Norges Bank Prefers to Fight Strong Krone

As I turned on the currency screens this morning, I noticed that the euro (EUR) had ticked up, albeit in a small move, to an eight-week high. But the most-impressive thing is that the euro has held onto its gains this week. So once again, just when it appeared that the euro was about to slide further down the slippery slope, it has bounced back. Of course, that doesn’t mean that it can’t still slip further — and in fact, personally, I’m surprised it hasn’t at this point.

But here’s the reason why it hasn’t, according to me. There are all these things that will happen in just two weeks, and no one wants to be short going into September and all the event risks that will take place. For if the German Constitutional Court agrees that the ESM funds can be used to recapitalize the troubled Spanish banks, without the government getting their hands on the money first, one HUGE obstacle for Spain will have been removed. And with the markets now feel that contagion isn’t going to happen, the euro could be in store for a nice rally.

But then the German Constitutional Court could go a different direction, thus throwing Spain and the euro under the bus. I truly believe the GCC will approve the payments, but then I’m probably out on that limb all by myself. I don’t think I’m saying that because it’s what I wish for. I’m saying it because maybe the GCC is like our Supreme Court and they pull a 180 on a major decision. OOPS, did I say that out loud? Watch your mouth, Chuck!

Norway’s central bank, the Norges Bank, is meeting this morning, and they will most likely keep rates unchanged. The markets are hoping for a rate hike, but they aren’t going to get their wish here. You see, Norway might have a housing bubble going on, but the strong krone (NOK) is keeping a lid on inflation, which at the last print was only 1.3%, well below Norges Bank’s target of 2.5%. The Norges Bank is fearful that a rate hike to combat the housing bubble would push the krone interest rates even higher than those already present in the eurozone. And while the Norges Bank members like that a strong krone is fighting inflation, they are well aware of what the strong krone is doing to exports, especially in the eurozone.

So the Norges Bank will keep rates unchanged at their meeting this morning (for us) and the markets will be disappointed, once again. But I see what the Norges Bank is thinking here, and that is that a strong krone is more of a threat to the economy than the risk of a housing bubble. Maybe they are right, and maybe they are wrong. I think that they should embrace the strong krone and let it fight inflation. So I think they are right! But I would love to see a rate hike here. But since none is forthcoming, I won’t get all disappointed about no rate cut, like the markets.

I know I’ve spent some additional time on Norway this morning, but when we are talking about the country that boasts the biggest budget surplus of any AAA-rated nation, I should spend additional time! And in the did-you-know category, Norway’s mainland economy, which excludes oil, gas and shipping, expanded 1% in the second quarter? This puts Norway on pace to post a very nice and strong 3.75% annual gain, compared with the -0.3% contraction in the eurozone and 1.9% gain of the U.S. (according to the government).

The Swiss National Bank is in the news this morning, and no, they didn’t announce another devaluation of the franc (CHF), like they did nearly one year ago. The story this morning centers around the fact that the SNB has a 365 billion franc reserve in currencies. That’s $380 billion. And SNB President Jordan has a real problem, because he wants to invest those reserves, but where? Recall last week I told you that it had been reported that the SNB was diversifying into other currencies. Apparently, they want more! The problem for the SNB is the so-called “safe assets” have become very, very expensive. Take U.S. Treasuries for instance. They are very overpriced, and you don’t pick up yield! And in Germany, German bunds/bonds are paying negative interest! Who wants that?

I haven’t been able to say this for the past year, but good for the SNB, in that their share of dollar reserves has fallen to 22%, from 28% just six months ago. Australian dollars (AUD) and Danish kroner holdings are up to 3.5% of the total, from 2.9% a year ago. It is reported that the SNB added some South Korean won this year. Well, if emerging markets are good enough for the SNB, then that’s good for our MarketSafe Emerging Markets CD! (See the add at the top!)

In the not sure why I even mention this category. The National Bank of Hungary cut rates yesterday, sending the forint to the woodshed. The markets had anticipated the NBH would hold off one month, and were surprised to see the NBH wet its powder yesterday. But just shows to go you that cutting interest rates doesn’t bypass the peripheral countries and that “everybody is doing it.”

The Aussie dollar and New Zealand dollar/kiwi (NZD), have seen better weeks, for sure! A week ago, the A$ was basking in the sun from the news that the SNB was buying A$s and the A$ rallied to $1.0505. And the kiwi was following close behind, with a gain to 0.8140 of their own. But that was last Wednesday. Since then, a feeling of despair for global growth has cast its net over the globe. And soon, this net will have blackened the hearts of the global growth campers. I have to think that more selling is in store for these two. But remember what I told you a few months ago: Even if the A$ falls to parity to the U.S. dollar, the currency is STILL STRONG! It’s just not AS strong, obviously. And it will still have a nice positive interest rate differential to the U.S., the eurozone and Japan.

Gold and silver are off by small amounts this morning. No biggie. Yesterday, both started the day in the red, but ended up posting small gains. Not the kind of gains we’ve seen lately from this dynamic duo. But after being stuck in the mud for several months and then seeing a week of huge upward moves, it was almost good to stop and catch our breath. Bloomberg is reporting that gold investors were the “most bullish in nine months.”

As we grow ever closer to Friday and the Big Ben Bernanke speech at Jackson Hole, the markets are whipping themselves into a frenzy again thinking that Big Ben will use Jackson Hole to announce additional stimulus (QE3), like he did when he announced QE2 a couple of years ago. It’s my opinion that he won’t announce QE3 at Jackson Hole and the markets will end the week with a sour taste in their collective mouths. Instead, I do believe that Big Ben will give the markets what they want at the Sept. 12 meeting. Even though Goldman Sachs says no QE3 is coming.

Yesterday, I told you about how I was sent a note from a currency dealer that China had announced a stimulus plan, but I couldn’t confirm the information. A dear reader sent me a link to a story in the U.K. Telegraph, which is where I should have gone first to look, as they are always ahead of everyone else. That confirmed the information. China will implement a series of stimulus injections into different areas of their economy that will total 10 trillion renminbi/yuan (CNY). That’s a very large number! But remember what I always tell you about the difference between China’s and the U.S.’ stimulus. China uses their treasure chest of reserves. The U.S. goes further into debt.

If you remember 2009, when the healing began for the risk assets, after the daily beatings they took in 2008, the Chinese economy was teetering, but after an injection of stimulus, the economy was soon ready to run again, and in June 2010, the Chinese announced that they would return to allowing the renminbi to appreciate. As far as global growth is concerned, we have to all hope the Chinese stimulus works again.

Did you see the S&P/Case-Shiller home price index data yesterday? Well, bust my buttons! Year-over-year prices of homes in the 20 biggest U.S. cities increased in June for the first time since 2010! Prices increased 0.5% overall compared to June 2011. This was good news for the housing sector, but aren’t we ready to go into September? The data is a bit stale, don’t you agree? And notice that the last time we saw a monthly increase was 2010, and what happened after that one-month increase? For the next 18 months, prices fell. And I would be very surprised if at this time next month we see two consecutive months of increases.

The other data in the U.S. yesterday surprised me a bit. U.S. consumer confidence fell by 4.8 points, to 60.6, in August, from 65.4 in July. The “experts” thought confidence would increase. But that was not to be! Apparently, consumers are getting caught up and realizing the “fiscal cliff” is coming, and food prices just keep rising. I know, this is gloom-and-doom stuff, but if I don’t talk about it, no one does! Well, maybe my friends Doug Casey, David Galland, Addison Wiggin and a few others. But you get the idea. It’s not the stuff you see on major media news shows!

Today’s U.S. data cupboard has the personal consumption data for the second quarter. Again, very stale data. And pending home sales for July. The Fed’s Beige Book will print this afternoon. No surprises here. So we could very well see a day of drifting again for the currencies and metals.

And this news plays well with the biggest drop in 10 months for consumer confidence. From the Chicago Tribune:

“General Motors Co. will idle the Michigan assembly plant that makes the Chevrolet Volt for four weeks from the middle of September to the middle of October, plant suppliers and union sources said on Monday.

“It will be the second time this year that the plant, which straddles the border of Detroit and the city of Hamtramck, has stopped making Volts.

“GM confirmed the plant idling, saying it will continue to ‘match supply with demand’ for both the Volt and the Chevrolet Malibu sedan that is also made at the plant. The automaker declined to specify how long the plant will be closed.”

Then There Was This, from King World News. It’s John Embry of Sprott Asset Management:

“We have the most beautiful setup in the world here. The fundamentals for gold and silver could not be better. Yet the public is not even in those markets. They don’t even care. So sentiment is negative.

“The bases that gold and silver have built will underwrite massive moves to the upside. Everything is now in place, and I think it’s all going to come to a boil this fall. I would add that I am wildly bullish on silver. I still believe it will take out the all-time high before the end of the year.

“Eventually, the public will enter these markets with a vengeance, and the masses will turn to silver because it trades at a 1-50 ratio to gold. That opens the silver market up to a lot more people. Gold may be the rich man’s refuge, but silver will be the refuge for the rest of the world. So there will be an enormous gain in price as the money flows into the already tight silver market.

“In a debt-logged world, with a weakening economy, you are going to have massive money printing if you don’t want a complete collapse. Gold and silver will be the go-to investments going forward, as the central bankers continue to destroy their currencies.”

I couldn’t agree more here. I still maintain that if you go to a cocktail party, beer bust, barbeque or whatever social function it might be, ask to see a show of hands of people that own gold or silver. And if they are really truthful, very few, if any, will raise their hand.

To recap: The euro is trading at an eight-week high this morning and has held its gains this week, which is surprising to Chuck, who thought the euro would be much weaker at this point. What does that say about the dollar? The Norges Bank meets this morning and will keep rates unchanged, much to the chagrin of the markets. The SNB has a $380-billion-reserves and where-to-invest problem.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning