Will the Euro Rally Last?

Front and center this morning, the euro (EUR) is rising once again, and now this recovery is beginning to smell like it’s gone too far, too fast for me… Yesterday I told you the euro had gone through the 1.27 handle quickly… Well, 1.28 didn’t last one day either, and now the euro is poking through the clouds to sniff 1.30 again. The single unit is trading right now, as I write, at 1.2975… I’ve seen it a bit higher when I first turn on the screens, but talk about a rise! Actually, that’s a 5.5% rise in the euro in the past month…

5.5% sounds good, but it’s not even in the top two currency gains in the past month… Five “Pfennig points” if you can name the best performing currency versus the dollar in the past month… Pat yourself on the back if you said, Swiss francs. (CHF) That shouldn’t have been too difficult to figure out, but the number two currency in the past month will be a shocker, or at least it was to me! It’s Swedish krona (SEK)!

Enough of that! I just put the finishing touches on our monthly letter to clients, called Review & Focus, and in it I talk quite a bit about the euro’s recovery, as it appears Europe is overcoming its peripheral countries’ debt problems. At least that’s how it appears… But, hear me now and listen to me later… Europe is NOT out of the woods, just yet… Yes, it’s’ adopted some very aggressive austerity measures to cut deficit spending, but we’ve got to see how that all pans out before taking the “overcoming its debt problems” too seriously… And don’t forget, at the end of next week, the European bank stress tests results will be out there for everyone to see. There could be skeletons in the closet for the euro, and then again, if these stress tests are as worthless as ours were, it’s open season for the euro again… Of course that’s my opinion, and I could be dead wrong, or a little wrong, or as I like to say…

Well… I have to get to this early in the letter today because this news has rocked the New Zealand dollar/kiwi (NZD) overnight… Here’s the skinny… Kiwi has fallen 125 BPS, or 1.25-cents, overnight after its second quarter GDP report disappointed. The New Zealand economy only grew 0.3% in the second quarter, while it was forecast to have grown 0.5%… I think the reaction has been overdone, folks… I still expect the Reserve Bank of New Zealand (RBNZ) to hike 25 BPS on July 29th… So… If you were thinking of buying kiwi, you certainly can buy it today a whole lot cheaper than yesterday!

The Canadian dollar/loonie (CAD), has bounced between 95-cents and 98-cents for some time now… It ratchets down when the price of oil drops, and bounces higher when the price of oil rises. It’s been that simple to track. Canadian data has been very good, but for the most part, the markets aren’t paying attention to the data, just the price of oil. For instance, yesterday, Canada printed a rise in manufacturing for the eighth month of the last nine! And… The loonie drifted on the day, and continues to be soft this morning, as the price of oil slipped from a $77 handle yesterday to a $76 handle today.

Norwegian krone (NOK) is off today, too; in fact, it looks like it’s a “euro story” today, with not many other currencies having a good day. You can count the currencies in the “green” on one hand… We’ve got euros, Czech koruna, Chinese renminbi (CNY), and Russian rubles (RUB)! Not exactly a murderers’ row, eh?

I think the New Zealand soft GDP print is the culprit here… The economic growth currencies don’t like it when one of their brothers gets whacked…

Dr. Marc Faber was on Bloomberg TV this morning, talking about the US economy, and I found that his thoughts were pretty much in line with mine, which I’ve shared with you previously. He too believes the Fed and Treasury are going to have to step back into the markets and attempt to stimulate the economy again.

Yesterday’s data, however, was mixed – so it wasn’t all bad! Capacity utilization was unchanged, instead of falling as it had been forecast, and industrial production actually posted a +0.1% gain instead of falling as it had been forecast. The Philly Fed (manufacturing for the region) was weak, and PPI showed that wholesale inflation is falling… In other words, wholesale prices are falling again… Can you say deflation? I knew you could!

The weekly initial jobless claims fell, but remained above 400,000 every week! The total last week was 429,000, falling from the previous week’s 458,000. There are two ways to look at this reduction in claims… Sort of like a glass half-full or half-empty thing… You could say, “WOW! That’s a good sign for the labor markets!” OR… You could view it like this… It was only a matter of time before the number began to fall, given the 450,000 that have filed each and every week for over a year now. Sooner or later, you’re going to run out of people who have lost their jobs. You’ve already counted all of them!

So… The Financial Regulation Overhaul Bill passed the Senate yesterday, and will be signed by the President as soon as it lands on his desk… Don’t you wonder just what else is in the bill?

For instance, the Health Care Bill mandates, according to Numismaster.com, “Starting on January 1st in 2012, US federal law will require coin and bullion dealers to report to the Internal Revenue Service all gold and silver coin purchases and sales greater than $600.” Apparently this little jewel was an add-on to the national health care legislation.

I understand that there are lawmakers already working on a bill to repeal this little jewel… But, now we understand don’t we, what the speaker meant when she said, “We have to pass it to find out what’s in it,” or something like that… Excuse me for a minute while I go over the wall and yell.

OK… I’m back now… Feeling better too! For it IS a Friday! You know, I really got carried away for a minute, when I was going to talk about the Cartel – you know them as the Fed – receiving more authority in the new Finance Bill… Well, all I have to say about that is… YECH! Weren’t they already at the helm before the last crisis? Oh boy, now they’re more powerful! Ron Paul? Where are you, buddy? We need you to slap some people around in Washington, and make them see that the Fed needs to be abolished, not given more authority!

Then there was this… You can find the whole story over at law.com… Bank of America Corporation has admitted to maneuvering as much as $10.7 billion in debt from its balance sheet and then back again through repurchasing deals that the bank called “dollar rolls.”

The deals involved short-term agreements in which the bank would move mortgage-backed securities off its books to another entity, while agreeing to repurchase the package at a later date. Usually this happened after the bank had reported its quarterly financial statement to the Securities and Exchange Commission.

In a letter responding to questions from the SEC, the bank admitted it wrongly classified the moves as “sales” when they were really a form of secured borrowing.

Critics have said it was an effort by the bank to hide the extent of its investments in risky mortgage securities.

Hmmm… Guess what would happen to you and me, if we did something like that to hide things from the government? But what’s worse, in my opinion, is the fact that over $10 billion of mortgage-backed securities are not worth very much, otherwise the bank would not have “hidden” them…

To recap… It’s a “euro story” today, since the single unit’s flying higher and higher each day, while the rest of the currencies, save but a few, lose ground to the dollar. New Zealand GDP printed softer (0.3%) than previously forecast (0.5%), which sent kiwi lower by over 1-cent. Canadian manufacturing posted a positive number for the eighth time in the past nine months, but the price of oil is weaker, thus pushing the loonie lower today…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning