EU Finance Ministers to Double Bailout Fund

Good day. The dollar traded in a fairly tight range most of the day, holding on to earlier gains. But just after lunch, sentiment shifted and the dollar started to drop, closing U.S. trading below the level it opened. And the fall accelerated as Asian traders entered the markets, pushing the euro (EUR) back above $1.335 and Aussie (AUD) over $1.04.

I couldn’t find a single item that caused the change in sentiment, and most of the research I read last night credited improved data from the U.S. and today’s EU finance meeting for the move. Currency traders seem to be gaining back their confidence in the global recovery, and are now more willing to place money into “risk” trades. The higher-yielding currencies typically benefit when we have these “risk on” days, and the low-yielding or “safe haven” currencies of the U.S. dollar, Japanese yen (JPY) and Swiss franc (CHF) are the ones that drop.

The stories that credit better data pointed to the improved weekly jobs data as one of the reasons investors’ moods improved. The weekly jobs data showed a drop in the number of people seeking unemployment to the lowest level in almost four years.

Initial jobless claims fell to 359,000, a 5,000 drop from last week’s revised 364,000. The revision to last week’s number was 16,000, so the net change to the number of people filing for unemployment claims in the last two weeks was actually an INCREASE of 11,000. But don’t tell that to the mainstream media — appearance is all that matters, and the 359,000 jobs claims were 5,000 less than last week, so the labor market is improving!

Economists from all the big equity trading houses were touting the improved labor picture as proof the economy is recovering. But is it? Another report by the Commerce Department showed fourth-quarter GDP grew at a respectable 3% annual pace. But the report also showed corporate profits climbed at the slowest pace in three years, and companies who are making less money will not be willing to hire or spend more on equipment.

The dollar really didn’t start falling until the end of the trading day, so I don’t think the currency desks were fooled by these headlines touting the 5,000 improvement in jobs. They must have been looking at the plethora of data we are scheduled to get this morning.

Personal income and spending for February will be the first piece of data released this morning, and is expected to show a slight increase in both numbers: income up 0.4% and spending up 0.6% (U.S. consumers are still increasing their spending at a faster pace than their income.) The PCE deflator and core numbers will be next, and are expected to be unchanged from last month.

Finally, we will get the University of Michigan confidence reading and the Chicago Purchasing Managers reading. The confidence number is expected to have held steady at 74.5, and the Chicago Purchasing Managers number will probably fall slightly, to a reading of 63 from last month’s 64. After reviewing the projections for all of this data being released this morning, I am having a hard time figuring out what currency traders are looking at to put them in such a good mood.

Maybe it is something happening in Europe. Yesterday got news that German unemployment fell 18,000, moving the adjusted jobless rate to a two-decade low of 6.7%. But this was old news, so we have to look at events that are occurring today.

European finance ministers begin a two-day meeting this morning with a goal of reaching an agreement to increase the funds available for any future bailouts. A draft statement written for the finance ministers was leaked out yesterday and showed European governments will increase the ceiling on rescue aid to 940 billion euros. The money has already been set aside, but it is in two different buckets, and 240 billion euros have been unused.

I detailed the structure of the two different bailout funds the other day, but I will give you another quick look at them. The main fund is the 500 billion euro European Stability Mechanism, which will remain in place. But before this permanent fund was established, European leaders had set up a temporary fund of 440 billion euros. Only 200 billion euros of this temporary fund were committed, leaving 240 billion untapped. According to the draft statement released yesterday, the EU finance ministers will first agree to keep both of these funding mechanisms in place. In addition, they would also agree to allow the extra 240 billion euros to be used (if/when needed) until mid-2013. The net effect is a doubling of the liquidity available to offset any future EU financial crisis.

Some will still say the funds will not be enough, and there is some truth to this statement if a larger economy like Spain is forced into a crisis mode. But currency traders seem to be giving the plan their stamp of approval, as the euro has moved back above $1.3350 this morning.

The OECD did its best to throw a bit of cold water on the positive vibe out of Europe this morning with predictions that the U.K. economy will slip back into recession this quarter. Official figures showed the U.K. economy contracted by 0.3% in the final quarter of 2011, which was worse than previous estimates of a drop of 0.2%. The OECD is predicting the U.K. economy will show a drop of 0.1% in the first quarter of March, officially putting them back into recession, which is defined by two consecutive quarters of negative growth. But some economists believe the U.K. will dodge the recession with a slightly positive growth number during the first three months of this year. The U.K. government’s independent forecaster, the Office for Budget Responsibility, predicts U.K. growth will be 0.8% during Q1 of 2012.

Currency traders seemed to ignore the gloomy forecast by the OECD, as the pound sterling (GBP) increased over 1 cent versus the U.S. dollar in the past 24 hours.

India’s central bank was in the currency markets yesterday, offering to buy up to 100 billion rupees (INR) ($1.95 billion) of bonds in an effort to inject cash into the banking system. The Reserve Bank of India has been instituting its own version of QE, last purchasing bonds on March 9. The bank has been doing a bit of a Jekyll and Hyde, as they were purchasing rupees in the market at the end of last year in an effort to halt the currency’s slide. Their currency intervention tightened liquidity, as they were pulling rupees out of the markets. Now they are having to turn around and pump them back into the system with the purchases of bonds. Certainly an about-face by the RBI, and it will be interesting to see if the currency traders punish them for this reversal.

One thing weighing on the Indian economy is the high price of oil. India is the world’s fourth-largest consumer of oil, so this year’s 15% increase in the price of Brent crude is definitely going to impact the Indian economy. The higher price of oil will push prices up across the board and keep the RBI from cutting rates.

Japan’s consumer prices unexpectedly rose in February, an indication that the Japanese government’s attempts to exit deflation may be working. Japan has been caught in a nasty deflationary spiral for a number of years, and beating deflation has been the focus of the Bank of Japan. The slight rise in prices is certainly welcome, and the higher oil prices could prove to force prices even higher since Japan is another very large consumer of oil.

But another report yesterday wasn’t as positive, as it showed Japan’s industrial production fell in February. Factory output slid 1.2% from the previous month, according to the Trade Ministry. This compared with a 1.9% gain in the first month of this year. Weakness in demand in Asia and Europe was blamed for the fall. On the positive side, production is still on a positive trend compared with last year.

As I said earlier, currency traders seem to be in a positive mood this morning, so the high-yielding currencies are doing well. Traders are moving funds out of safe havens and back into currencies that can give them better interest. The South African rand is up this morning, reversing losses from earlier in the week. The Australian dollar is also higher, extending its second quarterly appreciation versus the U.S. dollar. A report released Down Under showed Australian home sales increased and bank borrowing rose. The New Zealand dollar also rose, erasing an earlier decline.

Then there was this… I have been telling everyone about our WorldCurrency system conversion occurring this weekend. We will be “putting down” our old system, which has helped us grow the business over the past two decades (a time period more than double its expected life). Frank Trotter wanted to share his thoughts on this conversion with everyone, so take it away, Frank:

A lot has changed since the 1980s, but until this weekend, the WorldCurrency accounting system has not. Back then, Chuck Butler, Chris Gaffney and I would enter WorldCurrency CD information into Quattro Pro — a predecessor of Excel — which would print confirms out on a dot-matrix printer and maintain a list of clients, CDs and foreign exchange transactions. A couple years later, we converted to a system I wrote using a MS-DOS based database system — Paradox — since at the time Windows had not yet become available. This system has been refined and maintained by an excellent IT team for over 20 years and is still in use today, keeping track of something like $20 billion in annual transactions.

After this weekend, those days will be over. As Chris has hinted over the past week, starting Monday morning, EverBank World Markets will be operating on a system that has been ranked the No. 1 global banking platform for many years. We have made this move to provide our clients with a better experience both now and for many years to come. Immediately, there will be better access to your accounts online and more ability to enter trade orders from within our Online Financial Center. Down the road, we expect many new products that deliver on our pledge to be “The Toolkit for the Global Investor,” allowing you to execute on your strategies to diversify your portfolio worldwide.

So starting Monday, take a look online, call the trading desk if there is a question and take it a little easy as everyone gets used to operating in the new system; before long, it will be second nature.

I would like to thank many people for dedicating up to four years of their life to making this transition possible. You won’t talk with most of them or ever know who they are, but the level of commitment and professionalism has been a wonder to observe. Thank you. Now let’s move onward and upward.

Chris Gaffney
for The Daily Reckoning