Currencies Sell-Off then Rebound Overnight

Yesterday, I told you how the currencies were in “lock-down” mode, awaiting the FOMC statement and the State of the Union Address.

Well, the “lock-down” mode got “unlocked” when the Fed said that they (the Fed Heads) would keep interest rates “exceptionally low” for an “extended period”. That got the markets spooked a bit, as they thought this was a message from the Fed Heads saying they see something that would require interest rates to remain “exceptionally low” for an “extended period”… And that brought about some of the tired old trading that we saw for most of 2009, in which, when things get dark and dangerous, the risk assets get sold and dollars are bought…

For some time now, we kept getting mixed signals that this tired old trading theme was a thing of the past and fundamentals were creeping back into the markets… But this move yesterday proved that to be wrong.

So… Dollars were bought in the rest of the US session, and into the Asian session, with the euro (EUR) falling to 1.3930 in Asian trading… But then, things turned on a dime, and someone realized that the US president, had spoken a softer tone with banks in his State of the Union, and that goosed stocks, and got everyone feeling a bit better about the whole thing, and saw “risk assets” rebound, with the euro recovering back to 1.4050. (It’s back to 1.40, as I write.)

The high yielders got a boost when the “exceptionally low” for an “extended period” words were spoken. Currencies like the Aussie dollar (AUD) moved back above 90-cents, and so on…

There was a “dissenter” among the Fed Heads yesterday… Kansas City Fed Head, Thomas Hoenig, called for an increase in the Fed Funds interest rate, “sooner rather than later”… Now… There’s a Fed Head you could kind of get to like, eh? Hoenig voiced that inflation could surge within a few years with the economic recovery gaining strength and the benchmark interest rate at this “exceptionally low” level…

Of course, he didn’t say how he thought that might upset the applecart with regards to the unemployment problem… My guess is he didn’t think about that…

You know… I did some more research into the president’s proposed “spending freeze”, which I believe is nothing more than like rearranging the deck chairs on the Titanic… They’ve increased their deficit spending by such a large percentage in the past year that “freezing” it here doesn’t account for a hill of beans! Defense, Medicare, and Social Security aren’t a part of the “freeze”… And they are the three biggest hits to the budget! So… In the end… This “freeze” accounts for about $250 billion over 10 years… That’s chump change, folks…

Over that same period, some $9 trillion is expected to be added to the government’s debt pile. Which is to say the “freeze” will reduce the total deficit spending anticipated over the next decade by some 0.027%.

Don’t get me wrong, here; I’m glad it won’t keep going higher… But, it certainly isn’t getting “cut”… And that’s what we need to hear… Not all this sex, lies and videotape about a “spending freeze”!

Yesterday, we saw US New Home Sales decline 7.6% in December… Add this to earlier this week when we saw Existing Home Sales plunge! Is this what you would expect to see if your housing sector was recovering? I don’t think so! As I said the other day, I fully expect to see housing do a double dip, and home prices to fall another 10%… With all this unemployment, and foreclosures, etc. it’s just not the environment for a housing recovery, folks… I’m sorry to be the one to have to tell you these things, because you won’t see or hear about this on the dumbed-down major media…

Oh! And the period to sell the inventory of homes was extended in December to 8.1 months from 7.6 months in November… Yes, this is better than a year ago when the period was 12.4 months… But, if I’m correct, we’ll see this continue to tick up toward that 12.4 months figure once again.

Well… Yesterday, I was reading a newsletter from one of my fave writers, and friend, Steve Sjuggerud… Steve has coined an acronym for the “problem children” of the Eurozone… He calls them the PIGS… Portugal, Italy, Greece, and Spain… Many, many years ago –before the Eurozone came to be, in 1999 – I used to write about these countries and referred to them as “Club Med”…

Any way… Steve is convinced that the debt problems of the PIGS are going to weigh too heavily on the euro, for the euro to remain at current levels… Steve isn’t the first to think this, nor will he be the last… And… I have to agree that IF THE CLUB MED DEBT PROBLEMS CAN’T BE FIXED, then the euro will suffer…

But that’s a BIG IF, to me… So… Tread carefully, here… For the euro is the offset currency to the dollar… So, you can’t have a weak dollar with a weak euro; it just doesn’t work that way! So, if you believe the euro will suffer, then you are thinking that the dollar is going to rally… And that may be… But like I said yesterday… The US needs a weaker dollar to be able to pay just the interest on our debt… And if you don’t believe that, you’re dreaming. But… We could see a dollar rally… Shoot Rudy, we saw one in 2005 that lasted about 10 months… We saw one from August 2008 through Feb 2009, which was six months… But each time, the dollar returned to the underlying weak trend.

And… For months now, and I do mean months now, I’ve told you that a stock sell off could cause an adverse affect in the currencies’ values & gains since March of last year. I know I’ve certainly sounded like “the boy who cried wolf” quite a few times in the past six months, as I kept calling for a stock sell off…

We did get two mixed pieces of data from the Eurozone this morning… First… Germany’s unemployment rose this month, the first increase in unemployment data since June of last year. Germany – the Eurozone’s largest economy – saw their unemployment rate rise to 8.2% from 8.1%…

On the other side of the coin, Eurozone Confidence in the economic outlook posted a 10th consecutive month improvement! The index of executive and consumer sentiment increased to 95.7 from 94.1 in December…

So… Apparently, the problems of “Club Med” aren’t being seen as too big of a deal by the people in the Eurozone… Hmmm… Which means either they are wrong, or those calling for a meltdown are wrong…

It’s Thursday, so that means the Weekly Initial Jobless Claims will print, and we should expect the huge jump in last week’s data to correct this week. We’ll also see the color of December Durable Goods Orders, which should be pretty good, given the other data we’ve seen…

Gold has dropped below $1,100, and silver has dropped below $17, both are blue light specials, in my mind.

Then there was this… I received a note from a Latin American Currency dealer yesterday telling me that his trading desk believes that the Brazilian real (BRL) is now “oversold”… Hmmm… You have to be careful about these claims from trading desks, as they could very well be long reals, and need them to rally to unload them, so they kind of “nudge” the markets with a call… But then this looks to be legit, as the BRL’s RSI has reached an oversold level of 77. (RSI is the relative strength index, which measures assets in a range, and when they reach certain levels, they flash either oversold or overbought)

Now… I’m not a HUGE believer of this stuff all the time, but taken along with other things, it can be helpful…

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

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