The Real Leads Commodity Currencies to the Woodshed

How many people out there know about “network neutrality”? Well, if you don’t know, you’re about to find out tomorrow, when it will be decided upon… I’m not going to get into it, because after you find out what it is you’ll know why I didn’t explain it. All I will say is that this is just another thing that’s flying below the radar that’s about to be thrown in our laps.

OK… Yesterday, after signing off and hitting the “send button” for the Pfennig, I saw a story that shot across the desk, and then Don Ries sent me a follow-up later in the morning. The story was about the Brazilian government imposing a 2% tax on capital inflows. This was done in an attempt to slow down the Brazilian economy by slowing down the “hot money” that’s going into the Brazilian stock market by foreigners… Talk about throwing a cat amongst the pigeons!

Talk about pulling the rug from underneath the real (BRL)! It lost 3.5% for the day! WOW! I had a reader call and accuse me of not writing about this story in yesterday’s Pfennig, because I didn’t want to water down the BRIC MarketSafe CD sales… WHAT? First of all, I didn’t know about it until after I had sent the Pfennig out… And second of all… What does a tax today – that may not even be in place six months from now – have to do with the real’s value three years from now? Besides, this is good news for those who are buying the real now, for they get to buy it 3.5% cheaper! I shake my head and repeat… HOGWASH! Accusing me of hiding something!

Anyway… My colleague on the Currency Capitalist newsletter, Ashish Advani, had this to say about the tax announcement in Brazil.

“Frankly, I think this move to restrict capital flows is a pointless exercise at best. It’s simply a waste of time to think that they can control the strengthening Brazilian real.”

OK, back to me… In addition to Ashish’s thoughts… I tend to think there’s something up Bullwinkle’s sleeve here… Recall that about a week ago or so, I told you that Brazil’s Central Banker had mentioned the need to raise interest rates 200 basis points (or 2%). So… The government sees the real responding to that comment, and thinks, “Oh my God, we’ve got a big problem when rates really do go up 2%, for this real will skyrocket! What’s a government to do? Ahhh, we’ll impose a tax to offset the rate hikes, thus currency neutrality.”

So… I still like the real, but this really points out what I’ve been trying to say for some time now. These emerging markets currencies are Big Swingers, when they’re going good, they’re really good, but when things go awry, they really go bad, fast! But, that’s their game, as long as you know it, no biggie!

But like Ashish said, I see this as a short-term adjustment for the real…

OK… So, that news yesterday sent not only the real to the woodshed, but sent the Aussie (AUD), kiwi (NZD), Norwegian krone (NOK), and Canadian dollar (CAD) to join the real in the woodshed! The Big Dog, euro (EUR) lost about 1/2-cent, but was able to avoid the trip to the woodshed.

I also received an email yesterday from a reader that really ticked me off… And I get ticked off every time someone accuses me of this! The reader said that I was accusing the current administration with the “total deficit”… I AM NOT! I HAVE NOT! I USED TO SHOOT ARROWS AT THE PREVIOUS ADMINISTRATION FOR THEIR DEFICIT SPENDING! I CANNOT BELIEVE I HAVE TO KEEP EXPLAINING THESE THINGS! Look… Do the research and then point a finger at me! The research in this case would show that for over nine years, I’ve harped and harped about deficit spending! Remember when the US current account deficit reached 4.5% of GDP in 2001, and I blasted the government for doing that? Oh, forget about it Chuck, this is akin to talking to one of your kids… One of these days when they’re adults they will talk about how smart you became in your late years!

And as long as we’re on the subject of deficit spending, (which has been going on for more than eight years!!!!) Ty Keough sent me this:

The US is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

“People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public [is] debt held by foreigners, it’s not really the conduct of rising empires, is it?”

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain’s in the 20th, he says. “Excessive debt is usually a predictor of subsequent trouble.”

OK… Here’s some more Niall Ferguson… Ferguson dismisses the dollar loyalists, citing the British pound (GBP) – the last international reserve currency – as his example. “These things don’t last forever” but don’t expect it to happen overnight. “It’s a long multi-decade process,” he states. Even with the dollar near a 14-month low against the euro, he claims it’s not without historical precedence for the greenback to lose “another 20%” this year.

For international investors the loss is enough to offset this year’s stock market gains. Not exactly great motivation for foreigners to keep buying the almighty dollar.”

Sounds like Mr. Ferguson has been a loyal reader of the Pfennig for the past 17 years!

Fed Head, Janet Yellen gave a speech yesterday… Her comments are usually good for a few quotes, and this was no exception… Fed Head Yellen said, “It is to be expected that interest rate differentials will drive capital flows,” and that “US structural budget deficits, a serious problem, will require painful decisions.”

Well now, there are two subjects that I’ve talked quite a bit about lately, eh? Interest rate differentials, and the budget deficit problem… And some people wonder why I say that currency and precious metals diversification is a must? Really? When one of your own Fed Heads thinks that these things will be problems, doesn’t that spell it out for you? I thought so.

Not that I’m waving the flag for the Russian ruble here, folks, but I think it’s important to note that I’ve said all along that Russia is an “oil play” and nothing more… And that the currency has rallied in step with the rise in oil prices recently… And the ruble’s biggest move versus the dollar came overnight after oil briefly touched $80 yesterday!

A few people asked me yesterday why I didn’t include the Swiss franc (CHF) when I was talking about Aussie dollars and loonies going to parity against the US dollar… Well, for one, I wasn’t talking about that; I simply gave you a quote from Citigroup’s research team. But since you asked… The franc is only one cent away from parity, so in my mind it’s already there! I just keep thinking about the Swiss National Bank’s (SNB) warning to the markets about franc strength.

But hey! What could the little old SNB do to stop the franc from going to parity against the dollar?

Well… I was wrong… There I said it! I said that I thought the Bank of Canada (BOC) would lift their previous statement that their near-zero interest rates would remain in place until the second half of 2010… The BOC did NOT lift that statement… In fact, the BOC hung the loonie out on a line to be beaten until dry! The BOC whined about the strong loonie as working against economic growth.

So… I think the BOC did what they set out to do, and that was to: 1. Stop the talk about a rate hike before their stated timeline, and 2. Stem the loonie’s rise… The loonie dropped about 2% on the day.

But, like most things… The pain of the BOC statement will be forgotten about in a few weeks, and I suspect the loonie to be back on the road to parity against the dollar.

And then there was this… Long-time readers know my dislike of the Reserve Bank of New Zealand’s (RBNZ) Governor Bollard, due to his penchant for dissing his own currency, the kiwi. Well, in a turn of direction… Governor Bollard said in a speech last night that “there is little the Bank can do to bring down the value of New Zealand dollars, and that the high value of New Zealand dollars is not necessarily an impediment to raising the official cash rate in order to quell rising house prices.”

That’s central bank parlance for: “I’m giving you the green light to push kiwi higher”.

US Housing Starts were disappointing in yesterday’s print from September, where a 0.5% gain was very much less than expected.

PPI (wholesale inflation) declined 0.6% in September… Which is a very strange number, don’t you think?

To recap… Do you know what network neutrality is? You had better find out! Brazil imposed a 2% tax on capital inflows in an attempt to slow the economy and the real’s rise. The real reacted with a 3.5% drop versus the dollar. The other commodity currencies followed the real down versus the dollar. The Bank of Canada also tried to stop the loonie’s rise, and the RBNZ’s Governor Bollard give the green light to kiwi appreciation!

By Chuck Butler

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