Euro Rallies as Trichet Signals for a Rate Hike

First things first though… Yesterday, European Central Bank President, Trichet, did exactly what I said he would do on Monday… CABAL (Fed) Chairman, Bernanke did what I said he would do on Monday at his testimony on Tuesday and Wednesday…. And last night when I checked the currency prices, the euro (EUR) reacted exactly the way I said it would, as it climbed to 1.40 … In case you missed class that day, here’s exactly what I said about all of this…

Well… This week will be interesting regarding the euro and dollar… First we have Big Ben Bernanke speaking to the Senate Banking Committee tomorrow… If Big Ben stays “steady Eddie” and tells the Committee that the Fed intends to keep rates near zero, that will be the first step… Then later this week, the European Central Bank (ECB) will meet, and while I don’t expect a rate hike from the ECB at this meeting, what we might just might hear from ECB President, Trichet, is that the ECB is ready to hike rates… If those two things happen, folks, you could very well see the euro trading around 1.40 by week’s end… For… the interest rate differentials, as I explained above, will be getting wider, and those differentials will move against the dollar, no two ways about it!

I see these things happening, and quite often they take a long time to come to fruition, while this was one that happened to fall into place right away.

So… That was last night’s action… This morning, that 1.40 figure has brought out the profit-takers, and the euro has slipped back below 1.40… But, I don’t see it slipping further, especially on a Friday… The euro is around 1.3980 this morning… The other thing is that when Trichet jawboned the euro higher, along with rate hike expectations, the markets know that it’s not “hollow words”… The ECB has credibility to maintain price stability, and when they say they are going to do something, they do it!

A quick look at my new “Bloomberg Anywhere” screen and I see most of the currencies taking liberties against the dollar, this morning… Yes, I have the ability now, to get live prices and info, just like I would if I were in the saddle in the office… Technology, you’ve got to love it, eh?

Gold and silver have to play catch-up again today, as they were sold yesterday… Rate hikes could put a real damper in the precious metals’ ability to continue the large annual gains versus the dollar… But that doesn’t mean I think rate hikes could end their bull runs versus the dollar… You have to remember that in the early ’80s when gold traded above $800 (a record then) interest rates in the US were around 18% (remember those days?) So… While interest rate hikes could slow down gold and silver, I don’t think that rate hikes will be the kryptonite that a lot of people think the rate hikes will be.

Well… It’s a Jobs Jamboree Friday… the experts believe that February will have created about 200,000 jobs here in the US… Which would even outdo January’s awful showing of just 36,000 jobs created… But averaged out, the total is nowhere close to the number of jobs needed to be created each month to keep the economy growing… I’m not going to spend a lot of time on the Jobs Jamboree, because it has become such a manipulated number, and very political… I’m not saying one manipulates the data to their liking…but I could be saying that… But for legal reasons, I can’t! So I won’t! No! You can’t make me say it either!

All I’ll say is that whenever the “experts” get giddy with a number like 200,000 jobs, which would be the most since May of 2010, I take the other side of the bet, if you will, and say that there are downside risks to that number… So, in keeping with my normal order of business, I expect the number to be less than 200,000 and more like 175,000… Again, far less than what’s needed!

I’ll also say this about the message that ECB President, Trichet sent to the markets yesterday… I think he was also sending it to the Eurozone ministers, to work out a sustainable sovereign debt crisis response… Recall that I also told you earlier this week, that if the Eurozone ministers don’t work out a sustainable sovereign debt crisis response by the end of March, the euro would get sold… Beware the Ides of March, Eurozone ministers…

If they do work something out that everyone agrees is workable, then we could see the euro move steadily higher versus the dollar again… So, all eyes are on the Eurozone ministers… And they won’t get “an extension” like the NFL owners and players’ union got yesterday!

Chris told you about Brazil’s rate hike yesterday… I have to say… See, I told you! I told you long ago that Brazil’s interest rates would continue to move higher to combat their inflation, no matter what the government did, or said about all of it… OH! Brazil grew 7.5% in 2010, their fastest pace in 25 years! So, no wonder interest rates continue to go higher! There was a 7% increase in domestic spending so the economy is being driven by consumers and not the government, which is always a “good thing” in my book! OH! And the Brazilian real (BRL)? It continues to kick tail and take names later, folks…

Then there was this… From The Washington Post

The true amount that US state and local government pension funds will owe employees is at least $1.5 trillion more than what is being reported, economists said. The finding confirms fears that analysts have expressed for years but that politicians never faced. Experts said the way governments account for future pension obligations significantly understates the amount plans will have to pay.

That’s scary, folks… Really scary…

To recap… Trichet prepared the markets for a rate hike at the next ECB meeting, and the euro immediately jumped to 1.40… The euro has backed off a bit on profit taking this morning, but the move in interest rate differentials is in the works now, folks… It’s a Jobs Jamboree Friday…

Chuck Butler
for The Daily Reckoning