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The Rumor Mill Just Beat Up the Euro Again

jhaddock (January 14, 2009)

In Today’s Letter…

By Chuck Butler I’m writing from home this morning, as I will not be in the office on this wonderful Wednesday.

Writing from home or the road always presents problems for me. I’m so used to being in the saddle at my desk, and having the entire world’s currency information around me. But, my little work desk at home has some of those amenities. So, what the heck, let’s get started…

The dollar ripped through the 1.32 handle of the euro yesterday, like a hot knife through butter. There was little to no resistance at that 1.32 level. Before you could say “God bless you” to one of many traders here who sneezes all day long, we were trading with a 1.31 handle.

Once again, the talk about a European Central Bank (ECB) rate cut has really ramped up this week, and it’s taking a toll on the euro.

Apparently, no one seems to care that even if the ECB cuts 75 basis points this week, the Europeans will still have an interest rate / yield advantage over the U.S! I guess they’ll sort that out somewhere down the line, eh?

There’s a rumor going round that Ireland had requested aid from the IMF. Whoa there Partner! I know that things in Ireland have turned around on a dime from boom to bust, but I wasn’t aware of a problem that would run that deep.

Authorities denied the rumors of course, but you know me. Where there’s smoke, there’s fire.

This reminds me of an email I received two weeks ago from a reader in Ireland. The reader told me that there’s been a major slowdown in his country. He actually compared Ireland to a banana republic! I responded to him, saying, “No, that can’t be, because we’ve got a corner on being a banana republic right here in the U.S.A.”

You should have seen how fast euros sold off when this rumor hit the streets! It was scary how fast a currency could lose its value!

But, after they denied the rumors, the euro rallied back nearly as fast as it fell. As I write this, the euro is trading at 1.3225. The dollar is swinging a mighty hammer once again.

Why Risk Takers Are Running Faster Than You Can Say “Risk Aversion”

Talk about a flight to risk aversion! This rumor has the risk aversion campers battening down the hatches and heading to the cellars! Risk aversion is NOT good for currencies and commodities.

Risk aversion campers are also battening down the hatches after yesterday’s Citigroup (NYSE:C) news. Citigroup just announced they’re selling their brokerage arm, Smith Barney, to Morgan Stanley for US$2.7 billion in cash.

This sounds like a fire sale to me – looks like Citigroup is in deep trouble once again. Meanwhile, the government already gave Citigroup US$45 billion in TARP money – much more than any other bank has received, and they’re still selling their brokerage firm for a fire sale price.

This news scares the bejeebers out of me, as Citigroup has always prided themselves on the fact that a customer could do “one-stop investing.”

I guess we’ll have to wait-n-see if Citigroup announces a sale of another unit somewhere down the line, eh? But for now, this news is not good for any asset.

Deficits Are FINALLY Shrinking. Good News? Not Really.

I haven’t mentioned the huge drop in the trade deficit that showed up in the print yesterday. The trade deficit fell from US$56.8 Billion in October to US$40.4 Billion in November. Wow – that’s great, right?

Let’s take a closer look at the numbers. U.S. exports fell US$8.7 billion and imports fell US$25 billion. Lower oil imports accounted for more than half of this drop, but ex-petroleum imports also fell US$10.5 billion.

So, here’s the problem folks. The deficit isn’t shrinking for the right reasons. A narrower deficit caused by less spending and larger exports would be a manna from heaven.

But a narrowing trade deficit because of slashed spending and less exports is not a good thing for the economy.

This simply means…

1. The U.S. consumer has stopped spending, in an economy where consumption makes up 70% of the GDP. Translation: We’re in for a long recession.

2. The dollar is too strong, otherwise exports wouldn’t be so far off too. Yes, I’m quite aware of the fact that the recession is hitting all over the globe, but come on, we still buy Chinese and Japanese and even German exports even in a recession don’t we? These same countries would be doing the same with U.S. exports.

Bank of England Can Now Dump Cash on the Economy – Without Warning

I have a bit of news of the weird for you this morning. My colleague, Chris Gaffney sent this to me. Here’s a snippet of the story:

“The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the government will secretly pump extra cash into the economy.”

Oh boy! Just what the pound sterling needs as a stabilizer eh? Not! This is awful news for the pound folks…

I’ve said for months now that the Bank of England (BOE) was following in the Fed’s and Treasury’s steps. In other words, they’re headed for ruin. This is just another step in the Fed’s and Treasury’s direction – running the printing presses as needed.

That’s it for today… I got my itinerary for the Orlando Money Show next month yesterday. I’m looking forward to some warm weather already. I’ll be at two presentations, and one EverBank Town Hall Meeting so, I’ll be busy.

My little buddy, Alex, and beautiful bride used to accompany me on this trip each year, and Alex would go to Disney World, or Universal Studios to ride rollercoaster’s. But now he’s older, so we can’t take him out of school. Too bad…

Oh well… Time to go… I hope your Wednesday is Wonderful!
Chuck

P.S. In this type of volatile trading market, it’s absolutely essential that you learn how to manage these market risks in your trading account…particularly when you’re using leverage. That’s why I asked my trading colleague, Sean Hyman to show you how. Read on for his helpful tips on how to manage your risk…

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