The Euro Reserve Currency

Front and center this morning we’ve got the Aussie dollar (AUD) rallying strongly, and a lot of that move is coming to us by way of an interview with Reserve Bank of Australia (RBA) Governor Stevens.

Governor Stevens was asked at a breakfast function in Perth whether the RBA had any tools to prevent speculators from driving the Aussie dollar to US$ 1.10… Mr. Stevens replied that, rather than being “speculators,” there usually was a rational reason for big exchange rate movements… (OK Mr. Stevens… I guess you are going to tell us what that rational reason is for the Aussie dollar’s big move?)

“We’ve got one of the better-performing economies in the world. Even at very low interest rates, we still have a positive differential and we’re a country where the people here are, I think, reasonably confident about the future and foreigners are fairly confident about our future, and it’s not entirely surprising that they’re a bit keen on the currency.”

WOW! The RBA Governor said that? That’s amazing! Of course it’s true, and I’ve told you that for months now… But to hear the RBA Governor say it… Now that’s a horse of a different color, indeed!

OK… So… The RBA Governor gave the green light to currency traders, investors, and whomever else to take the Aussie dollar to $1.10… Now, will it ever get there? Well, that’s a different thing altogether! I remember last year, before the HUGE deleveraging that went on, and then the collapse of Lehman Brothers, that the Aussie dollar was marching toward parity with the US dollar, and when the you-know-what hit the fan, the risk assets got the snot knocked out of them, including the Aussie dollar. I had said that I thought the Aussie dollar could make it to parity, and when it got stopped at the border, and had only reached 98-cents, you should have seen the emails, accusing me of mis-leading people… Come on… 98-cents is so close to parity it can taste it!

So, it is with weariness in even reporting this story, that I will make this point… I DIDN’T SAY THE AUSSIE DOLLAR WOULD GO TO $1.10!!!!! I JUST TOLD YOU WHAT THE RBA GOVERNOR SAID WHEN ASKED ABOUT IT GOING TO $1.10!

Well… The Big Dog, euro (EUR) was really taking a shot at the dollar overnight, but has backed off in a bout of profit taking, I’m sure… The single unit went as high as 1.4970 overnight, but has backed off to 1.49 as I write. I got a kick out of a quote that I saw the other day by European Central Bank (ECB) President, Trichet, that said, “The euro was not created as a reserve currency”… Oh! Come on Jean Claude! You know darn well that the euro was created to compete with the dollar! You guys in Euroland were determined that a single unit covering several countries could work. It was a precursor, if you will, to what we’re hearing about more and more these days… A global currency. So… Call it what you want Jean Claude… I know, and now all of my readers know, that the euro was created to be a reserve currency in waiting.

OK, maybe that wasn’t really clear… I know I hear you saying, yeah, Chuck, clear as mud! But, the point is simply that Trichet once again was trying to defend the dollar in a kind of backhanded way, by downplaying the euro’s ability to be a reserve currency.

The news wires are filled with stories today about how the dollar is going to bounce here, because the selling has been too hot and heavy in recent days, and that the economic recovery is too strong to warrant a currency sell-off like we’ve seen. Well, that’s all well and good, as long as one truly believes that the economic recovery here in the US is on the up and up.

Do you believe it to be? I don’t! I wish I could… But I don’t! Not when the unemployment is so bad, and the little pulse that we see in the economy is from the government’s efforts to pump life into the economy… But this unemployment thing is absolutely awful, folks.

Alrighty then, let’s go on to something else… The Canadian dollar/loonie (CAD) has really been on a roll versus the green/peachback dollar. Canada will print their latest CPI (consumer inflation) this morning, and I think it will tell us a lot about the loonie’s ability to continue to move toward parity once again… The Bank of Canada (BOC) meets next week, and long time readers will recall that I’ve been pretty hard on the BOC in recent months, as they kept saying that they would leave rates at current levels until the second half of 2010… And they well should have been taken to the woodshed for those comments… Well, if Canadian CPI shows some inflation pressures, it will be down to the BOC’s meeting next week, to see if they change their previous stance. I think they will, and thus the loonie will continue to move higher versus the dollar… But that’s just my opinion, folks. I don’t have a crystal ball, and I could very well be wrong! (That’s for the legal beagles!)

Today’s data cupboard here in the US will be interesting, in that the TIC’s data will print, but for the most part, this VERY IMPORTANT PIECE OF DATA has been largely ignored by the markets… Why is that? Well, I don’t really know, but if I were to put my conspiracy hat on, I would say something like “the markets have been directed by the government NOT to make a big deal out of, to downplay the government’s inability to finance the deficit, for if that were to be the case, it would be curtains for the dollar!”

We’ll also see two of my faves… Industrial Production, and Capacity Utilization. For all the new readers to the Pfennig, I particularly like Capacity Utilization because it’s just about the only “forward looking” piece of data (along with Leading Indicators). So… Capacity Utilization is running around 69%… What does that tell us? It tells us the economy sucks! And don’t believe those that keep telling you the coast is all clear!

And then, since no one pays attention to those three pieces of data, the U. of Michigan Consumer Confidence will print and that WILL catch everyone’s attention! UGH! Even with a soaring stock market, I would have to think that consumer confidence would be taking a hit, of sorts… It would be difficult at best to do a survey these days about confidence and not run into quite a few negative thoughts from all the unemployed Americans!

And then there was this from The Wall Street Journal… “High unemployment in the US has led to rising charge-offs and delinquencies at credit card companies. The firms are reacting by limiting credit, raising the bar on lending standards and cutting back on loan portfolios.”

So… Again, this is just another reason why I don’t believe the economic recovery campers!

And to add to that thought… Have you noticed the huge jump in the oil price? And have you been charting the rise in Treasury yields? Well… Either of these looks good for the US consumer… Oil has jumped to $77 a barrel, and the 10-year Treasury yield has really pushed higher to 3.47%! (I guess it’s time for the Fed to buy some more auctioned Treasuries to bring the yield back down, eh?) But… These two things are very good, when not manipulated by the government at telling us about the future.

OK, to recap… The Aussie dollar is pushing higher toward parity with the dollar once again, and when asked about what the RBA can do to stop the Aussie dollar from going to $1.10, RBA, Governor Stevens basically gave the all clear to traders to take it there! The euro had moved to 1.4970 overnight, but is seeing some profit taking this morning, and the data cupboard has some important data this morning, but for the most part the markets will ignore it.

The Daily Reckoning