The Currency Markets are in Lock-Down Mode

When I signed off yesterday, the dollar was swinging the hammer, and all the non-dollar currencies, except Japanese yen (JPY), were getting nailed… That hammer swinging ended in the morning session here in the US, and the currencies did rebound a bit versus the dollar as I headed out the door for home… Overnight, we’ve seen no movement at all in the currencies…

I do believe that market participants and traders have gone into “lock-down” mode, until they see the color of two things today… 1. The FOMC statement this afternoon, and 2. The president’s State of the Union address tonight… I’ve got plenty of thoughts about that, but I’ll keep them to myself. I have really tried to avoid the State of the Union addresses in recent years. In fact, I don’t believe that I’ve really sat down and watched/listened to one since Ronald Reagan was president!

So… Since there’s not much we can do about the markets’ “lock-down” I’ll just go into the collection of thoughts today…

First up is yours truly… Yesterday, I told you about the President’s proposal for a “spending freeze”… Well, after I hit “send” I thought about this more, and came to the conclusion that this isn’t really a “spending freeze”… It’s more like a “cooling off”… But, if the President is really serious about “cooling off” spending, he’ll stop the proposed debt ceiling increase in its tracks. You know… The one I told you about that will increase the debt ceiling by $1.9 trillion!

And… Don’t even try to spin this as a “positive” which I’m sure will be done, for it’s not a spending cut… It’s not even, oh forget about it, the “spin” will be all the rage in the dumbed-down media…

OK… Now, that was one thought… Here’s the second… People tend to get short-term and long-term and put them under the same umbrella.

It is a proven fact that short-term currency forecasts are wildly incorrect and cannot be made with assurance that they will be correct.

Long-term forecasts, are based on fundamentals… And short-term is simply noise…

Fundamentals move markets… Charts do not. Charts simply become the “excuse” or the reason why the fundamental exists!

So, speaking from a fundamental basis… The US deficits will have to be dealt with at some time in the future… The only way the government can deal with this is by doing one of three things…

  1. Reduce spending…
  2. Raise income (taxes)
  3. Allow a general debasement of the currency

The reason #3 works is simple… If you allow a $20 bill to be worth just $5, your debt is easier to pay down, and you have more dollars to do it with…

So, for anyone on earth to not realize that this is our future, then they are dreaming…

Enough from me… Now, here’s good friend, David Galland, writing about the “initiatives” that the President will probably announce tonight for the middle class…

“Well, to the extent that these initiatives allow people to keep more of their hard-earned money, I salute them. But, of course, appeasing the middle class will require greater levels of deficit spending and an increase in taxes on companies or people that are above the $85,000 threshold.

“Which is to say that this is just so much more politically motivated deck chair rearranging on the Titanic. Quoting one of my favorite economists of all times…

‘There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.’ – Ludwig von Mises

“The system needs a reset, and it’s going to get one – no matter what the masters of the universe would like you to believe.”

Thank you David!

And now to Bill Bonner… Talking about the debate going on regarding whether the stimulus “worked” or not…

“An analysis done by the AP shows that stimulus spending has no effect on employment. The AP looked at counties that got a lot of stimulus money to repair roads and bridges, and those that didn’t. They found no connection between the spending and employment rates.

“Even we are a bit surprised. We knew that stimulus spending was a waste of money. But we figured the feds could force a little extra hiring here and there if they really put their minds to it. Apparently not… At least not on the scale of the present stimulus spending program.

“Stating the finding a bit more broadly: stimulus spending doesn’t really stimulate at all. In fact, it retards. And then it debilitates…by taking capital out of productive uses and squandering it. Instead of leaving the private sector alone so that it can find new ways to put resources to work, the feds take the resources and waste them in the old-fashioned, unproductive ways. Result: money spent; no stimulus; people poorer.

“Second, the Brookings Institution came out with a warning yesterday. It said 30% of the nation was either in poverty already or headed to it. The US is becoming like a ‘developing nation,’ said the report, with 39.1 million people living in poverty.

“Many cities have already reached the 30% poverty rate – including Cleveland, Detroit, Youngstown, Buffalo, Syracuse, Dayton and Hartford, Connecticut. But poverty is increasing fastest in the suburbs, says the report.

“We add a footnote. About 40 million Americans are also living on food stamps – a new record.

“Third, while the feds take money away from productive enterprises and honest savers, they also encourage people NOT to work. How is this possible? Alan Reynolds, writing in The New York Post last month, explained how the feds had probably added two points to the unemployment rate simply by stretching unemployment benefits from the traditional 26 weeks to the current 79 weeks.

“When you subsidize something, you get more of it…

“That is how the feds operate. They punish success and reward failure. If a man is lucky enough to get a good job and earn a lot of money, the feds tax it away from him. If he fails to find a job, on the other hand, they give him money. The longer he stays unemployed, the more money they give him.

“If a banker runs his bank well, he gets nothing but trouble from the feds…paperwork, bureaucracy, pettifogging regulations. But if he runs it badly, he gets billions of dollars worth of bailouts.”

Thanks Bill!

The “pro” column got another entry last night, as Australian consumer prices printed and show that they had gained more than the “experts” had forecast… This is on the “pro” side of the rate hike column, because with a very robust economy and rising inflation, the Reserve Bank of Australia (RBA) will have no other choice but to raise rates in a couple of weeks at their next meeting… One would think that this would underpin the Aussie dollar (AUD) and stop the bleeding that we’ve seen since China announced the “tweaking” of their economy…

The Brazilian Central Bank meets today… The markets don’t expect any rate move at today’s meeting, but are fully expecting the statement following the announcement to be very hawkish, leading everyone to believe that rates will be raised at the next meeting in April…

My question to the Brazilian Central Bank is, “Why wait?” What have you got to lose – or gain – by waiting? Well, I’ll tell you what they will lose… They’ll lose the purchasing power that inflation is eating away, and they’ll gain more inflation on top of what they already have!

Anyway… A hawkish statement will be forward looking, and currency traders like to “look forward”… So, if there is a strong hawkish statement, I would look for the real to rally, or at least be underpinned… But, here’s where things get sticky… The Brazilian Sovereign Wealth Fund was probably planning for this move, which is why they sold reals (BRL) for the last 3 weeks!

To recap… The dollar’s hammer swinging ended yesterday – for now… The currency market participants look to be in “lock-down” mode, waiting for the FOMC and the president’s address tonight to give them direction… I think they are barking up the wrong tree, but that’s just me! Aussie Consumer Prices are on the rise, and the Brazilian Central Bank meets today…

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

Visit: EverBank

Be the first to comment

Leave a Reply

Your email address will not be published.


*