs Jamboree for many years now. Even in the good times, when jobs are added, the report doesn’t say what kind of jobs were added… (These days they do at least break out the manufacturing jobs)… For all we know, 103,000 net new jobs could be minimum wage jobs, which would not be uplifting to the economy. Sure, min. wage work is important stuff, but I think you know what I’m saying here… That’s why I have always said that the two things to pull out of the Jobs Jamboree were the Average Weekly Hours Worked, and the Average Hourly Earnings… Well… The Average Hourly Earnings reversed August’s -0.2% with a +0.2% print, and the Weekly Hours Worked ticked up to 34.3 from 34.2…

This data indicates to me that we’re working longer, for about the same wage… The government calls this “productivity”… I call it hogwash!

And in a data print that normally doesn’t get top billing… Consumer credit in the US unexpectedly dropped in August by the most in over a year… Consumer credit fell $9.5 billion, partially reversing an $11.9 billion increase in July… Decreasing credit could be showing us that Americans are continuing to pay their debt, or… And most likely in my view, that they lack the confidence to boost spending on non-essential goods. So, the direction of this data next month will be key… Because we are only one month removed from an almost $12 billion increase in consumer credit… And one month’s worth of data doesn’t make a trend, just as one swallow doesn’t make a summer!

A friend of mine (thanks Peter), writes a letter and sends it to me periodically… His recent letter talks about the recent volatility of the price of gold…but wanted to remind everyone that… “Gold had a wonderful run-up this year, rising from $1,390 and cresting at $1,923 before correcting down to its present level ($1,670 as I write). While it’s human nature to think of its recent decline from $1,923, it is also important to remember its year-to-date performance — up approximately $280, or 20%, and this is for a period of less than 10 months — pretty impressive performance in anyone’s book.”

Yes… That’s right… It’s not time to give up on gold… Instead, use this price drop as an opportunity buy at cheaper prices than a couple of months ago!

Yesterday, I noted in the currency round-up that the Chinese renminbi (CNY) had taken a huge move down in price, up in value… Remember that European-priced currencies like the renminbi, gain in value versusthe dollar when the price goes down, for it takes less of that currency to equal a dollar. Well… I noted that the move down was big, because it was larger than normal… Remember that the renminbi is priced versus a basket of currencies, not just the dollar… And it’s trading range is limited at best… So, yesterday’s move was significant… Could it have been an error? Yessiree Bob! For the renminbi has retraced that move down yesterday with a huge move back up, (thus weakening the renminbi versus the dollar)…

And gold… Which was up $30 yesterday, is down $16 this morning… Two steps forward, one back… I’ve told you all that I truly believe that the US and now even Europe, are frowning on the increase of gold holdings by not only the general public but by central banks (like India, Russia, and China) for, the fear is that gold could replace the dollar (and now euro for that matter)… But the dollar is really only at risk here to be replaced as the world’s reserve currency. And thus I get my shirt all starched when I see gold take huge moves downward.

A few readers asked me to explain my quick thought yesterday about the PPT… The PPT is the Plunge Protection Team… So… Let me explain this all, and this will act as the “Then There Was This” portion of the letter today…

It is a matter of public record that the Working Group on Financial Markets (WGFM), which we allege to be the parent to the PPT, was formed under the Reagan administration. It was done by Executive Order on March 18, 1988. (Remember the stock crash of October 1987?)

This order states that the major appointees of this group are to be the Secretary of the Treasury, the Federal Reserve Chairman, the SEC Chairman, and the CFTC Chairman and those they designate to fulfill their purposes. The purposes, as defined in the Executive Order, are to “[enhance] the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and [maintain] investor confidence.” The order goes on to say, “To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.” (Executive Order 12631 of March 18, 1988, 53 FR, 3 CFR, 1988 Comp., p. 559

So… There you have it… You can believe the PPT is a working group today, or not believe it… Makes no difference to me… It IS what I believe… And if you don’t, believe in it… Don’t tell me… For as I said, it makes no difference to me… Chuck, you were a little hard on the Beaver there, weren’t you? I guess so… Sorry…

To recap… The currencies traded up most of yesterday, only to see some things cause them to back off this morning, led by the Big Dog euro. Slovakia’s vote on the EFSF changes and Trichet’s comments have weighed heavily on the euro this morning, and thus the rest of the currencies. Gold, which gained $30 yesterday, is down $16 this morning, and Chuck looks under the hood on the Jobs Jamboree…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning