Euro Reverses Slide in Short Squeeze

The Jobs Jamboree on Friday proved to be a real boost for the economy and the dollar, which rallied on a “strong jobs number” for the first time in a month of Sundays. I highlight “strong jobs number” because, this is what this has come to… 200,000 jobs were created, so says the Bureau of Labor Statistics (BLS), in December, which is the strongest number of jobs created in another month of Sundays… The jobs reports have been so weak for so long now, that the media, and markets are all lathered up and calling this a “strong jobs number”… It’s stronger than previous ones, yes…

The unemployment rate dropped to 8.5%, the lowest it has been since February 2009, and marks 6 consecutive months of at least 100,000 jobs — the first time that has happened since April 2006!

OK… Is it just me, being me that I smell a rat? Here we are in an election year, and suddenly the BLS says jobs are being created, when the weekly job cuts remain near 400,000 each and every week… 1.6 million jobs were created last year (per the BLS), so at least we’re heading in the right direction, eh? Whether the jobs are there are not. Whether they are full-time, or not. Whether they are minimum wage or not. All these things don’t matter, right now… The BLS has created a perception that the jobs market is rebounding… And, you are what you are perceived to be, right?

Well… Like I said, the dollar responded favorably to the jobs report, which could be an indication that maybe, just maybe, ’cause we never know, fundamentals are returning to the markets… Because the dollar should rally when the jobs report is stronger than previous reports.

The euro (EUR), being the offset to the dollar, was therefore weaker… The single unit is attempting to mount a rally, this morning, as German Chancellor Angela Merkel and French President Sarkozy are meeting, as I write, to discuss measures to rescue the euro over the next three months. Hmmm… They might want to get European Central Bank President, (ECB) Draghi, in a room, under a bright light, and attempt to get him to say “uncle” with regards to rate cuts! Because he cut rates at his first two meetings, and looks dead set on cutting them more!

I wrote about this last week, that given rates in the Eurozone are going lower… I say that, because of Draghi… He’s no Trichet, or Duisenberg… He’s more of a Bernanke and Greenspan. So, you can expect to see Eurozone rates dropping below 1% for the first time this year… It’s sad, I know… But I can tell you that Draghi and his fellow-Euroheads don’t care about the ECB’s credibility… And they don’t believe it will be damaged, as the markets will see the rate cuts as needed to help the Eurozone economy, which appears to be heading to recession.

Now… When I was a foreign bond trader, I would have looked at this and thought to myself… “This looks like a great time to be long bonds in a country that was getting ready to cut rates by at least 50 Basis Points (1/2%)”… But back then we would be talking about rates dropping from 5% to 4.5%… With rates starting from such a low point, I’m not sure there’s much to get excited about…

Speaking of the ECB… They will meet this Thursday, but after all my talking about Draghi cutting rates, I don’t think he’ll cut rates at this meeting, after having cut rates at his first two meetings…

To be fair and equal to different ideas… Last week I told you about three different analysts who called for the price of gold to be much stronger in 2012 and beyond… So, to give you the “two-way market”, my friend, and writer extraordinaire, Bill Bonner, is calling for the price of gold to be flat in 2012… Let me explain Bill’s thoughts… He believes that the markets are going to be circling the bowl again in 2012. Bill said, “What we learned in 2011 was that when a Great Correction pinches, the dollar is the salve of choice — not Gold. When investors fear losses they turn to the dollar for protection. They will continue to do so a while longer. We’ll probably see a further correction in the gold price… perhaps down to $1,200. Or perhaps it will stop at $1,400.”

OK… So, now you have two sides to the story, and you can make your decision, balancing the two thoughts on gold. Me? I’m not selling… And I’ll be happy to buy gold at cheaper prices!

I’ve been pretty tough on the Indian government and central bank, the Reserve Bank of India (RBI), and their inability to recognize inflation and act accordingly. This resulted in economic stagnation, and with high inflation, it appeared the economy would take a deep dive into recession… This is the reason the Indian rupee (INR) has been one of the worst performing currencies around in the past year. But… I read a good story in The Economist that talks about how the Indian economic miracle is not over… Well, I was all eye and ears for this, since I had written India off…

Indian economic growth is thought to grow at 7% this year, and will pick up from there… The savings rate continues to rise, which allows more investment, and that should be enough to keep the capital expenditure above 30% of GDP, which is quite good…

Does this mean the rupee will rebound? I think there are a lot of variables here… The Eurozone… The US and China… If all’s well in those three corners of the world, the rupee should be able to mount a rally.

Speaking of China… The Chinese renminbi (CNY) has been sliding weaker in the past week, which is something we don’t see a lot of, but it is happening, right here, right now… I think the Chinese government is very fearful of a slowdown from the Eurozone, and that demand in the US will not pick up, which would be a shot to both sides of the Chinese bow… So, the Chinese government is lowering interest rates, increasing money supply, and allowing the renminbi to get weaker, in hopes of all these things helping to offset the problems in the Eurozone and US.

How much weaker will they allow it get? Good question, Chuck! Well, I can’t put a number or percentage on it, but it could be significant, and then… It might just be a tempest in a teacup… I’m thinking that it might be the latter of the two…

OK… Back to the euro for a minute… The single unit fell to 1.2666 overnight, but it is being reported that the market got too short the euro, and a “short squeeze” was on, thus allowing the euro to rebound to 1.2750, which is where it is right now…

Elsewhere… Australian Retail Sales for November were flat, which was a disappointing result, and pushed the Aussie dollar (AUD) weaker this morning.

Canadian Consumer Confidence rose in the fourth quarter (the index rose to 107.4 from 105.1 the previous quarter). I keep reporting strong data from Canada, and the Bank of Canada (BOC) continues to sit on its hands… Maybe the stronger-than-expected US jobs report will give the BOC reason to get off their hands… But probably not…

Then there was this… Well, the BLS doesn’t give us a breakdown of the jobs created, so there are private companies that do that… And Adivsorone.com reported one such company. ITG Investment Research… Their chief economist, Steve Blitz, said, “The good news is that employment is up. The bad news is that the higher paying jobs have yet to return.” Blitz pointed out that the average hourly earnings were unchanged, and that 20% of the increase in private payrolls was for messengers and couriers. Net hires at restaurants and retailers (Christmas) and the aforementioned messengers made up 44% of the jobs added in December.

Yes, this is exactly what I thought would be the case… As I’ve always told you, and longtime readers will have grown tired of hearing this… The Jobs Jamboree is just a number… To get the real story… Look to the Average hourly earnings and the Average Work week hours… I thought on Friday that something didn’t look right, and there it was right there… 200,000 jobs created, according to the BLS, and no change in the average hourly earnings? Tells you a lot!

To recap… The Jobs Jamboree printed stronger than expected at 200,000, jobs created in December, and the dollar rallied on the data! This was the first time the dollar had rallied on a stronger jobs report in some time, and could indicate that we are returning to assets trading on fundamentals! The Chinese renminbi has taken a ride on the slippery slope of weakness this past week… One has to wonder if the Chinese are willing to absorb the critics of a weaker renminbi… The ECB meets this week, and while rates are going to go lower in the Eurozone in 2012, they won’t at this meeting, or so Chuck thinks…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning