SNB Intervenes to Weaken the Franc

It was a pretty sight to see gold turn around yesterday morning and head north once again… To watch these gyrations is pretty amazing sometimes… And I love it when an asset is down in the dumps in the morning, but rallies throughout the day… And conversely I strongly dislike when assets fall in price when there is no fundamental reason for it… I understand corrections… What I don’t understand are the “unusual circumstances” (wink, wink)… For we all know what I’m talking about here… The price manipulations… But, for now, gold is rallying… So there you go!

The currencies continued their bias to rally yesterday… And again, fundamentally speaking, the currencies like Norway, Australia, China, Singapore, Canada, and a few others, shouldn’t have to deal with these crazy “flights to safety” which sell the currencies and buys dollars… For, their fundamentals are stellar compared to those of the US, Eurozone, and even Japan… But Japan is a different animal… Fundamentals are thrown out the window when it comes to Japan…

Well… It was confirmed in a roundabout way yesterday that the Swiss National Bank (SNB) has been intervening to weaken the franc’s (CHF) value… I say “roundabout” because the SNB doesn’t just come right out and tell us… One has to get the figures from the SNB report on Foreign Currency Reserves… So, the way I look at it, if Foreign Currency Reserves jump, then the SNB has purchased them, after selling francs… For the most part, we’re talking about the SNB buying euros (EUR)… So… Their Foreign Currency Reserves rose 11% in September from August…

OK… That’s how I look at it… And the SNB has achieved their goal, right? They have maintained the floor they put in against the euro… And the franc’s value versus the dollar has plummeted…

Now… Back to Japan… Talk about a basket case of a country… All I’ll say is that Japanese officials should thank their lucky stars that the markets give the yen (JPY) credit for having a population that consists of savers. It is thought that the Japanese debt, which is legendary in size, could be self-financed by the Japanese savers… I don’t know if anyone has bothered to check that lately. It’s almost like an urban legend… Sort of like when investors believe that the Swiss franc is still backed by gold!

So it seems that China is claiming that the legislation designed to pressure China into allowing a faster appreciation of the renminbi (by placing duties on Chinese imports, and which is being discussed in the US Senate) is against World Trade Organization (WTO) law… So… If the US implements the measures, China will petition the WTO, and the US will lose that lawsuit in the WTO… Because to place duties on Chinese imports is based on a weak currency policy that’s followed in China, not a subsidy…

So… Not only would the US tick off their financier… They would be told to stop… So knowing that they’ll have to stop in the middle of the stream, wouldn’t it make sense to just let that bill/legislation die? I think so… We don’t need to tick off China…

Listen to me now and hear me later, dear reader… The US depends on the kindness of strangers to allow us to continue our deficit spending… And the major “stranger” is China… The day China does a Roberto Duran, and says “no mas”… We as a country will turn into Greece, with insurrection in the streets, because the government won’t have the money to continue to issue food stamps and all the other government boondoggles that exist… So… Please… Let’s not tick off China…

People argue that China needs us as much as we need them… And a few years ago, that was true… China got their financial strength from exporting goods to the US. But when the “you know what” hit the fan in 2008, and China’s exports to the US went to hell in a hand basket, the Chinese decided to change… And they promoted domestic and regional growth… So, yes China needs the US to continue to buy their goods, but not more than we need them…

OK… Today is European Central Bank (ECB) President Trichet’s last meeting… I bet he’s thankful for that! There are some analysts that are calling for a 0.5% (50 basis point) rate cut today… I doubt seriously that Trichet, in his last ECB meeting, will go for that! Especially with the latest print of inflation for the Eurozone running at 3%, well above the ceiling target of 2%… So… I believe it will be a no rate move meeting for the ECB, and Trichet in his last meeting. I’ve said this before, but for all of you who are new to class… When Trichet, who was the top dog French banker, took the reins from Wim Duisenberg and became the president of the ECB, I was not a fan… After all, and no ill will meant here, he was a French banker… Not a Bundesbank banker, not a Dutch banker or Austrian, but French… The Bank of France had a bad reputation when it came to credibility and providing price stability… But…

Mr. Trichet has done a very good job at the ECB… And while I’m sure he would love to have left the post with the Eurozone in much better shape, he didn’t tell the Greeks and other peripheral countries to run their deficit spending to unsustainable levels… He has strengthened the credibility of the ECB, and now it’s Draghi’s turn… And again, I’m no fan… So, hopefully when his term is complete I can repeat this discussion about Trichet, with Draghi…

But… In getting back to the what I said above… There are analysts who believe a 0.5% rate cut is coming… Maybe not today, but soon… What will that do to the euro? Well… I guess it all depends on what the markets are rewarding currencies on at that time… Go back to our discussion about how in 2000 and 2001 the markets would reward currencies from countries that cut rates to promote growth… Which is completely opposite from the normal trade, that rewards currencies who have rate differentials versus others… So, what will the markets think about that?

We’ll have to watch this carefully… The reason I say that is that once analysts begin talking about something like that (a 0.5% rate cut), the markets begin to price it in… Look at how they did that in Australia, punishing the Aussie dollar (AUD) when a rate cut got priced in, even though no rate cut has come about… Well… The euro has rallied the past two days, and is up a bit this morning going into the meeting… So, one never really knows with the fickle markets, but, that’s how I see it this morning.

The Bank of England (BOE) was first up this morning, and they have already announced that they are leaving their rates unchanged. And as I said earlier, I believe the ECB will do the same…

Well… The Challenger Job Cuts report printed yesterday, and it was U-G-L-Y! Sort of like that old saying about being so ugly that it wasn’t just the ugly tree, but instead the whole forest! Here goes… Hold on… US employers announced the most job cuts in more than two years in September! Announced firings jumped 212%… Yes, the military’s 5-year troop reduction plan plays here… But still, think about the 30,000 job cuts that were announced at Bank of America, and so on… And, add this 212% increase in September to the 47% increase in August, and the trend is not our friend!

With it being a Tub Thumpin’ Thursday, we’ll see the Weekly Initial Jobless Claims, which you may recall had an impressive 39,000 drop reported last week… It will be interesting to see what the report shows this week, given the Challenger data… I would bet a dollar to a Krispy Kreme that last week’s data is revised upward… Not that I want to see that, it’s simply a matter-of-fact type of thing!

Then there was this… From the Asia Times

Year-on-year consumer demand for gold in 2010-2011 grew 38% in India and 25% in China, compared with a 7% worldwide growth of gold sales. Accounting for over 55% of global craving for the noble metal, India and China ensure gold remains a trusted refuge of investment in an ailing world economy, weakened further with the deepening debt crisis in Europe and the United States.

On September 25, China joined the US, Germany, Italy and the UAE, in having ATMs that dispense bullion and gold coins.

Yes, now more than ever before, the Chinese people can buy gold… And the government actually promotes that they do so… Yes, that’s right, the Chinese government encourages the public to buy gold!

To recap… The currencies rallied yesterday and have a bias to continue to rally, with the euro leading the way. Gold reversed yesterday’s morning selling to finish in the black yesterday, and is up again this morning. Today is ECB President Trichet’s last meeting… Chuck doesn’t believe there will be a rate change today, not at Trichet’s last meeting. And the unemployment data here in the US continues to get worse!

This just in… The ECB did leave rates unchanged at the meeting this morning… However, the euro is getting sold on the news… Strange days indeed…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning