Two ‘Safety Zone’ Currencies That Consistently Beat Confused Markets
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The markets are riddled with confusion. And man what a difference a few days makes in the currency markets. So much has been happening, where do I even begin?
For starters, the market got some shockers last week from European Central Bank (ECB) President Trichet. Mr. Trichet did everything except come right out and say he would raise interest rates next month.
I’ve never heard Trichet be quite so blunt in any of his speeches. So you can tell the rising inflation in the Eurozone is really getting to him. However, it’s not quite so simple. He may want to raise rates but he’s also battling the high EUR/USD exchange rate. That could force him to keep rates where they are, despite how he feels about inflation.
Plus, a high interest rate and a high exchange rate are starting to cause hard times for the Eurozone’s economy fundamentally. In fact, several of their numbers have been missing estimates lately. Before, that rarely happened.
So when Trichet “popped off” last week it instantly set the euro soaring against almost any other currency - especially the dollar.
Unemployment in America Rockets Higher!
Then at the end of last week, the unemployment rate came out for the United States. Last month, it hovered around 5.5% and was expected to inch up a hair this month. However, it launched a half point higher in just a month’s time. That’s the fastest unemployment has risen since 1986.
That’s a huge leap. And everyone is noticing - even the politicians. Don’t forget the election coming up.
No one wants to be the president who either was in office or coming into office when unemployment numbers are soaring.
As a result, the dollar tanked and the euro soared once again.
Why? Well, a couple of reasons. First of all, more unemployed people means less money sloshing around out there in the retail market place to be spent. So it will spill over into corporate earnings which may cause more layoffs.
Of course the other main reason is that the Fed Chairman is having a problem raising rates - when he knows higher rates will likely slow down corporate America even more and make the situation even worse.
Yet, the Man behind the Fed also has to control inflation. Yet he also has to help keep America employed and not kill the little bit of growth that we do have in the economy.
Pick Your Poison: Fight Inflation or Aid Growth
So what can central bankers do? Both Trichet and Bernanke are between a rock and a hard place. Trichet needs higher rates to squelch inflation, yet a thriving economy and a lower exchange rate. You can’t get all of that together; so now come the tough choices…
Then Bernanke needs to kill high inflation, yet keep America employed. Plus, he and Paulson are also trying to support the dollar. If they lower rates, they’ll stoke inflation and possibly cause the dollar to head lower and send the euro into the stratosphere.
So how does all of this unfold without the Eurozone or American economies getting clobbered? It’s not going to be easy.
That’s the tough part about the stagflation that’s been building in the economy. Your growth slumps, yet inflation doesn’t come down as the growth slumps. In fact, inflation goes even higher while growth slows.
So you can attack inflation and growth, and let employment suffer. Or you can allow inflation to get out of hand (which is a nightmare for a central bank) and allow the economy to grow.
With all of the hard choices and confusion in the air, guess where big institutions are running to until these guys get it all figured out?
When There’s Confusion, Money Runs to Two Places: Gold and the Swiss franc
The big name traders are dumping assets into the Swiss franc and gold. Remember when I said the euro gained against almost every currency out there? Well one currency that’s still beating the euro (even in the thought of a Eurozone rate hike) is the Swiss franc.
That’s right. Check out the chart below. The euro actually lost ground against the Swiss franc in these days of uncertainty. In fact, the Swissie even gained against the euro on the day that Trichet hinted at a rate hike. Normally that would send the euro soaring across the board and it almost did.
Though I couldn’t help but notice on these days where the money was flowing. It never ceases to amaze me. Once, the mighty Swiss franc was backed by gold so it was an obvious safe haven for traders. But today, the Swiss franc is not necessarily “safer” than any other currency.
Yet traders instinctively still run to this currency just as if it were backed by gold in uncertain times. So that’s one of the “safety zones.” Not because it’s one in reality but because it’s still treated as one by traders.
The “Unstoppable” Euro is Sinking Lower Against the Swiss Franc
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Tags: , $USD, Ben Bernanke, Currency Markets, ECB, EUR, Federal Reserve, gold, inflation, International, stagflation, Unemployment In AmericaAbout the Author
Sean Hyman is a regular contributor to The Offshore A-Letter, My Two Cents and The Sovereign Individual, and Today’s Financial News. He has close to 15 years experience as a stockbroker, manager, and trader. In addition to his role as Money Trader editor, Sean acts as Currency Director for the Sovereign Society.
The Offshore A-Letter specializes is an elite global investment opportunities, asset protection strategies, tax management solutions, second citizenship and residency programs and offshore structures.