US Dollars and Japanese Yen: Safe Havens In Debt

Well… As the day went on yesterday, things got more mixed up… I kept reading news stories stating that the euro (EUR) was falling versus the dollar, but all the while, the currency screen kept showing the euro rising, actually getting very close to 1.34 on the day…

So, you can’t always take what you hear or read as fact… Or… As Marvin Gaye said years ago… People say believe half of what you see, Son, and none of what you hear.

Except of course, what you read in the Pfennig! HA!

But then maybe these guys are clairvoyant! For, what they were saying all day, finally took shape in the overnight markets… Risk was definitely back out in the doghouse, and the so-called safe haven trades were back in the penthouse. The euro is back to sitting just above the 1.33 figure… Back and forth, back and forth… Is Greece going to get financial aid, or aren’t’ they… One minute it’s yes, the next minute it’s no… I’m sure there’s a song there, but for once, (and I’m quite sure some are saying thank goodness!) I can’t think of one…

This current flight to safety is being fueled by the concerns that Germany won’t release funds to Greece as early as Greece would like them. I talked about this yesterday… And you could see the actual back and forth all day… Do they love Greece, do they not love Greece… Well, actually, I don’t think it has anything to do with love, but you get the point.

That’s the key master in the currencies today, as it carries over from the Asian and European sessions… All it would take to turn this around on a dime, is for a German official to back off the tough talk… Now, I’m not saying they should back off the tough talk. I for one, like the fact that a lender is demanding the borrower to show proof of their ability to repay the loan!

So… When the so-called safe haven trades start flowing, the dollar, and Japanese yen (JPY) are the beneficiaries… Are you wondering why I call safe haven trades “so-called”? Well… You see, it call comes from the financial meltdown of a couple of years ago, when the safe haven trades originally took place. When I say “safe haven” it’s a trade pattern where investors sell risky assets like commodities, stocks, and currencies, and buy dollars, to purchase US Treasuries…

Now, those people that took that flight to “safety” back in 2008 suffered serious losses, not only by holding Treasuries but by having them denominated in the dollar! For instance, the US 10-year Treasury, the fave note of buyers, had a yield of 2%, which has fallen to 3.80% and has even touched 4% a couple of times before the Fed steps in to intervene… Well, when pricing bonds, yield and price have an inverted relationship… So as the yield goes up… The price goes…. Down, right! By Joe, you’ve got it!

So, while these investors thought they were “safe”… They were losing their shirts!

OK… Back to currencies… So, all the non-dollar (except yen) currencies have lost ground overnight, as it’s a “risk off” day, once again.

Brazil was in the news overnight, and it’s not good news for the real (BRL)… The Brazilian government is talking about ways it can act to curb real appreciation, IF advanced economies favor policies that keep their currencies weak. Think about that for a minute… Brazil’s two largest trading partners, China, and the US both have currencies that are weak, which means, Brazil imports their inflation… So… Rather than just accepting it, the Brazilian government wants to fight back.

But here’s the problem I have with that… You come out, and make that announcement, and you basically tell the world that you are going to take steps to weaken the real. That’s all fine and dandy until some high falootin’ traders or hedge fund managers come along and decide to stop the government from achieving their goal… The markets always have deeper pockets than a central bank… So… All I’m saying is they had better be careful… You can’t always get what you want.

The Canadian dollar/loonie (CAD) bounced off parity again overnight, after reaching a high of 1.0041 yesterday. This afternoon, we get the Bank of Canada Governor, Carney, speaking to the House Standing Committee on finance this afternoon… I wonder if Carney is in the mood to give us a hint about their next rate meeting?

Tonight we get the first quarter CPI data in Australia that I talked about yesterday as being so important to rate hike developments.

Today, here in the US the Fed begins one of their two-day FOMC meetings, which means get the board games out to pass the time!

This morning, we’ll see the latest S&P CaseShiller Home Price Index and consumer confidence… I’m sure we’ll see a bounce in consumer confidence…

Then there was this… Poor Goldman Sachs… They just can’t catch a break these days, getting blamed for this, that and the other things… But now, the new accusation is pretty damaging to their image… In a story getting shared all over the country – but appearing in the LA Times first, I believe – investigators are saying that Goldman contributed to the mortgage market’s downfall… Senate investigators say that Goldman relied on its reputation to sell risky mortgage-backed securities, then bet against them and posted billions in profits when their value fell…

To recap… The currencies enjoyed a day in the sun yesterday, but were sent to the dog house in the overnight markets, as the German warnings about releasing funds to Greece, became louder and louder. Risk is off today, and the flight to safe haven currencies of the US and Japan are on… On a sidebar, I always stop for a minute and laugh to myself, whenever I mention the dollar and yen as “safe haven” currencies… The two largest debtor nations.

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.