It’s Another “Risk On” Day

Well… It’s another “risk on” day, at this point after the overnight sessions of Asia and Europe. Although there seemed to be some traders that wanted to exit risk assets… The moves were strange.

Traders in the overnight markets allowed the Big Dog euro (EUR) to remain above 1.51, which it scaled to yesterday afternoon. We saw some data in the US yesterday that flashed a green light at the risk takers, so… As we begin today, the Aussie (AUD) and kiwi dollars (NZD) are soaring once again, and the Swiss franc (CHF) has moved past parity against the dollar.

Front and center this morning, we saw Pending Home Sales rise and give the markets a good shot of risk taking. October pending home sales rose 3.7% according to the National Association of Realtors who reported Tuesday its seasonally adjusted index of sales agreements rose 3.7% from September to October to 114.1. It was the highest reading since March 2006 and almost 32% above a year ago, the largest annual increase ever for the index.

So… Some rot was scraped away from housing’s vine yesterday, and keeping with the trading theme that’s been in place for nine months now, the dollar got sold… There’s also something else permeating through the markets this morning, and that is some people are thinking that this Friday’s Jobs Jamboree will surprise to the upside of job creation… If that should happen, and the trading theme remain in place, you could see that the dollar sold like funnel cakes at a State Fair! So, keep tuned to this Bat Station for further developments!

Whoops! The Big Dog euro just slipped back below 1.51 this morning… Could be profit taking, as the move yesterday was quite impressive by this currency. Not as impressive as the price move by gold, which was up $15 yesterday, but still quite impressive!

Yesterday, I told you about how the Reserve Bank of Australia (RBA) had hiked rates once again by 25 BPS, but the statement following the rate announcement left a lot to be desired, if we were looking for indications of further rate hikes by the RBA… That tempered the move higher by the Aussie dollar initially… But as the day wore on, I think many observers of this currency and central bank realized just what I said yesterday, that the RBA would take the next two months to see what their 75 BPS of rate hikes have done so far… Here’s the key, right here, right now, for their next meeting in February 2010…

Australian inflation data will print about a week before the RBA’s scheduled February meeting… If inflation pressures are rising in the face of 75 BPS of rate hikes, we could very well see the RBA opt for a 50 BPS rate hike… If inflation pressures are nowhere to be found, then you can pretty much be assured that the RBA will take a flyer at the February meeting… But, here’s the key to take for all of next year… Unless China falls flat on its face, the RBA will be hiking rates throughout 2010… Probably 25 BPS each quarter.

This outlook bodes well for the Aussie dollar’s out-performance of other currencies, folks… It doesn’t take a rocket scientist to figure that one out!

It looks as though the Dubai debacle concerns have just about faded away… I truly believe that the media really should be to blame here… They whipped up the already-thinned-out-after-Thanksgiving markets, when all they had to do was look in our own backyard of California, to realize this was simply a tempest in a teacup. There were investors all over the world that panicked and took out their positions in stocks, currencies, commodities, and anything else that wasn’t US Treasury debt! And then three days later, these asset classes that were sold, are back on the rally tracks, and setting new highs for the year!

Yesterday, I also told you that India had received some good economic data… There have since been a few observers that are talking about the rupee (INR), and how it could very well be in store for a nice run versus the dollar. I must say, though, the Indian Central Bank (ICB) has not cared too much for a strong rupee… One might recall that in the past the ICB has actually intervened and sold the rupee whenever it got on a roll versus the dollar. I see nothing that will prevent the ICB from doing that again… Unless… The gains are small, and take a good deal of time to accumulate… In other words… A slow, drawn out appreciation versus the dollar.

But you know these currency traders, once they get their foot in the door of a currency they drive it like a rental car! Proving the old adage that if you start fast you can’t last! So, let’s hope rupees can fly under the radar and be stealth about their rise versus the dollar in 2010.

In Japan overnight… Remember they guy in Japan that when first appointed, he claimed he didn’t care about yen (JPY) strength? Well… He “got the memo” and is now saying that the Japan’s currency strength “must be dealt with”. I told you that when he first said that he didn’t care about yen strength, that his position wouldn’t last long if he maintained that thought… So… Yen weakened overnight, but not by too much, and remains stronger than I think the currency should be around 87 yen.

So… Big Ben Bernanke’s term is up next month… Hmmm… Throw him out with the bathwater! Get someone that believes in full transparency, and the ability of the US government to audit whatever it is the cartel does! We also need someone who believes in providing price stability! I wonder if we could trade Bernanke for the head of the Bundesbank, or the head of the Reserve Bank of Australia? Now wouldn’t that be cool?

Alrighty then! The Big News yesterday, and one now has to wonder why I waited this long to talk about it (I don’t know!), was the move by gold to $1,200! And… It hasn’t stopped there! Gold has added more to its price this morning and is trading right here, right now at $1,209! Remember when gold moved above $1,000, and I said, “well, now I’ll have to change my thought that I would say to people about buying gold on any dips below $900, to looking to buy gold on dips below $1,000… That seems so long ago… But in reality… It was just three months ago that gold moved to $1,000!

Talk about a huge move in a short time period! I still think about that conversation I had with neighbors at the end of August, when hold was $950, and they asked me if they should be buying gold… You don’t have to think hard to come up with my answer to them.

My good friend, David Galland, had this to say about gold’s recent move…

“Emotionally, I’m inclined to think that gold is running too far, too fast. That inclination is supported by considering that, over the same period, the dollar index (DXY:IND) has fallen by 14%. When it comes to first-world currencies, that’s a huge move.

“Even so, that data point is suspect, because all it really tells us is that the dollar has fallen less against other fiat monies than it has against gold, the world’s only honest money. And against gold, the dollar has fallen…about 35%. (Think of it this way…each dollar could purchase 1/778 or 0.001285 ounces of gold last year and now can only purchase 1/1192 or 0.000839 ounces, which reflects a decline in the value of the dollar relative to gold of 34.7%.)

“When I step back from the emotional reaction to gold’s stunning rise and look strictly at what’s actually going on in the world, I have to think that gold will go to at least $2,000 in this cycle.”

Thanks David! Always good to get someone else that’s as well thought of and respected like you to give their views.

OK… The data cupboard here in the US today, will yield some potential market moving data prints… First the ADP Employment report for November… And then this afternoon, the Fed’s Beige Book. The Fed’s Beige Book will be interesting to see if they remained concerned about commercial real estate like they were at their previous meeting… The Fed Heads also thought that consumer spending was “weak” in their last meeting, so any upgrade to that previous thought could spark more risk taking.

Then there was this… I was talking about diversification to a reporter yesterday, and told them to think outside the box with diversification, and that currencies and metals needed to be a part of any investment portfolio, no matter what country you live in! And it reminded me of a cartoon that I have on my desk of a chicken sitting on a street with a cup in front of it, looking like a penniless chicken, holding a sign that says: “All my eggs were in one basket”… Hits the nail on the head!

To recap… Gold hit $1,200 yesterday and continues to move higher this morning, along with the Aussie, and kiwi dollars, and Swiss francs which are back above parity to the dollar!

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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