US GDP Spooks Currencies

Yesterday, I saw the euro (EUR) touch 1.31, but it was quickly sent back down, but held steady Eddie around 1.3080 most of the day… But this morning, in the European session, the single unit has dropped to below 1.30… So… I saw that as I turned on the screens and thought, “Hmmm… I wonder what’s going on in Europe to cause this selling?”

The best I can figure out is that traders were looking ahead of today’s print of second quarter GDP and got the willies… European stocks are declining this morning on those willies, and that has led to some selling of the euro, which as long time readers know, will lead to selling in the other currencies, for the euro is the Big Dog/offset currency to the dollar.

Speaking of the euro, I went through my thoughts about the euro’s price range prospects in yesterday’s Pfennig, so I thought I would share with you two news stories that caught my eye this morning, which show the kind of wishy-washy, no clear direction, the markets have for the euro and the currencies right now…

1. “Dollar May Rise Versus Euro as US Data Unlikely to Worsen, Barclays says…”

And…

2. “Euro to Rise to 1.46, Highest This Year, on Trendline: Technical Analysis…”

See, it’s not easy being me! I have to go through these stories and make heads or tails of them… For instance in the second story, it’s a bit misleading, because in the story you find out that there are qualifiers, like, the euro has to trade above 1.3120 to send it to the next level of 1.36, and so on…

But that first story? Holy Cow! What are those guys smoking? Apparently they didn’t see the data that printed the other day from the Richmond Fed… According to the guy that I believe should be running our Treasury or Fed, Ambrose Evans-Pritchard, of the UK Telegraph… The report was “ghastly”!

I’ve said this before, but Mr. Evans-Pritchard knows more about what’s going on in this country than our own economists!

You know… The other day, I was telling the boys and girls on the trading desk here in St. Louis, MO – home of the 10-time World Champion St. Louis Cardinals – that they should not be getting all lathered up with the fact that the “earnings season” has produced quite a few winners… I quoted them some research I had done, and then lo-and-behold, there it was in the story by Mr. Pritchard… Here’s the skinny of what I told the boys and girls the other day… Again this is from the report on the UK Telegraph

I told them that just because the earnings were beating the forecasts, we should be somewhat concerned… And here’s why: “While 68% of companies have beaten sales estimates, this is hardly anything to get overly excited about. Back in 2Q08, 69% of companies had beaten sales estimates. We all know where the economy headed shortly thereafter.”

Interesting, eh? So… Second quarter GDP today? Like I said yesterday, I suspect the report will print between 2 and 2.5%… If the report prints greater than 2.5%, then you should be suspicious… Very suspicious!

So… If the euro has sold off by 1-cent this morning, you can be sure that the “other” currencies from countries like: Norway, Australia, New Zealand, Canada, etc. have sold off too…

And in keeping with the very strange trading mentality of flocking to dollars, yen and Swiss francs when it looks like the sky is falling, yen (JPY), and Swiss francs (CHF) are cooking with gas this morning. And… Of course, US Treasuries are also on the hit parade of investors this morning…

Speaking of very strange trading mentalities, the Japanese yen is trading at its highest level versus the dollar this year, this morning. Go figure! While I’m a believer of the “Asian growth story,” it doesn’t necessarily mean that Japan – with its title of “World’s largest debtor nation” – should be trading with an 86 handle!

There’s another rumor going around the world that China will print a sub-50 Manufacturing Index this weekend (Sunday). Recall that manufacturing indexes have a line in the sand drawn at 50… Any number below 50 represents contraction, and any number above 50 represents expansion… A sub-50 print for Chinese manufacturing would be a bad thing for the global growth, folks… And it would be somewhat of a hit to my call that China’s economy is NOT going to collapse as others said it would… I say “somewhat of a hit” because, as I’ve said before, there’s a HUGE difference between “collapsing” and “moderating,” which is what I believe the Chinese economy is doing.

And in the UK this morning consumer confidence took a hit, falling to its lowest reading in a year… You would have to figure that this was going to happen, given the austerity measures/budget cuts that the UK has adopted…

Now… Let’s get back to what’s going on here in the US with homes… I’ve already told you this week about the rot on the vine with homeowners… Well, some additional new data has come out from RealtyTrac and it’s quite ugly… But, another reason why the US will experience a double dip, folks… Here are a couple of the snippets of the report… But first you must put away all sharp objects, and be close to a wall you can yell at…

The latest figures show that the threat of foreclosures is spreading well beyond the top tier of metropolitan areas located in California, Florida, Nevada and Arizona, which have borne the brunt of the fallout from the housing crisis.

In all, about 1.7 million homeowners received a foreclosure-related warning between January and June. That translates to 1 in 78 US homes.

More than 1 million American households are likely to lose their homes to foreclosure this year.

Then there was this… I had my eye on the Bloomie TV yesterday for a minute and saw a blurb come across the screen that said, “Bullard calls for more QE” (quantitative easing) Well… You know me; I just had to see what the St. Louis Cartel President really said… And yes, that’s what he said… Here you go!

“The US is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, warning in a research paper released today about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

To recap… The currencies have given back their gains from yesterday, as the focus shifts to the US second quarter GDP, which will print this morning. Most observers believe it will be much weaker than the first quarter, and I agree. And that thought gives the markets the willies, for today, at least! The rest of the currencies have followed the euro’s lead to weaker levels versus the dollar, except the usual suspects that rally in times like this: dollars, yen, and Swiss francs…

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Chuck Butler
for The Daily Reckoning

The Daily Reckoning