Will the Focus Now Shift to the US Debt Problem?

Front and center this morning… The Eurozone leaders gave the markets something that they liked last night. Well, at least the Asian, and now the European markets liked it. The US guys and gals are always a different story… But for now, the euro (EUR) is soaring and taking all the other currencies higher… The euro has reached 1.40 this morning, which is something given that in recent trading days when the euro was rallying it would stall out around 1.3950…

So… Here’s the skinny on the deal or “Grand Plan” as I called it yesterday… In the end, Eurozone leaders were able to convince Greek bond holders that a 50% write-down was what the doctor ordered, so take your medicine and be happy! Yes, Greek bondholders will take a 50% write-down of the debt, which really pulls off the default blanket that has wrapped around Greece for almost two years now…

The Eurozone leaders were also able to increase the European Financial Stability Fund (EFSF) bringing the total number of euros to one million (so, if the euro is 1.40… That makes the EFSF dollar value at $1.4 trillion). And, the recapitalization of European banks will also take place…

So… All-in-all not too shabby… Yes, it will be painful for the Greek bond holders, but 50% is better than 100% if Greece defaulted! I invested in a start-up company once, and when things didn’t work out for them I got less than 50% of my investment back… So… I know all too well what that feels like! The thing that allows tragedy to change to comedy is time… So, in time, maybe there’ll be a joke or two about this… Until then, we know that on the outside, the Grand Plan is in place… Now it’s time to look under the hood, and see what this car’s got!

So… All those currencies that were getting punished because of the Eurozone debt crisis, are rallying this morning… I have to say that while I’m glad that the Eurozone leaders finally did something to tackle the debt crisis, I’m very skeptical of the long lasting effects of this plan… The unintended consequences have already begun to show up… For instance, yields on German bunds (bonds) are rising, because now investors feel better about investing in higher yielding places like Spain and Italy…

And the Eurozone Finance Ministers still have to work out the nitty gritty details of how the EFSF will work… Sort of like one of those people that win the lottery… Now that they have all this money, they need to figure out how they will spend it!

OK… Back to the currencies… Basically, no data or news from any country is going to trump the “Grand Plan” So, it’s “all about the euro today”… Commerzbank says that the dollar index may decline 1.2%… Well, the dollar index is so heavily weighted with euros, so, it’s not like they’ve gone out on a limb here…Consider that the dollar index hit its 200-day moving average on the downside. So… We can track it from here… The euro is 1.4020, and the dollar index is 75.65…

The one currency that didn’t like the euphoria surrounding the Grand Plan was gold… The shiny metal is down $15 this morning, as all the “uncertainty” that surrounded the markets yesterday saw some clearing up… But, we still have the Congressional Super Committee deadline coming up, so, short term traders took their profits in gold yesterday… Let them play their games, folks… We will just continue to hold, and buy on dips… Well, at least that’s what I’m going to do!

And by no means is the Eurozone debt crisis “solved”… This Grand Plan puts a huge tourniquet around the debt… Now, all the austerity measures, need to not only be administered but maintained with an iron fist or else this will all come to a head again in about five years!

The thing that this Grand Plan does, is throw the monkey off the Eurozone’s back and onto the US’s back.. For now the markets will switch their focus to the US debt problem… And we know what trouble that causes the dollar, whenever the markets focus on the US debt problem… And what better time to do so, than just four weeks ahead of the deadline for the Super Committee to come up with $1.2 trillion of spending cuts…

That period of dollar strength that I warned you about weeks ago, may be coming to an end, should the markets really get focused on US debt, for its far worse than the Eurozone’s problems…

The Bank of Japan (BOJ) is sitting on its hands, watching the markets push yen higher and higher. Again, I’m not champing at the bit for intervention… It’s just that I’m surprised that the BOJ has sat tight… They have more than enough funds… They know how to do it… So what are they waiting for? I saw a note yesterday from a trader who said that he would bet that we see yen 72 before we see yen 82… WOW! I sure hope he hedged that bet!

I said earlier that the only currency to not join in on the euphoria was gold… I was mistaken… I hadn’t gone completely down the list to see that the Chinese renminbi (CNY) lost some ground overnight…

And the Aussie dollar (AUD) erased yesterday’s selloff, and gained 2-cents overnight! WOW! Don’t look now, but the Aussie dollar has a $1.06 handle! Ahhh… As I said last week, those of little faith… That bailed on Aussie dollars… So, even with the calls for a rate cut getting louder and louder, the Aussie dollar hangs a +2-cents gain on its previous figure… I’d say there had to be some built up frustration to buy the Aussie dollar…

And kiwi (NZD) is hanging on to the Aussie dollar’s coattails, this morning. The price of kiwi has pushed to an 81-cent handle…

And the data cupboard here in the US is chock-full-o-goodies today, with the most important data print to be third quarter GDP, which is expected to have really bounced from the second quarter’s 1.3% growth rate… But here’s my thought on this… With the way the markets have been trading in recent times, a strong GDP from the US would deep-six the dollar, for all those safe haven trades would be flying out of here at breakneck speed!

We’ll also see the Weekly Initial Jobless Claims, Pending Home Sales, Personal Consumption, Pending Home Sales, and the Kansas City manufacturing report. But think about that GPD thing…

I don’t see how in the world we would print a 2.5% GPD figure for the third quarter… But I think it had to increase, because the Fed Heads all said it would in the second half of this year! Wink, wink…

Then there was this… In all my reading yesterday, between naps, of course, I came across some information that really ticked me off… And I mean REALLY ticked me off! It seems that the CFTC’s vote last week to limit positions in commodities including gold, won’t go into place for two years!!!!!!! So… We have to put up with these price manipulations for two more years? How could this be? What was the CFTC thinking? I told you last week, that we would have to see the details of the measure, and now we’re seeing them… In addition, the limits were watered down… The CFTC had mountains of emails, petitions, and letters, requesting that the limit be 1,500 contracts… The CFTC allowed 4,500 contracts! And while 4,500 contracts is better than what we have right now… I don’t understand why the CFTC didn’t go with the public’s cries for a more stringent number… But hey… We got something, folks… And something is better than nothing!

To recap… The Eurozone leaders did punch through a Grand Plan, to write-down 50% of Greek debt, increase the EFSF to 1 trillion euros, and recapitalize European banks… While this does not solve the crisis, it wraps a big tourniquet around it, and the focus will now switch to the US debt problem… The Grand Plan has pushed the euro to 1.40, and allowed all the currencies (except gold and renminbi) that were punished up to now because of the Eurozone debt crisis, to rally… Some of them have rallied Big Time!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning