Rumors Kill the Currency Rally

Well, the non-dollar currencies didn’t enjoy such good news yesterday, as they got whacked a good one! After signing off yesterday, the non-dollar currencies continued to rally versus the dollar, and then the rug got pulled out from under them in a NY minute! What happened? The risk assets were dropping like the Cardinals’ batting averages at the end of the season. Well… Remember yesterday when I said that the data for the week looked like it might show some healing in the economy, which would be bad for the dollar?

Well, it wasn’t data that caused this move… It was a few things that I’ll list for you that ganged up on the currencies and gave the markets the thought that the US economy just might not be free and clear, which brought about a return of the “risk aversion” trades… Here’s the list that ganged up on the non-dollar currencies.

Things making the US economy look like it’s on shaky ground again include:

  1. Rumors that first-time homebuyers’ credit will not be extended past November 30th
  2. Rumors that the ING rights issue is not being well received
  3. Talk of bank downgrades
  4. Mention of a new bill addressing ‘too big to fail’ giving the government broad power to dismantle financial companies that get into trouble

I was asked by our public relations people to put together some thoughts for CNBC… So, the above stuff was what I put together… CNBC then asked for an interview… Well, this is where I get off the bus… Long time readers know that I’ve been ambushed twice at CNBC, and decided to not go back for a third time. So, even though this interview has little chance of an ambushing, since they asked for the info… The Big Boss Frank Trotter will be doing the honors at 8:40 CT/9:40 ET, today… So, don’t forget to tune in!

Another thing that may be giving the dollar some love is the yield on the 10-year Treasury… This yield, as reported in yesterday’s Pfennig, had bumped up to 3.50%, which had been the proverbial line in the sand in the past. 3.50% had been the level that had seen strong Treasury buying (probably by the Fed!) to bring the yield back down… But yesterday, we saw this yield inch higher to 3.54%… We should keep an eye out for this, to see if there is any slippage in the yield, because that would only mean one thing… The Fed is buying again! And that’s the reason the dollar got some love yesterday from this yield… Because so far… The Fed hasn’t gotten their hands dirty here… But should they, once again, it won’t support the dollar.

So… There you have it! Just when we thought the data this week would send the dollar to the woodshed, these things popped up to underpin the dollar! Hopefully, it’s just a case of sell the rumor and buy the fact for the non-dollar currencies, as most of this stuff was just rumors in the markets.

But it did get people/investors/traders thinking about just how oversold, in the short-term, the dollar was… It normally takes something like this to get those thoughts to come to the front of the class, as the negativity had such a stronghold.

We’ve seen these “risk aversion” moves in the past seven months, and each time they’ve only lasted a short while. But that doesn’t mean we’ll see the risk aversion campers leave shortly this time. They might… And they might not… Don’t you just love it? I know one thing for sure! The sell-off yesterday was swift and strong. For instance, the euro (EUR) was 1.5050 before the sell off, and is 1.4890 this morning! What does that look like to you? Buzz! If you said, “Chuck, it looks like a cheaper level to buy” then you may have won a free subscription to the Pfennig newsletter! If you did not have that answer, then there’s a free parting gift for you at the door! HA!

Yes, it certainly does look like a cheaper level to buy… Of course it doesn’t mean that tomorrow’s price won’t be cheaper, but given the history of the risk aversion reversals in the past, it doesn’t mean that it will be cheaper either!

And… According to Commerzbank… “It would probably be premature to call this the end of the dollar’s weakness. It remains under pressure due to the low interest rates and the resulting attractiveness as a financing currency for carry trades.”

I saw a story last night about the Brazilian real (BRL), and how the real has gained +35% versus the dollar this year, as a Big Mac in Brazil costs more than it does in New York and London… Uh-Oh! That Big Mac Index again! But that doesn’t scare the research team over at Goldman Sachs (GS), for they still believe the real has room to gain versus the dollar… And you know me and the Big Mac Index… While it’s a “nice” measure, it’s not the holy grail of currency outlooks… I can point back to 2000 and 2001, when the Big Mac Index said the dollar was overvalued, but it took nearly two years before we saw dollar weakness… So, I don’t put much faith in the Big Mac Index, for short term forecasting. Not that I forecast – at least not in this letter I don’t – for I would be hung out to dry by readers if I got something wrong… I mean look at when I said I thought the Aussie dollar (AUD) COULD go to parity, and it only got to 98.5-cents!

OK… Dr. Marc Faber was in the news last night, as he was giving an interview on Bloomberg TV…

“The dollar will become worthless when people eventually realize the fiscal situation in the US is a disaster. It will go to a value of zero eventually, but not right now. Looking at Mr. Obama’s administration, it should already be there.” He went on to say…

“In my opinion, about 50% of tax revenues will be used just to cover interest payments on the government debt. That’s unsustainable. Then you’ll really be forced to print money. The best investments right now are foreign currencies, commodities, and equities.” And then when asked about Fed Chairman, Big Ben Bernanke, Dr. Faber said, “He’s a money printer. He’s nothing else.”

Whew! That’s taking the whole shootin’ match of the government and the Fed, to the woodshed, eh?

For those of you keeping score at home, make sure you’ve jotted down the right figure of dollars that the US government and the Fed have spent, lent or guaranteed… $11.6 trillion!

OK… It looks like the last country that’s needed to sign the Lisbon Treaty, the Czech Republic, is going to sign it… Now, let me be perfectly clear about this… I don’t agree with the Lisbon Treaty, but the European Union has gone so far down this road now, that there’s no turning back, so you might as well go along and sign the thing, I guess… The one thing it does do, is underpin the euro… For if this Treaty did not get signed, the pressure on the euro would be great, because you would have had all the naysayers coming out of the walls again talking about a collapse of the European Union and a return to the legacy currencies. You know: Deutsche marks, French francs, Spanish pesetas, and so on.

Speaking of Europe… I know it’s not really November… But it’s close enough! The Norges Bank of Norway will meet tomorrow, and are expected now to raise rates, which would make them the first European central bank to raise rates… Notice I said “now”? Well, the rest of the crowd are jumping on my bandwagon that began a couple of months ago when I said that it was a race between Australia and Norway to be the first to raise rates… There weren’t many pundits out there calling for rate hikes… But as time has gone on, and they read the Pfennig, they’ve come along nicely! HAHAHAHAHAHA!

In the last couple of weeks, the Pfennig and I have been mentioned a couple of times by the best writer on the planet, Richard Russell… And now, I have learned that Harry Schultz has mentioned us in his most recent letter… The Pfennig is really beginning to get noticed, eh? That just puts more pressure on me to come up with fresh, informative information!

Hmmm… And then there was this… PIMCO’s Bill Gross, who is known as the “bond king” admitted that he “has some concern on owning Treasuries”… If Bill Gross has some concern, folks, shouldn’t we? I recently did about a 20-minute video for our friends over at the Sovereign Society on the Treasury Bubble… Sure wish Bill Gross would have said something like this when I was putting that video together! Imagine what I could do with a statement like that when I’m doing a video on the Treasury Bubble!

OK, to recap… The dollar came back with vengeance yesterday, after some rumors on the street led people to believe that things in the US won’t be free and clear after all, which led to risk aversion… We’ve seen this risk aversion before, and each time it hasn’t lasted too long… Dr. Marc Faber checks in with some comments on the dollar, and Bill Gross has some concern about owning Treasuries!

By Chuck Butler

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