Euro Rally Continues On Increased Rhetoric From ECB Members

Front and centre here this morning, is the news overnight that the Russian Central Bank raised its refinancing rate 25 Basis Points (1/4%), their first increase since December 2008… Not that the Russian Central Bank or their rate hike news is something that would move the markets… I talk about it because, yesterday I told you that the ruble (RUB) had reached a 10-month high versus the dollar… Well, this rate hike, which was needed due to the increase in oil prices, has the ruble at 15-month highs this morning…

And speaking of oil prices… The one that I track is the West Texas Intermediate spot price… WTI… It’s the world’s most liquid forum for crude oil trading, as well as the world’s largest volume futures contract trading a physical commodity… So, when I quote the price of oil, I’m using this, and not Brent Crude, or any of the other oils that get reported… Just so ya’ know! Well… The price of oil backed off the $100 figure yesterday, but don’t think for a minute that the “run-up” in the oil price is over… There’s still plenty of geopolitical problems for this “run-up” to be over… Shoot Rudy, I wish it were over, for I certainly have no love of $4 gas… But, unfortunately, I just don’t see how we’ll get out of that in our near future…

Yesterday, we saw the currencies trade in a very tight range, which was fine with me, for the volatility lately has been giving me a rash! HA! The slippage I saw yesterday morning as I headed to the Big Finish didn’t have any follow through, so the currencies like the euro (EUR), remained strong throughout the day. The overnight markets didn’t move the currencies much either, so it looks like we’re trading in yesterday’s clothes, this morning…

Gold and silver took a turn on the road that led them to Sellersville… That was pretty strange watching the euro hover around 1.38, and gold selling off $10… But it was what it was… And this morning, with the currencies still in a tight range, gold is off another $2…

Yesterday, I was having an discussion (via email) with a reader, who is a real chartist/technical guy… He sends me stuff that I use in my fundamental research… For instance, yesterday we were discussing the Australian dollar (AUD)… I told him that I thought the Aussie dollar had more room to move higher, but that it needed to get moving… Otherwise, the long held positions in institutions and hedge funds will throw in the towel and move on to some other asset, for the Aussie had been around 1.01 for a few weeks now… I do believe that those long position holders gave the Aussie dollar a “get out of jail free card” because of the NZ earthquake, but now the Aussie dollar needs to get moving! The technical guy then said that’s exactly what the charts show… He said that if the Aussie dollar breaks out to the upside, the move could be big, but there is a horizontal resistance level…

Nice to see that technical and fundamental analysis can work together, but in most cases, I prefer to think that assets go into trends for fundamental reasons, and don’t come out of those trends until that fundamental reason is corrected or well on the way to being corrected…

Yesterday, we saw 1.38 in the euro in the early morning trading. The increased rhetoric from European Central Bank (ECB) members is really doing the trick for the euro’s rise. I think that the comments that I told you about on Tuesday, from ECB member, Mersch, got the ball rolling, and now ECB President, Trichet, has to temper the markets’ reaction to the thoughts that the ECB will hike rates at the next meeting… They may hike them, but I doubt that they will, because, Trichet is not going to be backed into a corner by the markets’ expectations.

Last week at our editors’ meeting, someone made a comment that the euro was a bad idea from the beginning… I said, “Hold on there! You have to go back to the ’90s… The Berlin Wall had collapsed, West Germany was reunifying with East Germany, and the combination would have made Germany very powerful versus the rest of Europe… Having seen that play out a couple of times in the past, the rest of Europe had to do something to rein in Germany, and having them join a European Union, was a very clever idea, and… They made the German Chancellor, Helmut Kohl, think it was his idea! And in less than 10 years, the euro became the second most liquid currency in the world, and was nipping at the dollar’s heels.” I don’t call that a “bad idea”…

Now, one could argue that Germany, Austria, Netherlands, France and Luxembourg would have been a good strong Union; while the southern countries of Italy, Portugal, Spain and Greece, along with Ireland to the north, should have been left off the roster. But… There’s strength in numbers. It’s with much angst now that the these periphery countries have caused such a debt debacle. But they’ll figure it out. Remember that at the base of all this is the economic engine of Germany…

Well… Did you see the New Home Sales data for January, yesterday? New Home Sales fell -12.6%, wiping out the previous months’ so-called 15.7% increase. The previous day we saw Existing Home Sales increase 2.7%. But let me tell you that the bulk of those sales were “short sales” and foreclosures; they were NOT first time home buyers. And the price fell out of bed on those sales! These “distressed” sales caused home prices to fall to levels not seen in nine years! So… Nine years of home price gains have been wiped off the slate, folks… That’s a very sad state of affairs, I’m afraid to say…

Today, we’ll see the first revision of fourth quarter GDP… I’m expecting it to be revised downward, but then, who knows what the “boys” in the back room are “cooking up”, eh? And then the U. of Michigan Confidence report will print. I’m sure this will be just as “mamby-pamby” as all the other confidence reports!

OK… Enough on US data! The Irish election is beginning about now… As with most of these parliamentary things, there won’t be a clear winner, and a new coalition will have to be formed… In all my years of covering foreign countries, this has been the case almost every time… And with the mess they have in Ireland right now, I don’t see anyone “volunteering” to lead! HA!

There were more rumours about an emergency meeting of the Reserve Bank of New Zealand (RBNZ) circulating last night, but when no meeting materialised, kiwi (NZD) rallied… This also helped the Aussie dollar to move past $1.01… Like I said above, the Aussie dollar is armed and ready to make a move higher, and it had better do so soon!

Did you see where Saudi Arabia increased their oil output to help smooth out the disruption caused by the violence in Libya? The Saudis raised their oil output by 8%, or 9 million barrels per day… I’m sure that decision to help smooth out the disruption, came from some meetings, and lots of sawdust was left on the floor.

There’s a story on Bloomberg this morning that caught my eye… The title reads: “Imperialist dollar ceded to gold, euro havens”… OK, admit it… If you saw that story title you would be all over that like a cheap suit, too! OK… So, now I’m intrigued, and drill down on the title to read the story… Here’s a snippet… “Middle Eastern investors appear to prefer the euro as a more stable and secure currency these days, while the idea of buying ‘imperialist’ US dollars may not appeal to your average North African dictator”… WOW! The story then goes on to say that “Global crisis usually causes funds to flow into US dollars, gold prices normally pull back when the dollar rises. This time, funds may prefer to flow into the euro rather than into US dollars, and this may be helping gold…” The writer then goes on to forecast the price of gold rising to $1,485 within a few weeks…

Then there was this… Rick Rule is a long time friend of ours… In fact, it was in his house that the idea of EverBank, the online Bank, was hatched… Rick is a commodities guru, and I always enjoy catching up with him. Well, yesterday Rick was interviewed by King World, and he said something that really made sense to me, especially since I’ve called for QE3 and QE4… Rick was asked about the exploding oil prices… Here’s a snippet from the interview…

The bottom line is that the increase in energy prices will have inflationary impacts. The US government wants to report the CPI excluding food and fuel; sadly people eat and drive and it does impact people’s cost of living.

Further, the political response to the economic shock engendered by higher energy prices will doubtless be more quantitative easing. The markets’ response to central bank counterfeiting will likely be much higher gold prices.

Thanks, Rick! That’s how I see it too… I scoffed and wiggled in my seat last week at the editors’ conference when not one but at least two editors got up and talked about the Fed ending quantitative easing…

To recap… The currencies traded in a tight range yesterday, with only Aussie, kiwi and Canadian dollars/loonies (CAD) able to add to their values versus the dollar. The price of oil has backed off the $100 figure… Today, we’ll see the first revision to US fourth quarter GDP… And the pressure is on ECB President, Trichet, to temper the markets’ expectations of a rate hike coming very soon, which has been the reason for the rise in the euro this week.

Chuck Butler

for The Daily Reckoning

Euro Rally Continues On Increased Rhetoric from ECB Members 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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