Aussie And Canadian Dollars Remain Above Parity

As I look at the currencies this morning, I see what Mike was telling you all late last week… The dollar continues to take liberties with the euro (EUR), and any currency that looks, smells or acts like the euro, which would be your Scandis (NOK, SEK), Swiss (CHF), and the euro-wannabes… The Aussie dollar (AUD), and Canadian dollar/loonie (CAD) continue to trade above parity, but the margin over parity is narrowing…

For the life of me, I can’t tell you why people, investors, and traders aren’t jumping all over the story this morning that the president has proposed a 2011 budget, that shows spending cuts totaling $1.1 trillion… But before you jump for joy, that’s $1.1 trillion over the next 10 years! Do you think the government really thinks we are that stupid that we won’t pick up the fact that the cuts only total $100 billion per year? And… Don’t look now, but anyone of the more than 600 people that I talked to last week in my presentations, will think I’m clairvoyant or something, because I told them the taxes were going to be raised significantly in the future, and voila! The new budget proposal includes tax hikes, which if I were a real mathematician I would probably figure out that the tax hikes are probably where the $100 billion comes from each year, so that, in reality, there are no spending cuts at all!

If I were a trader at one of the BIG shops, and I could control millions or billions of dollars of trades, I would be selling dollars like they were funnel cakes at the state fair! But I’m not… I’m just your friendly neighbourhood risk manager! But… I did tell everyone last week, that the deficit spending in the US is going to push everyone to the edge with tax hikes and dollar depreciation, causing a reduction of purchasing power… So, I tried… Not sure everyone got the message, because there are always some naysayers in the crowd… And that’s OK too, because, they keep me on my toes, and give me the fire to convert them!

The other thing I explained to everyone in my presentations last week, was that the debt servicing on the Treasuries that we’ve issued to finance our deficit spending is going to just choke off all of our tax receipts in the future… Then this morning I read this story on the Bloomie that interest expense (debt servicing) will rise to 3.1% of GDP by 2016, from 1.3% in 2010… The government is expected to cumulate $4 trillion in deficits by the end of 2015… And like I told the crowds last week… The interest expense now is based on low rates… But that’s changing, as we’ve already seen the 10-year Treasury rise from 2.63% on November 8th, to 3.63%…

But, don’t let those things get in the way of a dollar rally… I’m shaking my head in disgust, folks… Makes no sense whatsoever, but it is what it is. So, we carry on, my wayward son…

Of course, I know that uncertainty is not good for a currency, and the euro is now having to do another round of rope-a-dope, with the questions regarding who will take over the ECB Presidency… Mike explained this last week, but for all of you who missed class that day, Axel Weber, the Bundesbank President (Germany’s Central Bank…and a “real” central bank) was expected to take over the reins from Mr. Trichet, when his term ends… But Mr. Weber decided not to take over the ECB… (Can you blame him?) I’m somewhat bothered by this, as Weber was a real “Hawk”… So… There’s the uncertainty of the new ECB president hanging over the euro like the Sword of Damocles.

In addition, the euro was rocked once again by another periphery country’s debt problems… This time it was Portugal… It seems that last week, when Portugal went to the markets with their debt auctions, the markets demanded higher yields… And then, there’s the regional bank in Germany that’s hanging by a thread this morning…

Well… The Egyptian President, Mubarak, stepped down on Friday… It was just a matter of time before that happened… The military has taken over control of the country… I’m concerned about the direction that Egypt takes…

Did you see that China passed up Japan as the World’s second largest economy in 2010? I remember reporting last year, that it was believed this would happen, and it has… Japanese analysts believe this to be a temporary setback for them… I think they are really counting on the US economic recovery, as nascent as it may be, to come back strong, and support Japanese exports… I’m from Missouri… They’re going to have to show me…

You know… I said above that the Scandis were getting sold along with the euro, but even with that selling going on, it hasn’t dampened the enthusiasm, too much, for the Swedish krona… The krona is the best performing major currency for the past six months. And now I see that Goldman Sachs has boosted their forecasts for the krona! WOW! And… Sweden’s Riksbank meets tomorrow… Let’s see a show of hands of those who believe the Riksbank will hike rates tomorrow… Good! Because I believe that to be the case!

In China this past weekend… They received the news of their ascension to the #2 position as far as size of economy goes… And… Some very strong export data! Chinese exports rose 37.7% from the previous year… And… Even more impressive, their imports rose 51% for the same period! China’s January trade surplus was $6.47 billion (China’s trade surplus with the US was $13.6 billion) take out the trade surpluses from the US and Europe, and China owed the rest of the world! I have to say that I’m duly impressed by the import data in China… That’s a good indication that we’re going to see continued global growth…

One black cloud over China these days, though, is the drought in the nation’s wheat-growing region… Food prices are beginning to rise due to the fears of a bad harvest… The Chinese government has assured the public that food prices won’t increase… But, there’s no choice when the harvest is bad.

The data cupboard here in the US is restocked this week, and we’ll begin to see what the cupboard has for us to chew on this week, beginning tomorrow with retail sales for January. I have to say that maybe all the snow and ice might have prevented a lot of people from “shopping” In January… But, I’m sure that the sales of salt, snow shovels, and snow blowers were strong! The BHI (Butler Household Index) tells me that there were just enough non-snow and ice days to get some shopping done, and therefore I look for an “OK” sales figure, nothing great, nothing bad.

Tomorrow, we’ll also see the TIC’s data… (Net security purchases by foreigners) for December… You might recall that November’s number of $39 billion was awful…just plain awful. Well, the “experts” aren’t expecting a figure that’s much better than November’s… And then there’s more data as we go along this week.

Then there was this… So… Did you see the comments last week that the president made regarding Fannie & Freddie? Again, does he really think so little of our ability to think? Who the heck else is going to be able to provide the service that Fannie & Freddie provide? This is our government’s bed that they made, now they get to lay in it! But, for some real analysis of this, I turn to my former colleague, and friend, David Galland… Here’s David…

Put simply, the housing sector is a huge and important component of the US economy; and it is already in deep trouble. If mortgage rates were to increase by any appreciable amount, it would be devastating to both housing and the feeble economy. And make no mistake, absent government stooge companies guaranteeing loans for anyone with a pulse, interest rates will soar.

Thanks David… You’re the best writer hands down!

You know… Here’s my Pfennig’s worth… Over 90% of all home mortgages are underwritten with Fannie, Freddie or the FHA… It is totally irresponsible for the government to think that we believe that there could be some private entity that could do what is now being done by these entities… But, that’s just me, thinking out loud…

To recap… The dollar remains stronger this morning, with the euro losing almost another cent overnight with what now seems to be some “piling on”… First it was the Weber news, then Portugal, and now a region bank hanging by a thread in Germany… The Aussie and Canadian dollars remain above parity, but their margin above parity is narrowing, and China posted some strong export and import data, indicating that global growth is a go!

Chuck Butler
for The Daily Reckoning

Aussie and Canadian Dollars Remain Above Parity originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

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