Wait! We Won’t Get Fooled Again!

What a ride yesterday for the currencies! Gold? Well, at one point gold had shot up $24 on the day! It topped out at $1,142… The shiny metal then gave some back on profit taking, but gold holders have got to love it! Those who keep waiting for a pullback. Well, they might still be waiting when the cows come home.

Yesterday, we had a couple of Fed Heads talking, but the Big Kahuna stood out and moved the markets with his statements… Here’s the skinny…

Big Ben was giving a speech, and said, “The Fed will monitor closely the currencies, and the Fed’s policies will ensure that the dollar is strong.” Now, when he first uttered those words, the dollar got bought and the non-dollar currencies were sold… But then, a few of us had this feeling… It was a feeling that we had heard all this before… And there – in the archives, circa June 2008 – Bernanke said, “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.” Wait! We won’t get fooled again!

In June 2008, his statements spooked the markets into believing the Fed was really going to do something to bolster the dollar… But when nothing came along, the dollar REALLY got sold until the financial meltdown of August 2008… I mean… What has the Fed done in the past 1 1/2 years to “bolster the dollar”? Near zero interest rates that will remain in place for longer than they should… Quantitative easing… A bloated balance sheet of toxic bonds.

You could see the V-8 moments on traders’ faces when they realized, yesterday, that all this had been said before, and nothing came of it, so… We won’t get fooled again!

So, then traders reversed their buying of the dollar and sent the dollar to the woodshed. You should have seen the reversal… It was amazing… The Big Dog, euro (EUR), went from 1.4970 to 1.4860, and then turned around to rise to 1.50! Now, overnight, there has been some renewed selling of the non-dollar currencies, and the euro is back to 1.4910. Crazy… But not as crazy as Big Ben spouting off about “monitoring the currencies”… Yeah, right… And what are you going to do about them when they get out of line, Big Ben? Get the ruler out? I’ll tell you what he’ll do… Nothing… Absolutely nothing!

Memo to Big Ben… Ahem… Am I on? OK, long time listener, first time caller… Big Ben… Just what policies are you talking about that will keep the dollar strong? In the future, you might want to list to them, so that people like Chuck Butler don’t rip your comments to shreds for their lack of truth, and facts.

Non-voting Fed Head, Fisher, had this to say yesterday… “Our job is to maintain the purchasing power of the dollar, while fostering the conditions that enable the economy to grow without fanning inflation.” Hmmm I would say that he’s got that right… But, apparently, somewhere along the way, the part about “maintaining the purchasing power of the dollar” got lost, eh? I mean, since the Fed/cartel was formed in 1913, the dollar has lost 95% of its purchasing power… YIKES! Most people that did their jobs that badly would be fired… These guys have had almost 100 years to figure this out, and have failed miserably… And hey! Before I get accused of, Fed Head Fisher was the one that described the Fed Heads’ job, not me!

OK… While I’m on this subject of being accused… I have been beating on the US administration for nine years, folks… I know I’ve really stepped it up with the step up of deficit spending by this administration, but I chastised the previous administration beginning with their protectionism measures in 2000, and never let up with their deficit spending… Someone even said I never talked about Cheney and his “deficits don’t matter” comments… WHAT? I’ve even repeated the same joke several times about the deficits don’t matter crowd, and that they remind me of a guy standing on the Empire State Building who decides to jump off, and as he passes the 56th floor, he says… “So far, so good!”

Yes, so far, so good, because he hasn’t hit the concrete yet… And neither has the deficits crowd… But they will, and in fact, they are getting awfully close right now!

The US economy got a boost yesterday when retail sales grew at a faster rate than forecast, growing 1.4% in October, above the 0.9% rise projected by Wall Street. The jump came on rebounding demand for cars, a sign the economy kept recovering despite climbing unemployment. Aside from automobiles in October, other sales rose just 0.2%.

But… Are these numbers suspicious? Well, when you look at the previous month’s revision, you have to question these numbers as well… September retail sales, which were reported as -1.5%, actually fell -2.3%… I wonder what this number’s revision next month has in store.

Today, the data cupboard is stocked to the brim with data prints… Producer Price Index (PPI) prints along with two of my faves, Industrial Production and Capacity Utilization… And then the Big Kahuna of the day… The TIC’s data… For those of you new to class, The TIC’s data stands for Treasury International Capital… Or… Easier to understand… It’s the fancy, schmancy name for Net Security Purchases by Foreigners… This is how we track, how well we’re doing as a county at financing our ever expanding deficit…

I made a mistake yesterday when talking about the Reserve Bank of Australia (RBA) and saying that if they didn’t hike rates in December, that they would most likely come back in January at hike them… A reader pointed out to me that the RBA doesn’t meet in January… OK… So, I guess I should have said that the RBA would hike at their next scheduled meeting!

Speaking of the RBA… They issued their latest meeting minutes, in which they sounded less hawkish than one would expect, since they raised rates at the same meeting… But this less hawkish tone, set off a round of Risk Aversion once again in the currency markets overnight… Risk on, Risk off, is reminding me of a Wayne and Garth street hockey game…

For, it’s Risk on, one day, and Risk off the next day… So, while I find that the RBA minutes did set off this round of Risk off for the currencies, I don’t see it having lasting power… Look for this all to fade, especially if we get a rogue data print in the US today…

Late last week, I came across a story on the dollar that I totally forgot to talk about yesterday… So, here you go… Oh, by the way, strap yourself in for this one, and keep your arms and legs inside during the ride…

The German government’s 5-person council of economic advisers issued a report that said, “After the massive global increase in US dollar reserves in the past years, an “uncontrolled exit”, especially in emerging economies from the US dollar as a reserve currency is a possible trigger of instability in currency markets.” The went on to say…

“Countries holding “high” dollar reserves should consider committing to selling their dollar holdings in a coordinated way over a longer period of time.”

The folks over at the Royal Bank of Scotland (RBS) think that Bernanke’s speech yesterday, basically gave the green light for a further, slow, gradual decline of the dollar… And, quite frankly, that’s what traders would prefer to see too, given that they don’t like getting whipsawed day in and day out by the Risk on, Risk off game… When assets go to fast one way or the other, it just causes strong corrections, and people get hurt by the movements… But a slow, gradual decline I would think would be the preference of the US government… That way, no one notices… It’s not like a bubble that grows and everyone notices it…

Speaking of bubbles… And if you’re like me, when I type, or say bubbles, I immediately think of Big Al Greenspan… Well, you’ll love this Fed Head statement about bubbles… Here’s Fed Head Kohn… “Asset price bubbles can be spotted when they become extreme, efforts to spot bubbles may result in seeing more than there is.”

Now that statement plays well with Big Al Greenspan, who always claimed that bubbles could not be spotted before they got out of hand… Basically, what these two are saying in different ways is that the Fed could spot them, but probably wouldn’t like it, and wouldn’t have much at their disposal to do about it, so they just turn away…

And speaking of such… Fed Head Yellen said last night that the “US stock market is not overvalued”… That’s all I’ll say about that!

OK… Hopefully, you are still with me here, and reading… And you will recall me going on and on about China and their FX currency swap agreements and how that was a baby step toward gaining a wider use of the renminbi… Well… Yesterday, there was a story, that I think Ty told me about, that talks about China preparing to float the renminbi, testing it in Hong Kong… The Chinese government has been moving to allow banks in Hong Kong to issue bonds, hold deposits, and settle trade with the mainland — all in renminbi.

However, don’t look for this conversion to a floating currency to happen soon… Financial analysts believe it will not happen before 2020… It may come sooner… But I wouldn’t get all lathered up that it happens in the next year!

One of the best performing currencies VS the dollar this year, has been the Brazilian real, with a greater than 30% gain, so far… There’s been a shakeup at the Brazilian Central Bank, and there will be a few new members, with voting power at the next meeting on December 9th… I still don’t think the Brazilian real interest rate will be moved at this meeting, but with the new members, they might want to make a “statement” about how hawkish they are… And on December 10th, Brazil will print their third quarter GDP, which I would think would be quite strong… You would have to think that the Central Bank will have privy to this report before they meet on the 9th… And with the new members possibly wanting to make a statement, there’s a whole new outlook for the Central Bank meeting…

You know… As we draw closer to the end of the year, the closer we get to the winter Olympics which will be held in Vancouver, BC.Going back to the early days of the World Markets Division at the old Mark Twain Bank, here in St. Louis, we tracked currencies from countries that were holding the Olympics, noticing that there was always a rise in the host country’s currency… If that were to hold it would benefit the Canadian dollar/loonie… Will it hold true for the Vancouver Olympics? We’ll have to wait-n-see, eh? But really… Wouldn’t it be worth a flyer, a shekel or two to see if it did hold true?

And then there was this… Were you confused by the GM announcements yesterday? I was… First there was an announcement that GM would be paying back some of the bailout money to the Government… But then later it was announced that GM posted a $1.5 Billion loss… Kind of difficult to pay someone back, when you’re booking losses, eh? Strange announcements for sure…

OK, to recap, which I forgot to do yesterday! UGH! The currencies were whipsawed yesterday by comments by Big Ben Bernanke, that we’ve heard before! The RBA issued a not-so-hawkish minutes report that spooked the markets and it’s Risk off today… Brazil might have a different outlook for their next meeting in December, and the winter Olympics are ready for Vancouver, will that mean a boost for the loonie?

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.

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