Eurozone Plan Spurs Currency Rally

Front and center this morning, G-20 Finance Ministers are meeting in Paris, and it looks like the early leaks of what’s going on is responsible for the currency and metals rally this morning. A plan to deal with Europe’s debt problems has been hatched. The outline of the plan has deeper losses on Greek bonds, higher bank capital levels and increased firepower for bailouts, and the IMF. And it sounds like Eurozone leaders will meet next week to iron out the devil in the details, and put this to bed.

So… The euphoria this morning is tied to the hope that Europe can avert disaster… Yes, there will be pain, and lots of it to go around… But, unless you get on that bus to better times, you’ll never get there! I like German Chancellor, Angela Merkel’s comment this morning, that “This is not a euro crisis, it’s a debt crisis”… HAHAHAHA! Come on Angela… Do you really believe that by saying that, the markets will leave the euro alone, with all the debt problems? Really? Haven’t you been paying attention to what’s been going on with the dollar since 2002, when our debt level reached 4.5% of GDP for the first time, and has never been corrected? Maybe she’s getting cue cards from Tim Geithner? Now that’s funny!

OK… Back to the currencies and metals rally… The hope for a plan to deal with all this is turning on the green lights all the way to downtown… And the euro is pushing the envelope on its best weekly performance since the beginning of the year! But we all know the program here…Usually, on days like this, we come to a point when, behind the curtain, someone will flip that circuit breaker. Maybe… And maybe not… This rally seems to have some legs to it and some built-up frustration pouring out.

Yesterday, I was all prepared to talk to you about the Monetary Authority of Singapore (MAS) and how they were going to meet last night, and discuss their currency band, etc. I have honestly said that I was going to talk about the MAS easing the band, which could hurt the Sing dollar (SGD)… Well… The MAS did ease the currency band that they allow the Sing dollar to trade in, but… The MAS did not move the band as much as was expected…

Here is a snippet of the statement the MAS made… “MAS will continue with the policy of a modest and gradual appreciation of the Singapore dollar NEER policy band in the period ahead. However, given the expected moderation in core inflation, the slope of the policy band will be reduced, with no change to the width of the band and the level at which it is centered.”

So… The currency markets liked it, and the Sing dollar soared!

S&P cut Spain’s rating one notch yesterday… These rate cuts are beginning to pile up, and lose their effectiveness… Sort of like we are here in the US with our debt… We’ve become comfortably numb…

Yesterday, I talked about the incoming European Central Bank (ECB) President, Mario Draghi, and how the markets are thinking that he will buck the Maastricht Treaty mandate, and cut interest rates while inflation is higher than the ceiling target… Well, apparently the markets are attempting to build institutional momentum toward that rate cut… I would really hate to see that happen… However, I have a solution for the ECB’s problem… Just follow the US’s lead on this… If your ceiling target for inflation is too low (currently at 2%, with inflation at 3%), just adjust the ceiling target! Move it to 3%, and then inflation doesn’t look so bad, and you won’t be messing with the Maastricht Treaty mandate to provide price stability… Well, on the outside that is!

See? They should be “asking Chuck”!

Well… Folks… I’ve got some real problems with what’s going on in California — which is still a top ten economy of the world, and the most-indebted US state. It’s finding out just how expensive it will be to borrow money when everyone is scared of your ability to pay back the loan, ala Greece… I read on Bloomberg this morning that California may have to pay almost 15% more to borrow $2 billion this month than it did in September… Of course that’s not that big of a deal, now… Just wait… I read about this, and shake my head in disgust, but not as much as I did the other day, when I heard that the California Governor signed the dream act… If you don’t know what that is, I suggest you Google it… And maybe it won’t bother you, and that’s fine… It does bother me for a number of reasons…

Mexico meets today to discuss rates, and the thinking here is that the Mexican interest rate will remain unchanged, which is not good for the peso (MXN)… I’ve explained this before, but a country like Mexico, which has a history of doing things to hurt investors, needs a “risk premium” in the form of high interest rates to attract investors. And their current internal rate of 4.5% is nowhere close to a risk premium, and THAT, my friends is why pesos can’t find a prolonged bid.

The Aussie dollar (AUD) is about 1-cent stronger this morning. And why not? We saw consumer confidence and unemployment reports this week that support a stronger Aussie dollar… And then add to the data reports, the news that I told you about at the top, regarding hope for a plan to avert disaster, and the Aussie dollar soars!

Yesterday, I was showing something to Jennifer regarding a New Zealand bond issued in 1999 that matures next month… The bond paid 6% interest per year, and the currency (the NZ dollar/kiwi) gained over 50% in that time… So… Overall, a very nice investment, if made in 1999, and held to maturity… Of course, in 2008, most people sold anything that wasn’t Treasuries… However, the point I was trying to make, is that diversification and currency investing are long-term relationships… Sometimes things look bleak, but held for the right reasons.

You can’t find 6% yields any longer… When EverBank opened their virtual doors in January of 2000 (we weren’t afraid of Y2K) the interest rate on our checking account was 6.01%… Those hazy, lazy, crazy days of summer are over… Those days of soda, and pretzels and beer…

Yesterday, the trade deficit printed bang on with expectations of $45.6 billion… And I had a big laugh at the people on TV, saying… “The trade deficit remained steady”… As if a monthly deficit of $45.6 billion was OK! And it really was in the way they said “remained steady”! Hey! Go out and spend some money, because it’s OK that we book a $45.6 billion trade deficit, “it remained steady”!

And once again, 400,000 first time filers of unemployment claims were counted last week… That means that since April 8th, 2011, there have only been two weeks that posted initial jobless claims below 400,000, and those weeks were 399,000 and 395,000… So tell me, this isn’t a jobs problem? Or this isn’t a depression? Those people don’t stand in soup lines, instead they’ll have their unemployment benefits mailed to them or automatically deposited in their checking accounts. So… The media doesn’t see soup lines, they don’t show them, and people watching TV don’t see them, therefore there’s no problem, right? NOT!

In China overnight, consumer inflation printed for September… Inflation in China proves to be quite difficult to tame, although it did tick down to 6.1% from 6.2% in August. I say the inflation here proves to be quite difficult to tame for a number of reasons… But the one that jumps out at you is the Manufacturing that goes on in China… The Producer Price Index (PPI) represents wholesale inflation, you know… Like here in the US it’s inflation that’s in the pipeline that’s coming down to consumers sooner or later… Well, the PPI in China increased 6.5% from a year earlier in September. Yes, it’s slower than August’s print of 7.3%, but still 6.5% is nothing to ignore here… And to me, this will filter through to consumers…

This data should keep Chinese interest rates unchanged for a while… And keep the pressure on the government to monitor bank reserves, etc. And should keep some pressure, not a lot, but some on the Chinese government to continue to allow the renminbi to appreciate, for I’ve always told you that an easy way to combat inflation is to have a strong currency.

And what will be interesting this morning, is after passing the bill to punish China for their weak currency, the Treasury Department will issue their periodic report on China, in which they could accuse China of currency manipulation… Even with currency manipulation staring them in the face for years now, the Treasury has refused to label China as currency manipulators… But will they now? And if they don’t, doesn’t that make the bill just passed, look ridiculous? So, that happens this morning…

Then there was this… From the FT… A Eurozone official (not named) saying… “We’re increasingly coming to the view that the Eurozone crisis is too big a problem for Europe to solve on its own. If you want to sort it out properly you need American and Chinese money, which means the IMF.”

The US has its own debt problems, so you had better skip the IMF and go straight to China, do not pass GO, and do not collect $200… Get to China and tell them you’ll do everything in your power to correct the debt problem, and to protect the value of the euro (EUR). And tell them you are not the US and their willingness to allow the dollar to weaken!

To recap… Well, G-20 Finance Ministers are meeting in Paris, and it looks like a plan is being hatched to deal with the Eurozone debt crisis that the markets like so far, and that has the currencies and metals rallying this morning. The MAS is going to continue to allow Sing dollar strength. And the Aussie dollar has the wind in its sails from two strong data reports this week, and now the hope for a plan in the Eurozone.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning