Euro Rallies As Economic Data Piles Up Against a Strong Recovery

The fireworks went off early yesterday in the currencies, folks… And they have not died down or had water thrown on them in the overnight and morning sessions…

WOW! You should have seen the currency screens lighting up yesterday… First it was the rise in Initial Jobless Claims, and then the hits just kept coming for the dollar, and economy. ISM Manufacturing Index slid further than forecast, which means manufacturing is slowing down. And Construction Spending was down in May…

I told you for the past week that the economic data was beginning to pile up against a strong recovery and for a double dip, and yesterday was no different! I was told by one of my chartist friends that the euro (EUR) would find resistance at 1.24 and 1.2450… The resistance must have been of the ilk of that country that I won’t name so I don’t tick people off, because… The euro flew right past those two figures without much hesitation…

Here’s the skinny… The economic data keeps piling up against the economy, which drives people to buy Treasuries, which pushes the price of Treasuries up, and the yields down… And down… And down… There’s now a problem, folks… Yields are too low to be attractive, so the dollar got sent to the woodshed.

The euro was the Big Dog once again, rising 2% on the day, and the other European currencies like Norway (NOK), Sweden (SEK) and Switzerland (CHF), all followed… The commodity currencies had a tough row to hoe all day, as the markets looked at them and said, “if the US isn’t going to be the growth engine, there will be no global growth, and those currencies depending on global growth will slump”…

Now… I still believe that commodities are in a bull market, and that commodities will rally strongly again, once the sovereign debt thing is in our rear view mirrors, and traders and investors begin to focus on fundamentals once again… And it’s at that time, when these commodity currencies will come back…

Gold fell alongside the dollar yesterday… And fell hard! In fact, gold fell below $1,200 (albeit briefly) overnight… But, investors, traders, etc. saw what I had told Jen, our metals trader, the other day… If gold falls below $1,200, I want to buy more… I didn’t get the opportunity, because it happened overnight, and once it was below $1,200, the buying began, and gold is up $13 this morning… But, the wipeout it suffered yesterday was something to behold… And if you panicked, then that was the classic example of attempting to catch a falling knife!

The euro is back above 1.25 this morning… The last time it breathed the air above 1.25 was the third week of May, and then it was sliding down the slippery slope… So… Is this the “real thing”? Hmmm… I don’t think so, but I could be wrong. I’m told that most of the euro’s rise yesterday came from short covering… (When someone has to cover their short position they have to buy the asset, thus if you have a lot of short covering, the buys drive up the price.)

Then there was also a rumor that the Swiss National Bank (SNB) had come into the markets to sell francs and buy euros. The franc/euro spread had reached another all-time record level yesterday morning, and even though the SNB said that they no longer needed to stem currency appreciation, they can’t have the franc so out of whack with the euro, so they allegedly did something about it.

But… In the end, do euro holders care what drives their currency higher? Well, maybe, but have some fun with it…

The commodity currencies got a bit of a lift overnight, when it was announced that the new Australian Prime Minister, Gillard, had reached an agreement on a total revision of the mining tax… Here’s what I know… The Australian government announced a reworked version of its planned new mining tax, featuring major concessions to the mining industry including a reduction in the headline rate of the tax to 30% from 40%.

Iron ore and coal, are the only commodities that will get taxed, and that’s good news for commodities, and it eases industry fears about the potential impact on base metals projects.

I read the report from Australia, and it sounds OK… Now, get my first reaction here… No tax is a good tax… However, this resolution is much better than the first proposal, which would have carpet-bombed all commodities with a tax, thus reducing the output…

One note… The proposal still has to be passed by both houses of Parliament… Let’s hope that the fat doesn’t get added to their bills like they do the ones in this country!

OK… I have to rail on the Fed for a minute here, so if you’re not in the mood for taking the Fed to the woodshed, then go ahead and skip down a paragraph or two…

I read this story on the Bloomie this morning, and immediately went over to the wall and screamed so loud, my voice is kind of froggy now! UGH! Here is a snippet…

“Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008 that the tens of billions of dollars in ‘assets’ the government agreed to purchases in the rescue of Bear Stearns Cos. were ‘investment grade.’ They didn’t share everything the Fed knew about the money.

“The so-called assets included collateralized debt obligations (CDO’s) and mortgage backed bonds with names like HG-COLL Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.”

You can read the entire story here… But be prepared to put away the sharp objects, folks…

OK… So… Either these two lied to Congress, or… Maybe they didn’t know the difference between “investment grade” and “non-investment grade” assets!!! Which would probably make the most sense… But neither one should be acceptable to the American people…

Speaking of making sense… I saw a video of someone that didn’t make ANY sense! This was a video of the Speaker of the House telling people that unemployment benefits create jobs… I think that maybe I had better go back to school, and learn that kind of economics…

I’m currently reading a book by Judge Andrew Napolitano called Lies The Government Told You… This is a historical look at all the lies, not just a book on current lies… Once you read this, then you’ll have a different opinion on things, and then you’ll begin to say… “Hey, that Chuck was bang on with that thought, or that thought.”  OK, maybe I’m stretching it a bit there! HA!

Last year, in Vancouver, I gave a presentation at the Agora Financial Investment Symposium, and told the crowd there that their portion of the national debt was $37,000… Well, one year later… The number has grown to $42,000.. And that’s for every citizen… If we only count the taxpayers, the number skyrockets to $118,000… Nice, eh?

In our monthly letter to customers called A Review & Focus I do a section called “an inconvenient debt”…  It gets a little dark and spooky from time to time going through all this debt that we have. (You can get your copy of this “award winning” monthly newsletter by becoming a customer of EverBank World Markets… (OK, I made up the award winning thing, but it sounded good, eh?))

Well… I almost made it through the Pfennig today without talking about the Jobs Jamboree… But, I’ve got space to fill, so I might as well go down this road and talk about what will drive the markets this morning… (I’m sure you’re saying, “You think, Chuck? Yes, we would like to know about what will drive the markets this morning!”)

So, yes, the Jobs Jamboree is this morning. The experts believe that when you take out the government census workers, the US lost jobs last month… WHAT? Yes, that’s true… So, I guess the Speaker of the House might want to revisit with those economists that she said advised her, because we’ve been paying out unemployment checks by the truckload for a couple of years now, and we’re still not creating jobs!

But since we’re still dealing with an overall bias to risk aversion, a negative surprise on the jobs data would most likely benefit the dollar… I know, I know, that’s a strange and twisted way of thinking, but it’s true! In the old days, (now it sounds like I’m talking to my kids, who immediately head for the doors when I say, when I was a kid…) a negative number of jobs created would have sent the dollar to the woodshed, but not these days… These days, we have to deal with the risk aversion jugheads!

To recap… The euro had its best performance day in months yesterday, moving from 1.22 and change to above 1.25. Bad economic prints in the US got things started, and the short covering and SNB intervention took it from there. Today is a Jobs Jamboree Friday, and gold, which had briefly dropped below $1,200 is up $13 this morning.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning