Bond Auctions Fuel Currency Rally

Well… The bitter cold that was hanging over the currencies for the past week saw some milder weather yesterday, as that same bitter cold switched over to the dollar… Yesterday, I told you about how the Portuguese bond auction went off just fine, and yields actually fell in the secondary market. I said then that the news had initially put wind in the euro’s sails, but could not be withstood, and the euro (EUR) had fallen back below 1.30… Well, that was only for a short time… As the news of the auction filtered through the markets, adding in US Treasury Secretary Geithner’s comments on the renminbi (CNY), the dollar got sold… Right after lunch, I looked at the screens and the euro was not only through the 1.30 handle, but was trading through 1.31, which was a good thing for the currency because the move brought the beleaguered and beaten euro back to its 200-day moving average, which it fell through last week.

This morning, the news was even better, regarding bond auctions from the periphery countries of the Eurozone. This morning it was Spain, and Italy auctioning bonds, and both auctions went off without a hitch, and again, the yields on the bonds actually fell, which is an indication that the demand was strong!

The euro wasn’t the only currency taking liberties with the dollar yesterday and overnight… The Canadian dollar/loonie (CAD) traded to a 2 1/2-year high versus the dollar to the south of the loonie. The Aussie dollar (AUD) climbed back to $0.9950, and gold traded higher, after spending most of the day flat or in the red slightly.

So… The “flight to so-called safety” (to the dollar) was called off yesterday, and the trading looked like it was loaded for bear, with most of the losses taken by the currencies in the past week reversed in one afternoon’s trading…

And then the honorable Ron Paul, one of the few lawmakers who truly understands what’s going on with our debt and currency, posted a comment on his website…

It is nothing short of cruel and criminal for Congress to stand idly by while the life savings of Americans are inflated away to nothing. It is high time Congress insist on getting complete information on what the Fed has been doing, and for whom. My hope is that exposing the truth will demonstrate the insanity of the status quo and more people will call for sensible changes, such as legalizing competing currencies.

Unfortunately for gold, the rally yesterday didn’t last throughout the night, and the shiny metal has given back its gains from yesterday. Makes no sense to me, except of course if you believe in gold price manipulation, then it makes sense… And I do believe in that… Of course it could very well be profit taking… But given the story that I wrote about yesterday, regarding the tremendous demand that minters are seeing for physical gold, one still has to scratch one’s head in confusion over this selling of gold this morning.

The Bank of England, (BOE) and the European Central Bank (ECB) both are meeting as I type my fat fingers away here. These two meetings could very well have fireworks…but most likely, they will be non-events, with little clues to the future…

The ECB starts 2011 with the Sword of Damocles hanging over it… The ECB must deal with Europe’s sovereign-debt crisis as well as inflation… But there’s word out of China that soon the ECB might have one less worry… China is prepared to participate in any future Eurozone stabilization measures, seeing the euro as a key pillar of a multi-currency global financial system. Hmmm… If China is willing and able to supply needed depth to the stabilization fund, then that’s a good thing… It’s good for The Eurozone, as it could very well keep interest rates down on bonds, and it’s good for the Chinese, because… They get their foot in the Eurozone’s door just a little bit further in their attempt to rule the world! HA!

Yesterday, I was buying some pound sterling (GBP) for a customer, and said, “Whoa! That pound sterling price is pretty rich!” As long time readers know, I’m not a fan of pound sterling, as they have the same problems we have here, only on a smaller scale. But, when the bias is to sell dollars, the currencies – even the one’s limping along crutches – line up to take swings at the green/peachback!

Now… After all that euphoric talk about the currency rally, I’m watching the dollar rally back a bit, with gold really falling lower now. So, you see, currency traders are a fickle lot, and can be moved by the slightest change, which will affect their sentiment… Let’s hope this rally back by the dollar was just some profit taking.

Yesterday I talked about the weakening Swiss franc (CHF), and apparently the Swiss National Bank (SNB) saw it too and looked at it as a perfect opportunity to bash the currency… The SNB hasn’t had that opportunity in some time, but they do now… So, the SNB came out with a statement that scared some currency traders/investors/hedge funds into thinking the SNB could intervene and sell francs, thus reducing gains by trades, etc. The SNB said that franc appreciation was threatening economic growth. In fact, they said that the franc’s gains are “posing an extraordinary challenge” to some exporters.

So… Those comments caused some nervousness in those holding francs… But, quite frankly, I don’t know why! The SNB tried to huff and puff and blow down the franc’s house of strong currencies last year, but to no avail… If franc owners just ignore them, the SNB will go back to their children’s storybook, where they came from!

Yesterday, I told you about the 67% increase of income tax in Illinois… Upon further review, I see that it really raised the personal income tax from 3% to 5%, which is a 67% increase… But, the needs of the Illinois lawmakers to make ends meet are still not going to be met… So, in the end, it’s still bad…and it’s going to get worse!

And then… The Chinese renminbi (CNY) – again being hung out to dry by the Chinese government, as Chinese Premier, Hu, will be visiting the US next week – saw another huge mark up of the currency last night, which puts the renminbi, now, at a 17-year high versus the dollar. So… When Hu visits next week, and the lawmakers and all the President’s men try to beat on him about how strong the renminbi is, he can simply point to the fact that the renminbi is at a 17-year high versus the dollar!

Now… I know that I’ve said for some time now that the renminbi will be the next reserve currency of the world… That’s not going to happen any time soon, folks… But what I’m getting at here is that if you go back to 2003, when we first began offering renminbi deposits to US citizens, the IMF was saying that the renminbi was 40-50% undervalued… So, let’s split the spread and say it was 45% undervalued… Well, from July 2005, when the peg to the dollar was broken, to July 2008, the renminbi gained about 20% versus the dollar… Then from July 2008 to June 2010, the renminbi battened down the hatches and rode out the financial meltdown… But from June 2010 to now, the renminbi has gained 3.4%… So, that’s nearly 25% of the 45% in the books.

So when you hear US Treasury Secretary Geithner spout off about the renminbi being “significantly undervalued” like he did yesterday…is 20% considered “significantly undervalued”? Now, 45% in 2003, surely was “significantly undervalued” in my book… But 20%? I think Timmy Boy is pushing the envelope here, and going for the sensationalism of saying “significantly undervalued”!

Then there was this… And this is not good news, so if you don’t want to deal with this depressing news, skip ahead to the recap… From CNN Money…

Foreclosures were at a record high in 2010, and more than 1 million people lost their homes, even as notices started leveling off during the end year.

In total, there were nearly 2.9 million foreclosure notices filed during the year, according to report released Thursday by RealtyTrac. That was a record high, but just 1.7% above 2009.

It most certainly would have been higher had notices not plunged in November and December as banks halted tens of thousands of foreclosures in the face of the robo-signing scandal.

“Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity,” said James Saccacio, RealtyTrac’s CEO. “Many of the foreclosure proceedings that were stopped in late 2010 – which we estimate may be as high as a quarter million – will likely be re-started and add to [foreclosure] numbers in early 2011.”

This will continue, folks… Probably for years… UGH!

To recap… The dollar rally ran into Mr. Freeze, which cooled the dollar down and allowed the currencies to rally all day yesterday and overnight. The Portuguese bond auction was the igniter of the rally, and the well received bond auctions of Spain and Italy this morning, has kept the pressure on the dollar. Gold and silver are not rallying alongside their other non-dollar risk asset brothers – currencies…

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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