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Commodity Currencies Follow the Euro Upward

Jun 17th, 2010
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Yesterday, I told you how the currency rally had the brakes applied by a return to the European debt crisis focus… Yesterday’s trading was different, though. It was as if traders never heard that the US and the IMF were putting together a line of credit for Spain, for they began marking up the euro (EUR), and selling dollars, as if it was June of 2009! (You may recall that in June, last year, the dollar was on the slippery slope once again.)

So… The euro inched higher and higher on the day versus the dollar, and overnight? Well, there was no profit taking, no consolidation either; it was just plain unadulterated dollar selling! The euro is once again trading near 1.24… The focus on the European debt crisis was put on the back burner this morning, when news of a successful Spanish auction filtered through the markets.

But, just like the “old days” when the Big Dog, euro, would get off the porch to chase the dollar down the street, the little dogs would pass the Big Dog up… And so it was with the Canadian dollar (CAD), Swiss franc (CHF), New Zealand dollar (NZD), and even the Aussie dollar (AUD) got to run a bit!

Let me tell you what put the tiger in the Swiss franc’s tank… The Swiss National Bank (SNB) left rates unchanged yesterday, but they tried to sneak the sun past the rooster, by not mentioning what has been a staple of theirs for some time now, and that is… They didn’t mention the need to stem currency appreciation! WOW! It was like an Oklahoma land rush… No Sooners, though! Currency traders, and investors that were scared of SNB intervention, were given the green light to buy the franc.

Now… Let me set this up for you… The SNB didn’t want currency appreciation, previously, because they had deflation in their economy, and they figured that a weak currency would give them the inflation they needed to rid themselves of deflation… Well, I guess it worked, because deflation in the Swiss economy is gone. Poof! Just like that… Gone! So, now, the SNB will be fighting inflation, and what better tool to have at your side as you begin to fight inflation, than a strong currency!

Right behind the franc’s strong move was the move by the Canadian dollar/loonie. The loonie got some wind in its sails with the price of oil continuing to move higher… Yesterday, oil was trading with a 76-dollar handle, this morning it has a 77-dollar handle. Gold is also trading higher this morning, so the loonie has both sails catching wind this morning!

Here in the US yesterday, we saw the color of the latest Housing Starts data, and it was NOT good! Housing Starts for May fell 10%, and April’s figure was revised downward… Uh-Oh! Is this the beginning of what I’ve said I thought we would experience here and that is, a double dip in the housing sector, with home prices falling another 10%? Difficult to say with only a smidgen of data to view, so we’ll have to keep watch of all of the housing data closely.

Industrial Production and Capacity Utilization were good data prints yesterday, so it wasn’t all “bad stuff” for the US economy. The PPI (wholesale inflation) report was interesting… The Producer Price Index fell -0.3% in May… Huh? Year-on-Year though the index is up 5.3%…

Today, is the stupid CPI report, and as usual on Thursday, the Weekly Initial Jobless Claims… Jobless Claims will most likely remain around 450,000, and that, my friends, is a very telling picture of how our economy is doing… Don’t listen to the pundits on cable news that don’t deal with the truth, and follow the President around like a puppy follows his owner! An average of 450,000 jobless claims each and every week now for 30 consecutive weeks, which followed about the same amount of time that the average was over 500,000 each and every week!

And here’s another thing that’s a HUGE problem for the economic recovery folks to deal with… Money.cnn reported last night, “Most borrowers who have had their mortgages modified through a government-sponsored program will re-default within 12 months, according to a report released Wednesday.

“Between 65% and 75% of loans that are modified through the Home Affordable Modification Program but not backed by the federal government are likely to go bad, according to the report released by Fitch Ratings, a NY-based credit-rating agency.”

WOW! Or more appropriately… OUCH!

I came across a story online on Tuesday that I forgot to talk about yesterday, so here it is… Dennis Gartman was asked if he thought gold was in the midst of a bubble… Mr. Gartman’s answer was interesting… He contends that: “we are not in the midst of a gold bubble”… He then gave some data on enthusiasm for gold, and pointed out that it was nowhere near “bubbly.”

So… We’ve got that going for us, eh?

Then there was this… If the mortgage default story didn’t tick you off at the government, this sure will… CNBC is reporting this morning that: “More than 90 US banks and thrifts missed making a May 17 payment to the US government under its main bank bailout program, signaling a rising number of lenders are struggling to meet their obligations.”

Great… Just great! You know what’s coming from that, don’t you? Of course you do, that is as long as you weren’t living under a rock the past two years! More stimulus, more bailouts, more taxpayer agony, and more debt… Brother! Can us taxpayers catch a break for cryin’ out loud!

To recap… The Spanish auction of debt went off just fine overnight, and that has boosted the euro, which is nearing 1.24 again. The Swiss National Bank didn’t talk about stemming currency appreciation, which gave the green light to traders and investors looking to buy the franc without the fear of SNB intervention. And the Canadian loonie is gaining ground again with the price of oil rising, and gold back on the rally tracks…

Chuck Butler
for The Daily Reckoning

Commodity Currencies Follow the Euro Upward originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Russia’s Veers Huge Reserves Away From Major Currencies

Jun 16th, 2010
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At nearly a half-trillion dollars, Russia has the world’s third largest international monetary reserves and it’s decided it’s time to shop for currencies outside of the usual suspects. Specifically, Russia has begun adding the Canadian dollar to its mix and is now also looking at the Australian dollar.

According to Bloomberg:

“U.S. dollars account for 47 percent of Russia’s reserves, while euros make up 41 percent, British pounds 10 percent and Japanese yen 2 percent, Ulyukyaev said in November. The central bank has reduced dollars from 50 percent in 2006, when euros accounted for 40 percent and the remaining 10 percent was in yen and pounds. Russia’s international reserves, the world’s third biggest, reached 8.2 billion on June 4.

“President Dmitry Medvedev last year suggested Russia would reduce its use of the U.S. dollar as a reserve currency after the greenback lost 34 percent of its value against the euro in 2 ½ years. The euro fell to a four-year low of .1877 on June 7 and has dropped 22 percent since Nov. 25 on investor concern policy makers may fail to contain Europe’s debt crisis.

“Russia’s push to diversify reserves ‘is more a result of their desire to do something in response to the extreme volatility of the dollar and the euro,’ said Elena Matrosova, a Moscow-based economist at BDO International, the financial consultancy that lists the central bank among its clients. The Canadian or Australian dollar ‘can’t be truly called international reserve currencies because of their very limited liquidity,’ she said.”

This announcement comes after a recent statement by the world’s .5 trillion reserves leader, China, that it would “improve its [foreign-exchange reserves] diversification strategy.” It’s becoming a more common theme to look outside the currency majors and, in Russia’s case, at two commodities-driven economies. Perhaps we’ll see China take a similar approach.

You can read more details in Bloomberg’s coverage of Russia buying Canadian and Australian dollars for the first time.

Best,

Rocky Vega,
The Daily Reckoning

Russia’s Veers Huge Reserves Away From Major Currencies originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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“Shepherds” of Major Currencies Don’t Get Lost Confidence in Paper Money

Jun 14th, 2010
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“It’s gold that puzzles the current Fed chief,” says a commentary piece by William Pesek today. It’s not just Bernanke either. Articles have been consistently cropping up since Bernanke’s statement of confusion about gold, like this one from the WSJ, written by authors who don’t seem to quite understand gold’s value outside of being an inflation hedge.

Here’s a perspective from Bloomberg:

“’I don’t fully understand movements in the gold price,’ Bernanke said on Capitol Hill last week. That shocks gold bulls like Johann Santer, managing director at Superfund Financial in Tokyo. And it may be awful news for the global economy that some investors are surer than ever that the gold rally is just getting started.

“It’s hard to decide what’s more frightening: that investors are losing confidence in paper money or that the shepherds of the world’s major currencies don’t get what’s going on. Gold’s climb of almost 30 percent in a year reflects fear, not just market concern over inflation or deflation risks. People have lost trust in the global financial system…

“…There are many reasons why gold is back in vogue, yet two in particular are worth considering. One is fear about “black swans,” unexpected events that have great impact. The second reflects how little gold many central banks in Asia and elsewhere hold on their balance sheets.”

Above, Pesek points out two reasons why gold makes sense to him as an investment outside of inflation. Although, of course, there are scads more reasons that can be detailed, depending on whom you ask. Strange, though, that Bernanke finds it worthwhile to publicly speculate against the increasing value of gold. It’ll be interesting to see what he says next if gold continues to rally higher.

You can read more of Pesek’s detailed criticism in his Bloomberg commentary on Gold’s surge puzzling Bernanke.

Best,

Rocky Vega,
The Daily Reckoning

“Shepherds” of Major Currencies Don’t Get Lost Confidence in Paper Money originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Gold to Fight Fiat Currencies for Useless Title

Jun 10th, 2010
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“In the land of the blind,” the old saying goes, “the one-eyed man is king.” In the world of untrustworthy investment assets, therefore, which asset deserves to be supreme global ruler?

US Treasuries? Picassos? Shares of Apple Computer? Vintage Corvettes? Beachfront Real Estate?

It’s a tough call, made even tougher by the volatility of the foreign exchange markets and the capriciousness of national tax authorities. Truth be told, there is probably not just one supreme asset that merits trust above all others. But if there were just one, that asset would be gold…simply because it has the longest and most impressive resume.

Nevertheless, this trustworthy asset commands surprisingly little respect from most American investors. They remember gold as the asset that slumbered for two decades while stocks jumped 10-fold. And despite gold’s strong performance during the decade just passed, most investors are still quick to point out that gold has delivered a negative inflation-adjusted return since 1980. That’s 30 years and counting.

“At some levels,” reasons Brett Arends of The Wall Street Journal, “gold, as an investment, is absolutely ridiculous. Warren Buffett put it well: ‘Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’

“And that’s not the half of it,” Arends continues. “Gold is volatile. It’s hard to value. It generates no income… It’s a currency ‘substitute,’ but it’s useless.”

Arends offers a familiar and relatively coherent critique of gold’s stature in the world. And yet, if gold is as ‘ridiculous’ and ‘useless’ as he contends, the dollar must be doubly ridiculous…and the euro triply useless. What intrinsic “value” or utility do these sovereign IOUs possess?

A dollar possesses value only because enough people agree that it does. But if a large body of dollar-holders rebelled against this notion, the dollar’s value would decline, if not disappear altogether. Faith and habit support the dollar’s value. Nothing more. Isn’t that a bit ridiculous too?

And yet, the world’s ridiculous “faith-based” monetary system underpins the entire network of global commerce. Without dollars and yen and euros, global commerce would function very poorly. So the system persists, despite its obvious shortcomings. Oil producers, for example, continue to spend decades developing new projects, building pipelines and expanding refineries so that they can continue to exchange one gallon of gasoline for three pieces of green paper.

The whole thing is kind of insane…when you really think about it. But this form of insanity is benign in most economic settings. Everyone knows that a piece of green paper possesses zero intrinsic value. But no one cares, as long as four pieces of green paper buys a breakfast at Denny’s, five pieces of paper buys a lunch at McDonald’s and six pieces of paper buys a coffee at Starbucks.

Unfortunately, here in A.D. 2010, currencies are coming under suspicion. No one knows which currency is good or which is bad…or if any currency at all can be trusted. The global monetary system is creaking under the weight of excessive government debts. In such an environment, what asset is truly safe?

If money itself is not trustworthy, what is? What asset evokes confidence? What national treasury, government agency, financial institution or pension system inspires complete trust?

The time has come to ask ridiculous questions…and to continue asking ridiculous questions until some of the ridiculous answers begin to make perfect sense.

Gold might be as “useless” as the Journal’s Arends contends, but an ounce of it buys about 1,200 dollar bills. In a few years time, this same useless ounce of metal might buy 5,000 dollar bills.

The question then would be, “What do I do with all these green pieces of paper?”

Eric Fry
for The Daily Reckoning

Gold to Fight Fiat Currencies for Useless Title originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Currencies and Metals Rally

May 28th, 2010
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We have the currencies and metals moving higher versus the dollar, adding to yesterday’s rally. I was busy, getting trades together yesterday, and then went to do some trades, and was shocked at the move the currencies had made versus the dollar in such little time. The leader of the pack was the Aussie dollar (AUD), which I made a big deal about yesterday, saying that the fundamentally sound currency had been oversold.

The other high flyin’ currency yesterday, as I thought it would be, was the Brazilian real (BRL)… It was a day of “risk on”… But it was a day of “really” putting on risk! And for the first time in a week, gold did not sell off with the euro (EUR) rallying… So it was all seashells and balloons yesterday for the risk assets.

Overnight, we’ve seen yesterday’s gains held to and added to, so we’ve really got it going on today, on this Fantastico Friday!

Here’s the thing to think about this morning… It is a Friday before a 3-day holiday weekend, which means the liquidity in the markets will dry up after noon… London traders will be heading to the pubs, and NY traders will be heading to the Hamptons… Which means… The markets can become quite wild… Or they can be calm, and everyone gets to close their books and head out without risk on their books.

I would have to think that with the rise in the euro the past two days being so strong, that the short positions in the single unit are getting squeezed big time! As someone pointed out to me the other day… A currency’s rise because people are taking a long position in the currency is different than a currency’s rise because people are closing out short positions… And that’s true…

However, I’m now thinking that this move in the euro the past two days is something more than short positions closing…

I see where the boys and girls at Morgan Stanley believe the dollar will rise versus the euro as Greece undermines European Central Bank (ECB) credibility… But across the street, Goldman Sachs believes the selling in the euro is overdone, and is about over with… This is a good thing, folks… A “two-way” market… For a while there we had everyone on the same side of the ship… Now it’s more evened out… We certainly don’t want that ship listing to one side, eh?

So… As I said above, gold is holding steady this morning, and has even added ! Speaking of gold… A friend of mine sent me an article that outlined what’s going on in Greece with gold… It seems that the worried Greeks are paying more than ,700 per ounce for gold coins… And prices paid in the black market are probably much higher!

So… My friend said to me… “Chuck, Gotta wonder if Panicky Yanks might be the next group to start paying up for gold.”

I said, as a holder of gold… I’m all for that!

I saw a blurb on the screens at home last night about Indian GDP that’s expected to grow 8% this quarter… If that’s a fact, Jack, then the Indian Central Bank needs to get on the rate hike bus now! Don’t wait for a newer bus to come along… Get on the first rate hike bus that comes along, and don’t look back! Interest rates in India need to be higher, and that should underpin the rupee (INR)…

Economic data wise on this Fantastico Friday…

The data cupboard this morning here in the US has two of my fave reports, personal income and spending… I would say that given the rise in employment, according to the BLS, last month that income actually has a fightin’ chance of outpacing spending… That would be a novelty, but one that has to remain in place in my opinion.

We’ll also see the Chicago Purchasing Manager report (manufacturing), and the U. of Michigan Consumer Confidence…

Yesterday we saw the Initial Jobless Claims edge higher to 460,000 last week, and… First quarter GDP was revised downward to 3% from 3.2%… Most observers had thought economic growth would be revised upward, but that was not to be.

So… I made the statement on the desk that GDP wasn’t as strong as expected, and Chris Gaffney replied… “But Chuck, 3% is nothing to laugh about; 3% growth is strong.” Ahhh grasshopper, I said… But let’s not forget that the economy right now is having the pump primed by government spending, bailouts, stimulus, and funny accounting… He agreed, and we went back to work…

The data cupboard in Europe is pretty bare, but we did get a strong GDP report from Sweden this morning (1.4%) as they continue to emerge from their recession. I truly expect Sweden’s Central Bank, The Riksbank, to raise rates 25 BPS at their meeting in July. By then the markets will be moving past the Eurozone budget deficit problems, and so the timing of a Riksbank rate hike seems to be good…

And in Canada… With the Bank of Canada (BOC) meeting next week looming large, Canada will print their latest current account balance today… Look for improvement in their deficit to print… And that could be the deciding factor in the BOC’s decision to be the first G-7 nation to raise interest rates next week. I feel that it’s coming… Do you feel it, too? Do you feel like I do? Come on, let’s do it again. Do you…you, feel like I do?

And just for fun… Did you notice how the Chinese renminbi (CNY) weakened versus the dollar once the US officials left China? This pattern of doing this has been going on for years now… I don’t think we have to worry about the Chinese allowing the renminbi to weaken any more versus the dollar… It’s just a “notice” to the US, that’s all…

Then there was this… Work an hour per month; get counted as a new hire; get fired and rehired; and get counted again as a new hire… And then do it over and over again…  Sounds like a real fishy, underhanded way to push jobs numbers higher doesn’t it? And we would have nothing to do with this, right? Well… Strap yourself in, folks… Census workers are blowing the whistle, and describing exactly what I explained above. Are you upset enough to contact your representative in Congress? You should be! This is getting absolutely ridiculous, the games the government keeps playing with data to make it look better, so you feel better, and go out and spend… When the only thing you should be spending money on is paying down debt, and once debt is paid down… Then getting yourself out of Dodge… This could be the last chance saloon, folks…

Oh the games people play now… Every night and every day now… Never meaning what they say now… Never saying what they mean…

Chuck Butler
for The Daily Reckoning

Currencies and Metals Rally originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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