Commodity Currencies Take A Beating

Front and center this morning, we have the dollar back in the catbird’s seat, as the risk aversion campers were out again late yesterday and overnight. The euro (EUR) is one whole figure lower than yesterday morning, as it goes back and forth around the 1.41 figure. The risk aversion campers came out of the woodwork again late yesterday when S&P cut Japan’s outlook to negative, citing diminishing flexibility to cope with the nation’s “swelling debt load.” Hmmm… HEY! S&P! HAVE YOU LOOKED UNDER THE HOOD OVER HERE IN THE US? I DIDN’T THINK SO!

China was back in the news overnight, as they were rumored to have asked several banks to raise their reserve ratios effective today… I’ll talk more about China in a minute… But for now, this news has been a double slap in the face of the commodity currencies, for they already got slapped with this news last week!

I will say something here that might tick a few writers off, but I don’t care… One would think that given the problems of Greece, and a nascent (at best) economic recovery, the euro would have lost more ground versus the dollar… I’ll let you in on a little secret that these guys who are calling for a collapse of the euro don’t know… The euro is the second most liquid currency in the world, behind the dollar. And right now…liquidity is in!

It certainly appears that the euro’s decline/correction has been “tamed”… And the reason? Traders are now preferring liquidity over economic performance… Now… This doesn’t mean that the correction can’t go further, pushing the euro and other currencies lower versus the dollar… What it says is that if traders really want to see the euro lower, they are going to have to work at it… Harder.

The commodity currencies of Australia (AUD), New Zealand (NZD), Canada (CAD), Norway (NOK), Brazil (BRL), and South Africa (ZAR), have been out of favor since the announcement by China last week that they would attempt to “tweak” their economy – which is central bank parlance for: “slow the economy down, but keep it running, just don’t let it overheat”

So… To me, this “out of favor” situation with the commodity currencies is being a little overblown at this point… China said they were going to “tweak” their economy, they didn’t say they were going to “shut it down”!

And then the oil-producing commodity currencies are getting a double whammy with the fall of the price of oil…

But to me… The oil thing is crazy talk… If the recessions around the world are coming to an end, as the economists say, then the demand for oil will be increasing, not decreasing! But, that’s just me thinking logically, right?

Speaking of economies coming out of recession… The UK is the last major economy to come out of recession, as it booked a positive GDP for the fourth quarter of 2009. Now, don’t get all lathered up about pound sterling (GBP)… The Office for National Statistics said that compared with the third quarter, gross domestic product in the three months to the end of December increased 0.1%. Compared with the fourth quarter of 2008, GDP fell 3.2%.

That’s right… The positive figure was a measly 0.1%… But hey, it was positive, and that’s all that counts in the “ending the recession” game…

Well… What have we here? Is this for real? OK, I know I have your attention now… Did you see that the US government has proposed a spending freeze? WOW! I mean, after you’ve spent $1.9 trillion (that’s already in this year’s budget) what more could you find to spend money on? I find this laughable… But, a good sign at the same time.

Yes, look for this announcement at the president’s State of the Union address, tomorrow night… A three-year spending freeze… Of course, that doesn’t include defense spending… Which I guess is a good thing, considering we’re fighting two wars right now… So, on one hand, I find this laughable, because before health care was deep-sixed by the people of Massachusetts last week, there’s no way the President would have made this announcement of a spending freeze… On the other hand, though… It’s the first sign, that maybe, just maybe, spending can be lassoed in and brought under control… Of course, that’s a long and winding road, which leads me to your door, but… You’ve got to start somewhere!

Of course, what will the president do if the economy does experience a double dip like I’ve said I believe it will? You know darn well that there will be calls for more stimulus spending… Then what’s a president to do? Well, maybe he won’t say, “watch my lips, no more spending”… HA!

Speaking of budget deficits… Did you see where Greece issued $28 billion in new 5-year, high yielding bonds? That’s four times what the Grecian government thought they might sell! So… Maybe, just maybe, Greece won’t be the immediate problem that everyone has made them out to be! Of course, Greece will have the US’s problem in the future, when the bonds come due… But for now, I do believe this hurdle has been cleared.

And… Speaking of double dipping… Could the US housing market be heading there? Yesterday, we saw a very interesting report that certainly suggests that may be the case… Existing-home sales sank 16.7% in December to a 5.45 million annual rate, according to the National Association of Realtors. The drop, which came after three straight increases that were fed by a government tax credit, was worse than forecast…

With unemployment at 17% (yes, I know the government says it’s only 10%, but they don’t count all the people that are unemployed!) Anyway, how can home sales rise, without major damage to the home prices? I truly believe that we’ll see a double dip in the housing sector, with price damage leading the way… Which could lead to more foreclosures, and the circle doesn’t get broken… UGH!

OK… In Germany this morning… Germany’s Business Confidence, as measured by the think tank IFO, came in stronger than expected, defying the naysayers of Germany’s recovery! The Business Confidence index printed at 95.8, from the previous print of 94.7…

You know… I’ve been following these foreign economies since 1992, when I began trading foreign bonds, and writing the Pfennig, and one thing I’ve noticed over the years is that the IFO think tank does a good job of giving the markets indicators as to how strong German GDP will be… So, if that remains in place, and I don’t see any reason to believe it wouldn’t, I would look for stronger German GDP growth.

I also saw a headline go across one of my screens this morning that said Brazil’s January Consumer Confidence Index rose to 116.4 from 114.1 in December, last month… So… Things in Brazil are going well, economically… We just have that Sovereign Wealth Fund gumming up the works for the real’s value versus the dollar… This is where the sharks begin to circle, for they smell blood, and that’s the Sovereign Wealth Fund’s cash being spent on making the real weaker. Contrarians would look at this and say… Buy Brazil while the sharks are still circling, for when they feel the Sovereign Wealth Fund’s cash has run out, they will strike, and strike with a force!

But, that’s just my opinion, I could be wrong there…

Yesterday we saw existing home sales decline, and today we’ll get the S&P/CaseShiller Home Price Index for November… We’ll also see consumer confidence, and of course the board games all get out as the FOMC meeting begins today…

To recap… The dollar has reversed the gains the currencies made the past couple of days, as China and S&P’s downgrade of Japan’s outlook, sent the risk takers hiding, and the risk aversion campers came out of the woodwork… Are we really going to announce a spending freeze here in the US? And German Business Confidence continues to get stronger…

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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