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Daily Pfennig 3/2/10: RBA Hikes Rates!
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In This Issue….
* A long history of dollar moves...
* Canadian GDP jumps 5%...
* U.S. Traders didn't like the Greece package...
* Getting out of Dodge...
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And Now... Today's Pfennig!
RBA Hikes Rates!
Good day... Well... I'm back in the saddle! And a Terrific Tuesday to you! It didn't take long for me to get the emails started telling me how wrong I am again... WOW! Of course, I wonder where these people have been the last 9 years, as when 9 years ago I was the first writer to issue a white paper calling for the long term down trend for the dollar... Or, in 2002, when everyone was writing off the euro, I wrote the white paper, "The Year of The euro"... Or in, 2005, when everyone called for the collapse of the euro... But not me... Or, in 2008, when everyone called for the collapse of the euro... But not me...
Is this time different? I doubt it... Lose value for 6 more months? In my opinion yes... But then returning to the underlying weak dollar trend. Look folks, if you really think that by sending me emails telling me I'm wrong, and I'm stupid, and everything else, that I'm going to change my mind on this... Then you might as well stop! Or... Start writing that great American, NOT! George Soros, and tell him how great he is...
Here's the thing... The U.S. dollar entered the long weak dollar trend in 2002, after posting a deficit of 4.5% of GDP, which historically meant that the country posting such a deficit would experience a currency crisis... THIS WAS A FUNDAMENTAL REASON FOR THE WEAK DOLLAR TREND! And guess what the CBO told us about 10 days ago? That's right... That the U.S. deficit is going to average 4.5% of GDP for the next 10 years! Where's the cleaning out of the fundamental reason for the weak dollar trend?
I told many people last week, that "Yes, the dollar can rally... But these are merely circuit breakers so that the dollar's direction isn't a one-way street, for if it were to become a one-way street, then... Everyone would head for the exits at the same time!"
Ok... Sorry, but sitting at home yesterday, reading those notes, just got my temper raging, and I experienced "writer rage"!
Well... The Reserve Bank of Australia (RBA) did, as I said they would, hike rates yesterday... Adding another 25 BPS to their internal rate to 4%, the RBA made a statement that leads me to believe they are nowhere near an end to the rate hike cycle. The RBA's statement ended with this... "Interest rates to most borrowers nonetheless remain lower than average and it is appropriate for interest rates to be closer to average". Sounds like more rate hikes are on the way to me!
Australia also printed a strong Retail Sales figure for January of +1.2%... Tomorrow, we'll see the color of 4th QTR GDP, which will really tell us for sure if the rate hike cycle continues higher...
Yesterday morning I told you about how I expected Canada's 4th QTR GDP to show a greater than 4% figure... Well, 4% was conservative! 4th QTR GDP actually printed at 5%... And, the recession officially ended earlier than thought, as the 3rd QTR GDP was revised up to .9%! This 5% print of GDP was greater than the experts and the Bank of Canada (BOC) were forecasting... (3.3%)... So, as I said yesterday, maybe this moves the BOC to raise rates earlier than they stated they would... But raise them now, or next week, or next month? I don't think so, but before the summer sun is hot, and the tall colorful cold drinks with umbrellas are prevalent around the pools... I do think so!
The data in the U.S. yesterday was, as Yogi Berra says, déjà vu all over again! What am I talking about here? Well... Personal Spending far outpaced Personal Income... So, what does that remind you of? Yes, of course the go-go days that helped fuel this financial mess we're in... We can't continue to spend more than we make folks... When will this become part of our inner thoughts?
Hey! John Williams, over at Shadow Stats, confirmed my belief that we have greater than 20% unemployment, as he printed a greater than 21% figure for his latest reports... And yes, I know, the Gov't is doing everything it can to keep those unemployment benefits going, but their motives are dark, as they want to get money in your hands to spend, not save, or pay down debts...
The data cupboard is pretty bare today with only Vehicle Sales for February to print...
I have to tell you that what I'm seeing in pound sterling is really a driving force for the euro weakness... I've explained all this before, but for those of you new to class... The FX market is made of currency pairs... Since we're mostly dollar based investors, we care about dollar / whatever currency... But all currencies are tied together with these pairs... And if there's a ton of selling of pound sterling VS dollar, that would carry over to dollar / euro, and dollar/ krone, etc.
The thought in the U.K. these days is that the economy is facing the risk of a double dip recession... Well... If they get one, you can bet your sweet bippie that we'll get one here in the U.S. because... It seems that for the last two years, whatever happens in the U.K. carries over to the U.S. Short positions in sterling are piling up, and I doubt there's anything that can save the currency from bigger declines at this point...
OK... Yesterday, I told you that I would give you something different to think about rather than all the destruction and loss of life in Chile... This is very similar in theory about what I wrote after the Tsunami in Thailand a few years ago...
First of all... This is a well-managed economy and they have enough policy flexibility to deal with this devastation. There may well be selling of Chilean pesos in a knee jerk reaction to the earth quake, but I doubt that will continue. You see, Chile has a $11.3 Billion savings fund will stabilize the peso... And, while copper mining is put on hold right now, the Government will The government will likely tap the $11.3 Billion fund, stockpiled with copper revenue, to finance reconstruction projects... And the rebuilding of their infrastructure will regenerate their economy... You see bridges falling down, and roads buckled... I see the need for new bridges and roads that will require jobs, equipment, etc.
So... That different than the stuff you see on TV, eh?
You can always get the "different slant" on things from me, which is what so many people at last week's conference would say to me when they would stop by to shake my hand and tell me how much they enjoyed the Pfennig...
Yesterday, I said we would have to wait to see the U.S. reaction to the news that a 34 Billion euros package had been put together to help Greece... Apparently the U.S. traders didn't like it... Of course it was different when the U.S. financial institutions were getting bailed out... I wonder if it will remain different when California has to be bailed out... Or Illinois... Or Michigan... Or New York...
And I could sit here all day telling them they are forgetting about the U.S. states nearing default... But it doesn't do me any good, for they have their focus on Greece and the euro right now... I have to say that yesterday, I woke up from a nap, and right there on my TV, on the Glenn Beck show, they were talking about Greece and California, and all the things I've been saying to you for over a month now! Maybe, there's a Pfennig Reader over at Fox...
Then there was this... Talk about getting out of Dodge before sundown... Fed Reserve Vice-Chairman Donald Kohn, announced that he will retire from the Fed... They say... That Kohn was a very close friend, and advisor to both Greenspan and now Bernanke... Given what we now know about Greenspan, thanks to Bill Fleckenstein, and his book, "The Age of Ignorance at the Federal Reserve", knowing that Kohn was a close advisor is probably not a good thing on a resume, eh? Now, the President has to find 3 new Fed Heads... This is going to be pretty interesting to see who he picks...
To recap... The RBA did indeed hike rates by 25 BPS, and gave a statement that leads one to believe more rate hikes are coming. Canada posted a strong 5% figure for 4th QTR GDP, but rate hikes there will have to wait a month or two. Pound sterling crosses are hurting euro, krone and other currencies, and the Chile earth quake will provide infrastructure rebuilding projects...
Currencies today 3/2/10: American Style: A$ .9040, kiwi .6980, C$ .9665, euro 1.3550, sterling 1.4980, Swiss .9265, European Style: rand 7.5860, krone 5.9435, SEK 7.1650, forint 197.10, zloty 2.89, koruna 19, RUB 29.90, yen 89, sing 1.4030, HKD 7.7640, INR 46, China 6.8266, pesos 12.71, BRL 1.7880, dollar index 80.75, Oil $79.09, 10-year 3.63%, Silver $16.60, and Gold... $1,121.70
That's it for today... Good to be back today... Like I said the FXU Conference was very good, and tiring! My beautiful bride leaves today for Florida, leaving the "boys" at home, which normally means lots of pizza, for that's what my little buddy Alex, likes! Chris' wife is gone too, and Kristin's husband is gone, so we all have child drop off, pick up, take to weight lifting, guitar, and other activities to do this week... This could be our first year of "cooler" weather in Florida where the Cardinals have spring training... That had better change by the time I get there! And... My fave TV show, 24, is going really good right now... And our Blues begin play again after the Olympics break... Hope you have a Terrific Tuesday!
Chuck Butler
Senior Market Strategist
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Two decades ago, Chuck Butler embarked on his extensive career in foreign investments as the Director of Operations for the Fixed Income Division of the Mark Twain Bank. He oversaw the clearing and custody of all bond department trades and Mark Twain portfolio transactions.
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