What The ECB Will Do

Today’s Pfennigfor your thoughts…

Good day, and a Tom Terrific Tuesday to you!

Well, here we are. The 30th of June, will the sun not rise tomorrow? Sometimes you would think that people actually think that, because Greece, which I’ll remind you is the economic equivalent of Kentucky, is going to default.

Now, don’t get me wrong here, Greece is important.  But there is a limit to the drama, isn’t there?

Today is the day. June 30th.  The day that Greece informs the IMF that they will not be making their loan payment of 160 billion euros to them. This is going to set off all kinds of whistles and hand signals, folks, the first of which would be whether or not the Eurozone grants the continued use of the ELA (Emergency Liquidity Assistance) loans to Greek banks.

I would think they would to see if politics can still work their magic, but should they stop the ELA loans, then all hell breaks loose in Greece. And they have defaulted.

But they still have this referendum to vote on this Sunday.  I told you yesterday, that the Greek leaders are actively telling voters to vote “no”. But with over 70% of Greek voters wanting to stay with the euro, it could get ugly.

Once the vote is over, we could have a “yes” vote, which would basically tell the current Greek government that the people no longer want them in power, and they would need a new government. But a “yes” vote would be good for negotiations.

Or we could get a “no” vote… and if that happens then they’ll have to see how the voters voted to know how to handle things going forward. Do they want a program directly capitalizing the banks, or do they want to leave the euro?

A “no” vote, even though this is what the Syriza party wants, would be a big hit to the Greek economy, folks. Sure, austerity is no fun at the beach, and certainly not all seashells and balloons, but, whatever austerity brings, it will be far better than the mess that leaving the euro will bring.

But like I said at the start today, this shouldn’t bring the world to a stop. But it will, so we have to deal with that. So, we’ll have to wait and see what the European Central Bank decides with the ELA. We’ll get a good indicator of whether the ECB wants to continue to negotiate with Greece here folks.

All this and the euro is just a touch below 1.12, of which it was about ½-cent above the 1.12 figure overnight. The brave traders of Asia, were thinking that all would be right on the night, and began to mark up the euro, but then the European traders arrived and decided that the news is not that encouraging, and began to sell euros. A very strange overnight session.

The dollar is, for the most part, on the upside this morning vs. the currencies, and gold. The Chinese renminbi/yuan was  allowed to appreciate overnight, after spending a few days on the other side of the appreciation fence.

I was doing some reading, as always, regarding China and their bid to gain acceptance into the IMF’s basket of reserve currencies called SDR’s (Special Drawing Rights), and got to thinking about something I mentioned a couple of weeks ago. That is, that China could be thinking about widening the currency band in which they allow the renminbi to trade in.

Right now the limit is 2%, daily, and I see that being widened to 3%… Of course that currency sword cuts both ways, folks, as it could appreciate as much as 3% or it could lose as much as 3%…

But I see this as a precursor to the IMF’s request to have the renminbi “more freely usable” and because of this, the IMF’s announcement later this year most likely will center around the currency, and therefore the IMF could make their inclusion of the renminbi, “conditional” — conditional that the Chinese allow the renminbi to become more freely usable.

In other words, floating, deliverable, and no longer controlled. So, that’s the carrot that I believe the IMF will hang before the Chinese. You can be a full weighted member of the SDR…if...

Isn’t that how the IMF has always worked? Yes, it is. And that’s all I have to say about that!

The dollars of Australia and New Zealand are getting sold this morning, as once again a weaker than expected data print in New Zealand caused a selloff that carried across the Tasman to Australia. This time it was the ANZ (Bank) Business Confidence report which for June was a negative -2.3, vs. the 15.7 that printed in May.

I want to point to something I talked about a couple of months ago, when the cross between the Aussie dollar (A$) and N.Z. dollar/kiwi, was getting very close to parity, and there were tons of traders, economists, and analysts that thought parity for this cross was inevitable.

Not among those “tons” of people was me. In fact, I believe I told you that Australia was the larger economy and would weather this storm, so if you were a “cross trader” I would opt for being long A$ vs. kiwi, just for good measure.

It’s always nice to see a plan work out! I say that because yesterday, that cross which was nearly at parity a couple of months ago, is now 1.1304, which was a high for this year. I do believe that there’s more to be seen here, given that New Zealand has run into a rough patch with data prints, that will probably light the fire under the Reserve Bank of New Zealand (RBNZ) to cut rates again this month.

But for us “regular” folks, that don’t trade the “crosses” the A$ continues to be persona non gratis with traders vs. the U.S. dollar. And that’s not likely to change any time soon. Just my opinion, and I could be wrong.

U.S. stocks got whacked yesterday, and no I’m not going to get crazy and start talking like a stock jockey, but I just wanted to point out that stocks got whacked, and the currencies traded on their own, with some up, some down on the day. None of that “risk on, risk off” baloney that we’ve had to deal with since 2008, and that really highlights what I was telling you yesterday, about we could be getting back to fundamentals.

I had a reader send me a question, asking me what the difference between fundamentals and sentiment were. He thought that sentiment was merely short term fundamentals. And yes they are in most cases. But, the thing with sentiment is that the traders can forget fundamentals and just trade because they “think differently”.

To me, it’s very simple, either the fundamental tells a trader to buy or sell, or it doesn’t. And the currency only moves because of the fundamentals.

The Russian ruble is stronger this morning. It’s been a tough week for the ruble, as it had to grapple with a new recession, falling interest rates, and sanctions that a month ago seemed to be on their way out the door, but now remain. Interest rate differentials have always been a very strong fundamental for a currency, and here, the ruble enjoys one of the best differentials in the world, along with Brazilian real.

But with large rate differentials sometimes comes “problems” in the respective country, and this has never been as brilliantly illustrated as it is now with Russia and Brazil. I still think that ruble is the better currency than the real, because of the fundamentals, and the fact that the real still has “leadership problems”.

Gold is down $7 as I write this morning. I was surprised to see so many people writing about what I mentioned yesterday morning.  I think it’s becoming so apparent that gold’s price is being manipulated downward or at least suppressed. And I have my beliefs that originate in the Wikileaks cable that I told you about a few years ago. Well, let’s go see what others are saying.

Yesterday morning, I told you how surprised I was to see gold not taking off for higher ground, given the goings on in the eurozone, and Greece.  I even mentioned that, well, let’s just go to the tape to see what I said:

But the one asset that should be considered THE safe haven, gold, just can’t find any wind for its sails this morning. At least the shiny metal isn’t down, which would really raise suspicion wouldn’t it, given the flight to safety going on?

Well, the people at GATA, sent me an email yesterday, and this is how they felt about this scenario:

No one who has followed GATA for a while could have thought last night, as Greece collapsed financially and the foundations of the European Union and its currency were shaken, that gold would do anything but decline or be held steady under surreptitious central bank intervention in the markets.

But at least today’s price action, the most anomalous since the otherwise inexplicable smashes down in April 2013, may awaken a few of the more oblivious analysts who purport to cover the gold market.

Time to shift gears, and move along.  And I’m finished with the currencies for today, so might as well see what’s up in the data cupboard!

The U.S. data cupboard will have the S&P/CaseShiller Home Price Index for April today, and the Consumer Confidence Index for June. Home prices keep rising, and so does Consumer Confidence. So, I guess it’s all sugar and spice and everything nice for us here in the U.S., eh?

Oh come on Chuck, do you always have to be such a smart Alec about everything?  Well, when preposterous things come along, I just have to point them out, and when doing so, well, I , have no excuse, it’s the way I am. A big smart Alec.

Before I head to the Big Finish this morning. I wanted to once again remind everyone that the problems with banks being closed in Greece are the collateral damage that too much debt causes. One day, everyone is walking around not giving one thought about how the country has too much debt, and the next day, they are wondering how they will get cash to go to the store.

It’s not a problem, until it is. Well, actually, it was a problem all along, but no one except people like me noticed it!

Have you ever wondered, what would happen if the global finances ever experienced another 2008? Well, now you don’t have to! The Bank of International Settlements (BIS), the Central Bank of Central Banks, issued a scathing report recently, and I have some of that here for you. You can also go to the following link and read the entire story that was in the Telegraph, right here:

The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises, the Bank of International Settlements has warned.

The so-called central bank of central banks launched a scathing critique of global monetary policy in its annual report. The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies.

Rather than just reflecting the current weakness, they may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates.

“In short, low rates beget lower rates.”

The BIS warned that interest rates have now been so low for so long that central banks are unequipped to fight the next crises.

Chuck again. I guess the solution to this is for us to never experience another financial meltdown, eh? I mean if Central Banks are in no condition to help then let’s just make certain that we never get to the point where we need them!

That’s it for today…

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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