France Has a Successful Bond Auction

Front and center this morning, the euro (EUR) has plunged overnight, and now sits 2-cents below where it was yesterday when I was writing the Pfennig. France auctioned bonds this morning, and had to ratchet up the yield, as many buyers are afraid of the rumors that France’s AAA rating is about to be slashed. But this is old news, and shouldn’t have caused the move in the euro that we’ve seen since yesterday.

I told you yesterday that I believed “the focus that had been turned off for the Christmas holiday, will be turned back on to the goings on in Europe, and any time that happens, it won’t be good for the euro…” I didn’t know that it would begin so quickly! But it has… And so the ratcheting down of the euro’s value will pick up where it left off before Christmas.

One of the largest moves downward versus the dollar came from a very unlikely currency last night… The Chinese renminbi (CNY) saw the largest one-day reduction in its value versus the dollar since last November… China also lowered the daily reference rate by the most in a couple of months… I told you yesterday that I thought an adjustment to rates was coming, after we saw inflation drop in December.

The Chinese know all too well that the goings on in the Eurozone and in the US are going to harm their exports, which, even given their attempt to switch to a more domestically driven economy, is still a major piece of their economy. And so they are adjusting their thoughts on currency appreciation, even though I know I told you yesterday that I thought the Chinese would allow the renminbi to appreciate to help fight inflation. I guess they are caught between a rock and a rock… None of this changes my thoughts on China moving toward ousting the dollar as the reserve currency of the world… If anything, it pushes the timetable further out… Like the timetable for when the Chinese economy eclipses the US economy…

Originally, that was thought to happen in 2014… But now the IMF says it will happen in 2016… But that will only be the last straw, as China has already eclipsed the US in terms of car sales, exports, fixed capital investment, issuance of patents, net foreign assets, and the quality of science and math education… (All according to the IMF.)

On Tuesday, my first day back, I wrote about the countries that waded into the currency intervention waters in 2011… One of the biggest culprits with that was the Swiss National Bank (SNB), which finally saw that straight intervention doesn’t work after spending trillions in their attempt to weaken the franc (CHF), only to see the franc get stronger and stronger… The SNB had another rabbit up their sleeve, and fixed a “floor” for the franc versus the euro, and then spent about $10 billion defending the floor, which was fixed at 1.20…

And the Swiss franc began its ride down the slippery slope… Investors bailed, for no one wanted to deal with a currency that had a central bank so against it… Well, now the Swiss Trade Union Federation, the country’s largest umbrella organization for labor unions is calling for the SNB to increase the floor to 1.40 to fight the “looming recession”…

And the Swiss franc loses more ground to the dollar… While the cross to euros remains pretty steady Eddie around 1.21 to 1.23… I sure hope the Trade Union doesn’t get its wish, for a move by the SNB to fix the cross at such a huge move to 1.40, would be very damaging to the Swiss franc… I’m really struggling here, folks… I fought this currency war idea for a long time, but I’m coming around…

There is something we need to keep an eye on here… I don’t know if you’ve seen or heard about the inquiry into the SNB President, Hildebrand’s wife’s currency trades… But it is alleged that she made a ton on currency trades, trading ahead of the SNB’s announcement in September that it was going to fix the floor for franc versus the euro… Now, I don’t know if she did or didn’t, but you know me… Where there’s smoke, there’s fire… And there sure is a lot of smoke with this story…

Anyway… Hildebrand is going to have a press conference this afternoon (for them) and discuss the findings… There are thoughts that he might have to resign, which would leave the SNB with a lack of credibility… And, could very well prompt the markets to test the weakened SNB’s resolve… Which means we could see a spike in the franc… But that’s all pie in the sky stuff that hasn’t happened yet… Just thought I would talk about what “could happen”…

Elsewhere… Australia saw November’s trade surplus (that’s right I said “surplus”, strange sounding word, eh?) print slightly smaller than expected A$ 1.4 billion versus the forecast of A$ 1.6 billion… I doubt this report damaged the Aussie dollar that much, considering that a trade surplus is an uncommon commodity these days… There were reports that the Japanese were unwinding their long positions in Aussie dollars, but I don’t see that happening… At least not right now. My friend over at RBC told me that the TFX daily reports don’t reflect that happening… So, the Aussie dollar weakness overnight has to be sympathy trading with the drop of the euro…

Here in the US, did you see where the Fed Reserve sent ideas to US lawmakers about how to help the troubled housing market, warning that home prices would continue to fall if no action is taken. Uh-Oh… Does this smell of government intervention in the housing market to you? It sure does to me! I mean the government has already attempted to stop foreclosures, and put mortgage companies through the gauntlet… Let’s hope the lawmakers have too much on their plates to deal with this, and allow the markets to adjust on their own!

And here’s some BIG news, folks, regarding our deficit spending…The US President will visit the Pentagon today, and it is there that he will announce the biggest cutback in military spending since the end of the Cold War… Hmmm… I had better keep my thoughts on this to myself, and save them for sitting on the Butler patio…

Yes, Chuck, move along, these are not the droids you’re looking for…

Data wise… Factory Orders in December weren’t as strong as expected (1.8% versus 2%) And Domestic Vehicle sales were strong once again. Hey… This is America! We know all about “car loans” so that we can drive the newest, shiniest, most technological cars around… We invented all this, so it doesn’t surprise me that, even with 22% unemployment, car sales are still strong… It’s what we are all about! Cars!

In an attempt to get back on everyone’s good side… Here’s the latest joke I heard that plays well with the currency problems today in the Eurozone… OK… A Greek, Portuguese, Italian and Spaniard go into a bar, and all order a drink, the bartender asks them, “Who’s going to pay?” and they all answer at the same time… “The Germans!”

I see that there are some analysts out there that are calling the latest drop in gold to be the last, or at least near the last, and that a rally for gold is on the way… Citicorp analyst, Tom Fitzpatrick, is one of these analysts, saying, “The gold correction has run its course… And a rally is now back on the cards. Granted it is not all smooth sailing. Gold my drop to $1,550 before turning, but, when the turn comes, I see it going all the way up to $2,400.”

And John Hathaway (not the UFC fighter!), the manager of the Tocqueville Gold Fund had this to say, “To me we have had our correction, shook out a lot of people and now there is sellers remorse. Now those people are not able to get back in except by paying a higher price, so this is classic bull market action.”

Then there was this… Yesterday, I included a snippet of an article written by silver guru Ted Butler… In the article Ted Butler (TB) talked about the size of the positions that are being taken in silver and how it was responsible for the price moves of silver… I had a few readers tell me they didn’t get what TB was saying… So… Here’s my Reader’s Digest version of it… TB believes and can point you to the trades that show the price manipulators shorting silver using futures contracts, which drives the price down so the same price manipulators can then go into the market and buy silver cheaper and make deliveries on their positions that came due… It’s a vicious cycle…

In addition… Maybe the CFTC (commodities regulator) showed a little backbone yesterday, when on Wednesday, they asked an appeals court to dismiss a challenge of its rules aimed at preventing excessive speculation in markets such as oil and gold that was filed by two top industry groups. The futures regulator urged the US Court of Appeals for the District of Columbia Circuit to dismiss the lawsuit, saying the laws under which the rules were passed do not require the appeals court to directly review them.

Let’s hope the court does the right thing, eh?

To recap… The euro has plunged overnight, and brought the currencies (even the Chinese Renminbi) along for the ride on the slippery slope. France auctioned bonds without a major problem, even with the threat of their AAA rating getting slashed! Gold continued to be well bid, and is trying to break the mold that has them getting traded along with stocks… Watch for the SNB press conference today… Could be interesting!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning