Is the Weak Euro the Reason Germany is Recovering?

Things didn’t get any better for the currencies yesterday (save yen (JPY) and francs (CHF)), as the focus, whether it belongs there or not, remains fixated on the GIIPS once again, and their ability to function under the weight of debt they’ve created for themselves. For those of you new to class, GIIPS is short for the countries of the Eurozone that consist of: Greece, Italy, Ireland, Portugal, and Spain…

As I’ve tried to do from the beginning… I’ll give equal time to the likes of: California, Michigan, Illinois, and a host of others with debt problems that should demand equal time in the woodshed… But that’s not what’s on traders’ minds right now.

The euro (EUR) has given up almost 1-cent since yesterday morning, even in the face of news this morning that German Industrial Orders for June had increased 4.1% versus 3.8% in May…

And to top that data… Germany’s second quarter GDP blasted a new path to a 2.2% gain! This represents the fastest quarter of growth in Germany in two decades! And when you compare what this second quarter did to 2009’s second quarter, the increase is 3.7%!!!!

You know, I’ve highlighted several times in the past, how the weaker euro was helping German manufacturing, and exports… Well, the German Economy Minister, Rainer Bruederle gets upset when people say that exports are responsible for German economic growth. Bruederle said, “German economic growth is in no way driven by exports alone.” Apparently, Mr Bruederle was able to point out that domestic demand is contributing about 60% to the economic expansion. He went on to say that, “The recovery in Germany’s economy is underway with full force.”

Well, that may be, but it’s not enough to take the focus off the deficit problems of the GIIPS right now… And the euro is barely hanging on to 1.26 this morning… And, while I admit, I’m not in Germany, so I don’t really know, I still believe that exports drive the German economy… I’m from Missouri; I’ll have to be shown that I’m wrong here…

Over in Japan, the yen is going hog wild versus the dollar and euro once again this morning… Here’s the skinny on this latest move: The Japanese Finance Minister held a press conference last night, and did not make one mention of the yen… He didn’t mention its strength, or the risks associated with his currency getting out of whack with the other Asian Currencies… Nothing, nada, zero, zilch, a great big goose egg, regarding the yen…

So… Folks, traders are taking this non-mention of yen, as a signal that the Japanese Finance Ministry has turned on the green lights… But this is where I think these guys and girls that believe that yen can continue to move higher without interference from the Japanese Finance Ministry, have another thing coming… The Fin Min could be setting a trap… I would be very careful here…

And further down in the South Pacific, the Aussie dollar (AUD) continues to be held hostage by the “uncertainty” of the election outcome, and of course the risk aversion going on right now…

Yesterday, I went out on the limb and said that the Bank of Canada (BOC) would carry on with a rate hike on 9/8… Well, one piece of data that might give us a better idea if that will hold true or not will print today… Canadian Retail Sales for June prints first thing this morning… I don’t have a BHI (Butler Household Index) for Canada, but the “experts” have forecast a nice 0.4% increase for June… Let’s see if that’s bang on or not…

Well… South of Canada, the US will print July’s Existing Home Sales this morning. I think those campers that believed that housing was “out of the woods” are going to receive a huge awakening this morning… The July report will be the first one that is completely void of the tax credits and other government stimulation (except for the government keeping interest rates at zero!). I think that this report is going to open some eyes, and will begin to play well with my call that home prices will drop another 10% before we turn this ship around…

And… If we remain in this current pattern of risk aversion because the US economy is circling the bowl, the dollar will rally on a bad print of Existing Home Sales this morning. Should it? NO! But… That’s the game people play now, every night and every day!

It’s all a matter of keeping the dollar from going for a ride on the slippery slope once and for all! Like circuit breakers… We were beginning to see the dollar selling big time once again, and mysteriously the focus shifted from the selling the dollar, to the Eurozone deficit nations… Just like that!

Think about that for a minute, and let this sink in… Remember? We were dealing with a fight, if you will, between two different ideas… In Europe, austerity measures were being used to get out of deficit problems… And in the US, spending to promote growth measures was being used to get the country’s economy rolling. (They didn’t care about deficits!)

And from the time Europe began their austerity measures the euro began to gain back lost ground versus the dollar, moving from 1.18 to 1.31… So, guess which plan was winning the markets’ favor?

But then it all stopped… Just like that! You can’t tell me that it wasn’t the US directing the media to focus on the Eurozone to take the heat off the dollar…

I know, I know, that’s all a little too much conspiracy… But it’s exactly what I believe I see going on, folks… That’s what’s still great about this country; you can think what you want… At least for now, that is! UGH!

OK… Let’s get back to the facts, Jack! And… Gold is down $8 this morning and about $10 since yesterday morning. So… It’s not just a “flight to safety” going on… Because if that were true, gold would be soaring right now. And… It isn’t! UGH!

There’s something else going on right now, and I can’t put my finger on it… I mean, the FOMC announced Quantitative Easing (QE) again a couple of weeks ago, and the damage to the dollar that should be going on, isn’t happening… Have the markets become “comfortably numb,” with all the goings on in the US? It sure looks that way… And I’m here shaking my head in disgust, folks… For this is not how “free markets” work…

Then there was this…  I saw this on the Bloomie…

“The US Court of Appeals for the 2nd Circuit denied a request from the Federal Reserve/Cartel to reconsider a ruling that requires the central bank to identify banks that received loans after the collapse of Bear Stearns. The Fed has seven days to disclose the information, unless the court stays its ruling. The Fed has argued that disclosure of the information would stigmatize the borrowers, causing them ‘severe and irreparable competitive injury.’”

I can’t express enough the need for this information from the Cartel… And I would think that the public is with me on this. Of course if we ever passed the “audit the Fed” bill, we wouldn’t have to go to court to get information from these guys!

To recap… The risk aversion that settled into the markets last week, continues, with the euro losing about 1-cent from yesterday morning. This in spite of some very good economic news from Germany. The markets’ focus is now fixated on the GIIPS deficit problems once again, and one (me of course!) has to wonder how that focus was shifted from the dollar’s problems to the Eurozone… Canadian Retail Sales this morning could be a good indicator for the BOC meeting 9/8, and… US Existing Home Sales for July print this morning… Strap yourself in for this report!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning