Greek Crisis Continues to Weigh on the Euro

I am going to start right out this morning with an update from Chuck Butler, as he got some pretty big news yesterday and wanted me to share the following with you.

To my dear readers and friends…

About the time you receive this Pfennig and read it, I will be heading to the hospital, to have my left eye removed. There’s nothing they can do to save the vision any longer, and since it has cancer, and is causing me so much pain, this is the only option left. I could go into all the medical descriptions of what happened, but it doesn’t matter any longer. All I ask is that you all say a quick prayer for me, and my surgeon.

I believe I will bounce back from this quickly, and with new vigor, for I no longer will have the cancer pain in my eye. So… On this Fantastico Friday, let’s get this done, and over with, and begin to live pain free! Onward and Upward!

I spoke to Chuck on the phone a few times yesterday, once right after he left his doctor’s office, and again a few hours later; and his outlook seemed to change dramatically over this short time. I point this out to let you know how resilient Chuck is. During the first call I could hear the shock (and some fear) in his voice; but in just a couple of hours he came to grips with it all and sounded like his old self again. He has an incredible wife, loving kids, and a beautiful little granddaughter who give him the inspiration and courage to fight. And he also draws strength from his loyal Pfennig readers, who have reached out to him with a seemingly endless amount of support and love. Good luck Chuck, we are looking forward to seeing you back on the desk real soon!!

It is actually a bit tough for me to get back to the markets after the news from Chuck. His experience makes you realize there is a lot more to life than what the dollar did last night. But Chuck has entrusted me with taking care of the newsletter he created over two decades ago, so I will move on to giving you readers the information you depend on.

The dollar rose yesterday as the Greek crisis continued to worry investors. A poor earnings report from Google also had investors calling the global economic recovery into question. The typical ‘bad news for the economy is good news for the dollar’ trading pattern continued. Any time we get data or news which calls the recovery into question, investors move funds into the ‘safe haven’ of the US dollar and Japanese yen (JPY).

The euro (EUR) fell as Greek Prime Minister George Papandreou asked for a meeting with the EU, the IMF, and the ECB. The meeting, which was set for April 19th was seen as a first step for Greece to tap the rescue package that has been proposed. Papandreou has tried to convince the markets that Greece does not ‘need’ a bailout, and that his country would be able to work its way out of the crisis on their own.

In an attempt to calm the markets, EU finance ministers said Greece does not have any immediate plans to trigger a rescue package. But the currency markets still aren’t convinced. Papandreou’s latest request certainly looks as if he now realizes that the bailout money will be needed. This has increased the risk premium in the markets, and encouraged many to start shorting the euro again. Traders want closure, and tend to sell uncertainty. The Greek crisis is like a dark cloud hanging over the euro, and the euro will have a difficult time catching a bid until sunnier times for Greece.

Speaking of a dark cloud, have you seen pictures of the volcanic eruption in Iceland? The explosions have sent an ash cloud over northern Europe. The Icelandic financial crisis sent a similar cloud over the European markets back in 2008. Iceland has started to try and put their financial house back in order, but they are still struggling with a weak banking system and haven’t been able to turn to Europe for help. As you will recall, Iceland shut down their markets in response to their financial crisis, and investors and bankers have pretty long memories; so they continue to struggle to rebuild their monetary system.

Uncertainty over the upcoming UK elections has pushed the pound (GBP) lower. The first televised debate ended with neither of the top two candidates victorious. Liberal Democrat Nick Clegg emerged as the winner of the debate, outperforming both Prime Minister Gordon Brown and Conservative challenger David Cameron. These results certainly call into question the ability of either of the major parties to win a clear majority in the May election. This would lead to a ‘hung parliament’ and weaken the prospects of an aggressive effort to deal with the mounting deficits in the UK. The election looks like it will go down to the wire, and the pound sterling will continue to be volatile. Again, I wouldn’t suggest placing any money into the pound sterling at this time, and would actually be a seller of the currency.

Data released yesterday here in the US showed an uncertain picture of the US economy. The weekly jobs numbers showed another increase in claims that climbed to 484K. Continuing claims also increased, showing that the improvement we saw in the jobs picture over the past few months may have been fleeting. Industrial production in the month of March showed a very small increase of just 0.1%, which was less than expected. And one of Chuck’s favorite economic indicators, Capacity Utilization, also came in below expectations at just 73.2%. As long as this number stays down, corporations will not look to make additional investments into new facilities, and a weak utilization number is also bad news for future employment. Companies are able to ramp up production using existing facilities and employees.

On the positive side, the Empire Manufacturing data, which tends to be volatile, showed an improvement in the area’s manufacturing sector with a move up to 31.86 from last month’s 22.86 figure. The Philadelphia Fed and NAHB Housing Market Index also showed improvements.

So overall the data showed the US economic recovery is still questionable. Without a turnaround in the labor sector, the US recovery will continue to be tepid at best. But foreign investors remain confident in the US and continue to move money into our economy. TIC flows for February showed a dramatic increase, rising to $47.1 billion from last month’s revised $15 billion figure. China remained the biggest foreign holder of US Treasuries, even after its holdings fell by $11.5 billion. This was the fourth straight monthly decline in China’s holdings.

The worst performing currency over the past 24 hours was the South African rand (ZAR) which dropped close to 1% versus the US dollar. The currency lost value due to a move by the central bank to ease controls for hedging currency risk. The new rules allow companies to enter into forward-exchange contracts without having to provide proof of their foreign-currency needs. This opens up the foreign exchange markets, which is a good long-term move for the central bank. But short term, the change allows traders to ‘short’ the currency without proving any ‘real’ need; which will probably increase volatility in the markets.

As I said earlier, Chuck was back to his old form last night, and ended up sending me a bit of fodder for today’s Pfennig. April 15th got him thinking about taxes, and he sent me the following:

61, 39, and 47…

What are these numbers?

Of every dollar the US spends, only 61% of the spending is covered by taxes… 39% is BORROWED…

And 47? 47% do not pay taxes in this country… I’ll not say any more than that about that!

Chris Gaffney
for The Daily Reckoning