The Daily Commodities » Currencies

US Dollar Entrenched in Rally Mode

Daily Reckoning.com — Sat, 08 Jan 2011 01:10:11 +0000

01/07/11 St. Louis, Missouri – The dollar is rallying again today, and quite frankly, right now, the institutional momentum is so strong, that there’s nothing that would stop this rally…today that is. It’s a Jobs Jamboree Friday, the first of 12 for 2011, and as I said yesterday, I believe that the US will post the best monthly number for job creation in a couple of years today. I truly don’t believe that it’s something that can be maintained, given the fact that we’re talking about December, when shops bump up their employment to deal with the Christmas shopping season. But, it will be the Big Kahuna today, job creation that is, and for that, we need to analyze what this will do to the currencies, right?

First of all, the Bureau of Labor Statistics (BLS) will print job creation for November this morning. Right now, the “experts” believe that 150,000 new jobs will show to have been created in November. The unemployment rate, however, will only tick down 1/10th to 9.7%… Again, that’s the forecast by the “experts”. I think that if the actual, no wait there’s no such thing as “actual number” with the BLS, well, then what should I call it? OK… I think that if the trumped up number is anywhere close to the forecast, then the dollar will rally further… And even currencies like the Japanese yen (JPY), Swiss franc (CHF), and Chinese renminbi (CNY), who have found solace in any past dollar rallies, will be sold… Because, it’s going to be all about the dollar today…

The beleaguered and beaten down euro (EUR), is really feeling as though it’s getting sand kicked in its face again. Yesterday, the euro fell through the 1.3050 line of resistance, which according to the technical people, means the next stop for the euro is 1.2970… After that, we’ve got a quick fall to 1.28 and change, where the euro fell last winter, when Greece was a major contributor to the euro’s weakness. Remember, I’ve told you for years now, that the euro is the offset currency to the dollar… So, it makes sense that dollar strength will show up in euro weakness. Hey! You can’t say that I didn’t warn you that we could see euro weakness early in 2011… (Sorry, I have to put that in there, because there will be quite a few emails in my box telling me that I should have warned people about a weaker euro to start 2011, and this way, I cut that off at the pass!)

Did you hear what European Central Bank (ECB) President, Trichet said about the euro? He said that the euro was “a stable currency, as stable as its predecessors, including the Deutsche Mark.” WOW! I’m sure the Germans weren’t too happy to hear those words coming from a Frenchman… Besides that comment from Trichet, the only other thing going on in the Eurozone was the printing of third quarter GDP, which was bang on expectations of +0.3%… This is the GPD for all 16 countries… So, Germany’s third quarter GDP was quite strong…

The Canadian dollar/loonie (CAD) seems to be the only currency with any intestinal fortitude to stand up to the dollar’s rally this morning… The Swiss franc is holding on, but if you go back to last Thursday, the headline on the Pfennig was “Swiss francs and Copper reach all-time record highs”… And gold? OMG! The shiny metal has lost another $13 this morning! And silver is $3 lower than it was a week ago!

After the Jobs Jamboree this morning, I expect the dollar to be entrenched in rally mode, and then Fed Chairman, Big Ben Bernanke will give his testimony on the economy to lawmakers… I truly believe that Big Ben will toe the line and explain why the Fed needs to continue its QE2 program… For those of you who missed class yesterday, I said that the Fed had only bought $170 billion of the $600 billion total scheduled for this round of QE. For those of you keeping score at home… The total in the first round of QE was $1.75 trillion… Holy Money Printing, Batman! What will be the end result of these QE implementations? Well, Robin… It’s not going to be pretty… But at least the Fed has applied lipstick to the pig for now, and that’s all the media and markets care about, which is shameful… Shouldn’t the Big Picture be explained for fair and balanced reporting? You are so smart, Batman…

So… At the top I told you that even the Japanese yen was losing ground to the dollar. Well, there seems to be a rumor going that one of the major credit rating agencies may be about to downgrade Japan’s credit rating, because of their debt picture. Hmmm… I can tell you right here, right now, that the credit ratings agencies don’t have the intestinal fortitude to cut the US’s rating because of its debt picture… No way, no how… It ain’t gonna happen! Why? Because if there was news about a possible cut, the US would simply close down the rating agency… That’s my scenario; I have nothing to back that thought up… It’s just how I see it happening, and as always, I could be as wrong as two left shoes…

I would caution the markets from making too much of a credit rating cut for Japan… A currency dealer told me yesterday that 95% of Japanese Government Bonds (JGB’s) were in the hands of domestic investors… So the Japanese hold 95% of their country’s debt, and those domestic investors aren’t going to give two hoots about a credit rating cut.

Don’t you just love tidbits of info like that? Here you are, standing around at a cocktail party, and some guy says, “Hey! My inside information tells me that Japan is going to get a credit rating cut. That will sure knock the stuffing out of Japanese Government bonds.” And you can say… “Ahhh… Not so fast there, cowboy… My guy tells me that 95% of Japanese Government Bonds are held by domestic investors, which will mean the credit rating cut won’t mean a hill of beans to them”… And to think you get this cocktail information for free!

But… The rot on the Japanese yen’s vine could very well, finally be exposed…

The Norwegian krone (NOK) is beginning to rally against the dollar as I write this morning… A quick look at their data cupboard, and I see where Norwegian Retail Sales for November showed a nice rise of 1.8%, and Industrial Production printed with a rise of 0.9%… Both of these results were far greater than the expectations, so, that’s why the krone is feeling better about itself this morning, and mounting a mini-rally against the dollar.

A former colleague of mine, sent me a note last night, telling me that he had read a research report that called for investors to buy Singapore dollars (SGD) instead of Chinese renminbi… He asked me what I thought. I said… “That’s exactly what we’ve told investors for over a year now… That Sing dollars are a great proxy for renminbi.” I went further to say that I wish all our investors would opt for Sing dollars over renminbi, as long as renminbi remains a non-deliverable forward, which means it’s non-deliverable, and its liquidity is tight! You can wire Sing dollars anywhere you want… So, for those of you who missed this discussion that we had about a dozen times in 2010, there you go!

So… I told you yesterday of Brazil’s latest attempt to stem the real’s (BRL) rise… Well, now Chile has decided to do the same. Now, the Chilean peso (CLP) is an ill-liquid currency, and you would have to be an institution, or Monty Millionaire to find an institution to make a market in it for you. I find it interesting to talk about, given the Chilean pesos’ rise in 2010…and the fact that these developing markets have central banks that believe they can manipulate their currency, with limited resources.

The Aussie dollar (AUD), is really feeling the problems that the floods have caused, as exports are now threatened, and we, (Pfennig readers) all know that a major portion of Australia’s economy is derived from exporting those raw materials…

Well… That brings me to the Indian rupee (INR)… This marks two comments on rupees in the same week for me! WOW! Well, to follow up the discussion we had a couple of days ago regarding the rising inflation in India… I saw this… India’s annual food-price inflation jumped to 18.32% in the week ending Dec. 25, a development that experts said might lead the central bank to raise interest rates. This should underpin the rupee…

And then to follow up my discussion about worldwide food prices rising… Food and commodity prices are expected to rise worldwide because of flooding in Australia, an extremely cold winter in Russia and drought in Argentina… So get ready… stock up the pantry shelves…

Then there was this… The good folks over at the NIA (National Inflation Association) put out their forecasts for 2011, and it looks like they will be bang on with this one, considering the report yesterday, that showed the Holiday sales were not as robust as first thought… Here’s the NIA’s thought…

Although most analysts on Wall Street believe retailers will report a major increase in holiday season sales over a year ago, NIA believes any top line growth retailers report will come at the expense of dismal bottom line profits. NIA expects many retailers to report large declines in their profit margins for the 4Q of 2010 and first half of 2011. Retailers have been selling goods at bargain basement prices in order to generate demand. Americans, being flush with newly printed dollars from the Federal Reserve, have been eager to buy up supplies of goods at artificially low prices. However, shareholders will likely sell off their retail stocks on this news. As share prices of retail stocks decline, retailers will begin to rapidly increase their prices by mid-2011.

To recap… The dollar continues to swing the hammer, even against the Chinese renminbi, and Japanese yen, two former stalwarts versus the dollar, rain or shine… It’s a Jobs Jamboree Friday, which will show that job creation in December will have been the best in a couple of years… But is it December holiday employment only? We’ll have to wait for the January numbers to know… There are rumors this morning that a credit ratings agency is going to downgrade Japan’s credit rating because of their debt picture… Would this same credit ratings agency do the same in the US? And Chile is following Brazil into the currency manipulation ring.

Chuck Butler
for The Daily Reckoning

What Bubble? Commodities Have More Upside in 2011

Jordan Roy-Byrne, CMT — Tue, 21 Dec 2010 03:15:19 +0000

Even though Commodities as per the CCI are within 2% of an all-time high (and at an all-time high when priced against a basket of foreign currencies), there is absolutely no sign of a bubble or froth in the commodity complex. Various data will show that both Commodities and the commodity stocks are under-owned and have more room to rise.

One way to measure the value of a sector is to look at a sector’s overall size as a percentage of the S&P 500 (NYSE:SPY). The chart below is from Ryan Puplava of PFS Group. It is a bit dated, but as of today Energy and Materials comprise 15% of the S&P 500. The 2008 peak was about 19%. The 1980 peak was 43% while Technology peaked at 35% in 2000 and Financials and Consumer Discretionary accounted for 35% of the S&P 500 in 2005.

In addition, some sentiment indicators show there is little interest in Commodities. Assets in the Rydex Commodities fund (c/o of Sentimentrader) were over $300 million at the 2008 peak and dwindled to as low as $40 million. The CCI has recovered to near an all-time high and even the CRB is at a two-year high, yet assets in the fund are only $43 million! Moreover, we can clearly see what happens in a bubble as in 2008, assets surged about 300% in six months.

Also from Sentimentrader, we see 59% surveyed as bullish on Commodities. While this is a two-year high, it is well below the levels of 2006-2008.

Despite the solid performance of the commodity sector, investors don’t seem to be enthusiastic. For one, the stocks comprise 15% of the S&P 500 compared to 19% in 2008. Perhaps investors don’t want to get burned again as in 2008? Perhaps they like the safety of bonds more (which fund flows do indicate)?

In any event, contrary analysis tells us that skepticism, a wall of worry or outright indifference to a clear uptrend indicates that uptrend has the ability to move higher. Commodities are in an uptrend and sentiment analysis shows that the long side is not too crowded. To find out how you can profit and the best risk-reward opportunities in Commodities, join us for a 14-day free trial to our premium service. We cover all commodities and sort out the best stocks in the best.

Good Luck!

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com

Why Commodities are Rallying as Currencies Decline

Daily Reckoning.com — Wed, 10 Nov 2010 23:48:04 +0000

By Eric Fry

11/10/10 Laguna Beach, California – Cotton…silver…palladium…nickel…corn.

What do these things have in common?

Answer: They are not a dollar bill. And neither are they a euro (EUR) or a renminbi (CNY) or a rupee (INR)…or any of the other currencies that central bankers around the world are aggressively debasing.

“It’s not just our own Federal Reserve that wants to destroy its currency,” observes Chris Mayer, editor of Capital & Crisis. “It seems everybody is doing it. As Eric Sprott, a great investor hailing from the Great White North, recently noted in his Markets at a Glance letter:

‘By our count, no less than 23 separate countries have now intervened in the foreign exchange market in some way since Sept. 21, 2010. The goal for all is to increase the supply of their respective paper currencies in order to drive them down in value.’

“Investors, though, aren’t dummies – at least not always. That’s why real assets are rallying.”

The nearby chart tells the tale. Commodities, as an asset class, have become quasi-currencies. From gold to coffee to cattle, commodities of all types have been soaring in price, ever since the Federal Reserve publicly declared its war on deflation. General Bernanke vowed to conduct this war aggressively and to utilize a battlefield tactic he called “quantitative easing.”

The war has been underway for several months, but victory is nowhere in sight. Instead the battlefield is littered with the remains of dollar bills that once seemed so powerful and full of potential.

Seeing the results of this campaign, investors are growing increasingly fearful of taking sides with the US dollar. Instead, they are placing their security in the hands of gold, silver, platinum and numerous other commodities. As such, every major commodity has outperformed the S&P 500’s 8.8% gain for the year to date. Only zinc and cocoa trail behind.

In a world where every major paper currency is suspect, gold is a compelling alternative. But it is not the only alternative. As reliable stores of value, a bale of cotton or a bushel of wheat also seemed preferable to paper currencies.

“And, as if [commodities] needed another reason to rally,” co-editor, Joel Bowman, observed earlier this week, “China is betting on ‘stuff’ over ‘paper.’

“Reports Barron’s: ‘This year, for the first time ever, China has been investing more overseas in assets like iron, oil and copper than it puts into US government bonds.

“‘China in this year’s first half spent $31 billion on hard assets,’ the journal continues, ‘compared with $23 billion on Treasuries and other US government bonds. Experts say China’s investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China’s previous practices. For many years, the mainland spent next to nothing on hard assets abroad, while its purchases of US government debt ranged as high as $100 billion a year.’”

Monetary tastes and habits – like culinary tastes and habits – do not change overnight. But once these habits begin to change, they rarely regress to their previous condition. General Bernanke would be unwise to ignore this tendency of human behavior.

McDonald’s opened its first restaurant in China in 1990 – trying to sell hamburgers to rice- and chicken-eaters. Twenty years later, 1,100 McDonald’s restaurants dot the Chinese landscape…and 1,000 more will open by 2014. Tastes rarely change quickly, but when they do change, they usually change forever.

The Chinese, the world’s largest buyers of Treasury debt, are slowly changing their monetary tastes and habits – preferring hard assets over US paper. Likewise, global commodity markets are telling us loud and clear that many, many investors around the world are also changing their monetary tastes and habits – also preferring hard assets over US paper.

But in the midst of these evolving long-term trends, short-term counter-trends sporadically arrive – usually with a surprising fury and intensity. Yesterday was one of those moments. Gold, silver and platinum, along with almost every other major commodity traced out what chartists call an “outside day reversal.” In other words, these commodities advanced strongly early in the trading session to exceed the prior day’s highs, but then reversed later in the trading session to finish the day below the prior day’s lows. And most of these commodities performed this volatile feat on extremely high volume. Net-net, a classic outside day reversal – the kind of pattern that usually signals the end of the rally, at least temporarily.

“This could be a blowoff day for the precious metals,” options pro, Jay Shartsis remarked during yesterday’s trading session. “I note the SLV (IShares Silver Trust) is trading huge volume. It opened at $27.80 and hit $28.30. If it closes near the bottom of the day, a sharp drop seems likely. First hint will be a decline below the opening of $27.80…I am buying puts on Pan American Silver”

Three hours after Jay’s missive, SLV closed the trading session at $26.18, thereby confirming his bearish expectation.

So the red-hot precious metals sector has decided to take a well-deserved breather. In all likelihood this breather will last a while – a few days at least, a few weeks perhaps. But the long-term trend for silver, gold and most other commodities remains unchanged. As long as the Fed and 22 other like-minded central bankers are racing one another to devalue their currencies, commodities will remain “well bid.”

“If you are worried about gold tanking, you shouldn’t be,” says Chris Mayer. “Gold has lots of room to move higher. It is a metal whose value depends on the dilution of paper currencies. As the central banks of the world have expressly told us that they intend to dilute their currencies, you should have few worries about gold’s price…and natural resources should still be a good sandbox to play in to make a lot of money and protect your wealth against inflation.”

Amen.

Eric Fry
for The Daily Reckoning

Why Commodities are Rallying as Currencies Decline originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Risk Appeal Weakens Greenback

Andrew Wilkinson — Thu, 28 Oct 2010 23:01:57 +0000

The dollar has largely been on the defensive overnight following a request of treasury dealers from the Federal Reserve to offer feedback on what they expect to hear from the FOMC next week. This isn’t an unusual step and the responses will help the monetary committee better estimate how to go about sizing and shaping its ongoing activities. In Asia risk appetite returned after a journal supported by the Peoples Bank of China ran a story indicating stronger growth this year than expected. The euro was on good form following a revival of business confidence.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

U.S. Dollar – Next Wednesday the FOMC will announce its intention to embark on a scheme to buy various assets in the open market starting with an initial round of $500 billion. At least that now appears to be the consensus view. However, the market view at this point stumbles across a cavern of opinion ranging anywhere between $1 trillion and $2 trillion as to where the Fed will stop. The Fed asked its primary dealers to offer feedback on the size and timing of its plan as well as where yields are expected to go as a result of its intervention. The dollar index measuring the worth of the currency against a basket of most common trading partners reversed its midweek gain and stands lower by around 0.6% at 77.67.

Japanese yen – The yen fought back against the dollar’s midweek gains, which saw the Japanese currency print at its lowest in two weeks. The Bank of Japan today left its benchmark interest rate unchanged at 0.1% and maintained the size of its asset purchase plan. It did, however, widen the array of collateral to be included for future purchase by lowering the threshold to include bonds holding a lesser credit rating. The yen rallied to as high as ¥81.22 this morning over investors’ fears that if the FOMC announces a sizeable plan next week it would put the Bank of Japan bank under pressure to expand its own quantitative measures. Those fears were fanned when the Bank said it would reconvene after the Fed makes its announcement next week. The euro/yen rate remained unchanged at ¥112.55.

Aussie dollar – The Aussie rose after a report from the Financial News appeared quoting a researcher at the Chinese Association of Social Sciences as saying that the remedial policy measures aimed at harnessing domestic growth have had limited impact. The paper is published via the Peoples Bank of China and aroused optimism that domestic activity is perhaps stronger than expected. The researcher predicted that the pace of growth will exceed 10% this year. The Aussie rebounded from its lowest level against the dollar in two weeks rising from 96.52 U.S. cents to 97.75 cents. A stronger regional recovery bodes well for Australian mineral producers.

British pound – Two critical pieces of data tugged at the pound today. Last week’s GDP report remains the arbiter of the currency’s health. The current fear is that the Bank of England might be a better central bank by holding off implementing a second wave of easing. This is boosting the appeal of the pound and today lifted it back to $1.5890 against the dollar. A Nationwide housing report showed house prices across the nation fell by almost twice as much as was anticipated leaving the average cost of a home just 1.4% higher on than last October. The average home cost slumped to its lowest in eight months according to today’s data. Naturally this is bearish report and doesn’t bode well for consumer confidence. However, a retail survey of companies by the CBI trade body was relatively sanguine. But it didn’t show that retail expectations are predicting a calamity over the winter. A balance of sales expectations did admittedly decline for the first time in five months but the report was marginally firmer than hoped for. The euro lost ground against the pound and slipped to 87.09 pence following today’s raft of data.

Euro – Confidence across the Eurozone amongst executives and consumers rose to a three-year high during October and boosted the view that core European growth remains firm. An EC business climate indicator also rose to an 11-month high. The euro recovered from yesterday’s first visit in a week to below $1.3750 and today rose to $1.3871 boosted by a growing assuredness that the prospect of a double-dip recession remains slim even in the face of fiscal austerity in coming quarters.

Canadian dollar – The weaker greenback and the possible spur to commodities demand out of China persuaded investors to once again plump for the Canadian dollar. It rose to 97.48 U.S. cents and continues to fight back against several days of dollar strength.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Risk Appetite Resumes to Leave the Yen Weaker

Jordan Roy-Byrne, CMT — Thu, 14 Oct 2010 00:12:20 +0000

Tuesday’s revival in the fortunes of the dollar came to an abrupt standstill when the minutes from the FOMC meeting confirmed a willingness to act further to buy bonds in the open market to spur lending. And while the story was hardly new, the minutes also included discussion as to why the central bank felt a need to engineer higher consumer inflation expectations. Investors were quick to discount a further debasement of the value of the dollar and immediately put the currency back on the back foot.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

U.S. Dollar – The dollar has consequently shed 2.25 cents per euro, which rose from $1.3775 to $1.4000 within 24-hours. The dollar index remains sickly at the midweek point and is 0.3% lower in early trading. The dollar had risen on Tuesday when it appeared that risk aversion, caused by what appeared to be a further orchestrated move by China to curb growth, might be the order of the day. The revelation that the Fed might be prepared to bolster inflation expectations through future policy adjustments undermined the currency’s earlier gains and sent its index to a nine-month low.

Euro – It’s the European single currency that continues to pick up the dollar’s slack. On Tuesday ECB member Axel Weber warned that it would be less dangerous to exit from a loose monetary stance than to find out later it had been too lax for too long. His observation that the risks of a Eurozone recession were low reminded investors that the chance of further bond purchases in the Eurozone is diminishing. That view was buttressed after a positive revision to data for industrial production across the Eurozone in July, while fresh August data beat expectations of lower output and built further upon earlier gains in the summer. The month-on-month jump in industrial output of 1% means that annual output stands 7.9% higher than a year ago. The euro currently stands at $1.3969.

British pound – While Axel weber was tentatively suggesting that monetary policy should revert to neutral the same can’t be said of Bank of England policy maker David Miles. He warned of the dangers of a premature removal of monetary stimulus. However, with government departments in Britain scrambling to finalize precisely where the axe must fall over the next couple of years, the outlook for economic growth looks challenging to say the least. The recovery trajectory plateaued over the summer in the face of an austerity plan and today’s employment picture turned bleak. The September benefit claimant count confirmed the deterioration in the prior month sending the overall count to an eight-month high at 1.473 million. The turn in the cycle was further evidenced by a dip in the Nationwide Building Society’s consumer confidence index, which slid to its weakest in 18-months. Home prices are resuming a downturn interrupted by economic recovery a year ago, while uncertainty over the outlook is restraining consumers’ appetite to spend. The pound nevertheless continued to improve against the dollar possibly because further quantitative easing will be larger in scale than in the U.S. coupled with the fact that British inflation remains above target rather than below as is the U.S. case. The pound buys $1.5843 while it slipped to its weakest in five months per euro at 88.09 pence.

Japanese yen –Demand for higher-yielding assets resumed after the FOMC statement and helped remove some of the elevated demand for the safe haven of the Japanese yen. Asian stocks rose after Bank of Japan Governor Shirakawa said he’d research more on how to apply the recently announced ¥5 trillion fund to include the widest range of assets possible in order to expand the economy further. The dollar remains hemmed into a narrow range for now but is higher at ¥81.85 against the yen. The yen slipped against the euro to ¥114.24. Yen demand was also tempered after some bullish economic data. Machine tool orders for August unexpectedly rose and built upon a previous gain, rising 10.1% on the month to stand 24.1% higher compared to one year ago.

Aussie dollar – A downturn in a measure of consumer sentiment in September appears to be nothing more than a blip on the radar. The October reading for Westpac’s consumer confidence rose 3.3% to 117.0 to reinforce the health of economic recovery. The march of the Aussie unit continued spurred by healthy Japanese data, a decline in demand for the safety of the yen and a broad revival in risk appetite sufficient to keep the Aussie dollar close to its highest since exchange rate controls were abandoned in 1983. The unit today buys 98.81 U.S. cents.

Canadian dollar – The Canadian dollar remains buoyant thanks to soaring commodity prices and rising equity prices. At 99.51 U.S. cents this morning the loonie is fast-approaching a clash with parity against the greenback – a date rudely interrupted six-months ago by fears over global recovery. It took exactly 30 days for the Canadian dollar to hit a 2010 low of 93.00 cents having last reached parity on April 21. It’s taken five months to practically reverse that loss.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Biggest Ever Yen Intervention – and What It Means for You!

MoneyandMarkets.com — Sun, 19 Sep 2010 03:18:50 +0000

by Bryan Rich , Money and Markets

Source Link

Last week, I pointed to the challenges facing Switzerland and Japan’s currencies. As for the yen, I said that nothing short of actual intervention would relieve the pressure on its exporters. I also said that I expected it to happen.

And it did.

Japan intervened this week to stop the ever-rising yen, its biggest one-day intervention on record. But many in the foreign exchange market believe the effort will fail — and ultimately a strong yen will win out.

I disagree.

First, I can’t think of one fundamental argument that would support the case for a stronger yen.

Second, Japan has every incentive to keep intervening.

Remember, this is a country attempting to weaken its currency, not save it from a death spiral of weakness.

Given that fact, unilateral currency market intervention by Japan works in their favor in several ways …

It softens the currency burden for its all-important exporters.

And it requires Japan to print more and more yen, ultimately easing monetary policy even further. Indeed, a move needed in Japan’s fight against another round of deflation.

So what do they do with all of the freshly printed yen?

They sell it and buy U.S. dollars. That means they stockpile currency reserves … an area commonly perceived to be a gauge of a country’s financial wealth and stability.

Perhaps even more favorable: It’s a politically-positive move. For a country that’s had six prime ministers in the past five years — nearly seven in the wake of last week’s elections — stepping up to the plate to weaken the yen is a political win.

Why Japan’s Intervention Will Work

Because of the incentives I discussed above, I expect Japan’s efforts to persist and pay off. But when you add in four more pieces of supportive evidence, the case is even stronger that we may have seen a long-term top in the yen.

Supportive Evidence A: The yen is way overvalued

Below is the OECD’s measure of the most overvalued currencies based on Purchasing Price Parity (PPP). As you can see the yen is among the most overvalued currencies in the world, more than 25 percent too rich against the dollar.

Supportive Evidence B: The long yen trade is overcrowded

The chart below shows the massive build up of long positions in the yen, a dynamic that typically doesn’t end well for those on the side of an extremely overcrowded position once the selling begins.

Source: Bloomberg

Supportive Evidence C: History of successful intervention

The only other time the yen was this strong against the dollar was in 1995. The yen traded as high as 79.75 against the dollar before the Bank of Japan stepped in, sending it 46 percent lower over the next three years … and in the process marking the all-time high for the yen.

Supportive Evidence D: Debt, debt and more debt

Japan’s debt load is twice the size of its economy. The Bank of International Settlements projects that by 2040 it will reach 400 percent of GDP.

As I detailed in my May 15 Money and Markets column, Japan: The Sleeping Sovereign Debt Giant, Japan faces big structural shifts that will likely make it difficult to internally finance its debt much longer. It will soon have to start competing for international capital to fund its debt. And given its non-competitive interest rates, that raises the specter of default.

A weaker yen could force other nations to follow.

In fact, Standard and Poor’s said this week the risk of a sovereign debt default in Japan is “slowly increasing.” This fundamental problem in Japan will ultimately result in a much weaker yen.

What Does this Mean For the Rest of the World?

Japan’s intervention could be just the first step in a long, sharp devaluation of the yen. And in a world where unsustainable debt and deficits are prevalent and economies are fragile, this could ignite a wave of currency devaluations in other countries.

Already, Japan’s move has started speculation that countries like South Korea, Singapore and Thailand could follow suit.

Bottom line: This intervention could mark the beginning of increased global currency risk, another round of capital flight from high-risk currencies and another, more sustained, period of global risk-aversion.

Regards,

Bryan

P.S. For more news on what’s going on in the currency markets, be sure to check out my blog, Currencies Corner. You can follow me on Twitter, too, and get notified the moment I post a new message.

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China Dumps the Dollar as Yields Sink

Money Morning — Thu, 19 Aug 2010 21:33:37 +0000

BY DON MILLER, Associate Editor, Money Morning

Source: http://moneymorning.com/2010/08/19/china-yuan-2/

China cut its holdings of Treasury notes and bonds by the most ever in June, instead favoring the debt of Europe, Japan and Korea. The move has fueled speculation that plummeting U.S. yields are driving away the Asian giant, which has ambitions for its currency, the yuan, to replace the dollar as the world’s main reserve currency.

China’s holdings of long-term Treasuries fell by $21.2 billion in June to $839.7 billion, a U.S. government report showed recently. Total Chinese investment in U.S. debt declined 2.8% to $843.7 billion, the smallest in a year, following a 3.6% slide in May.

The shift comes as President Barack Obama increases U.S. debt to record levels, making it harder to finance sales to sustain the U.S. economic expansion.

The People’s Bank of China on June 19 ended its currency’s two-year peg to the dollar, saying it would allow greater “flexibility” in the exchange rate. The yuan has since appreciated by 0.5%.

Prior to letting it float, the central bank had been limiting the yuan’s appreciation by selling the currency and buying dollars, a policy that led to the accumulation of the world’s largest foreign-exchange reserves and the build-up of its Treasury holdings.

But the Treasury sales and the rapidly appreciating yuan may be signaling China has bigger things in mind for its currency.

The People’s Bank of China said on Monday that it would allow foreign central banks and overseas lenders to increase investment in its domestic interbank bond market.

Analysts interpreted the move as a way of promoting the renminbi, while reducing China’s exposure to the U.S. dollar.

“This is an integral part of pushing the internationalization of the renminbi,” Wang Tao, chief China economist at UBS AG (NYSE: UBS) told the Financial Times. “In order to encourage foreign institutions to get involved in renminbi settlement, you need to give them somewhere to invest.”

Money Map Press Chief Investment Strategist Keith Fitz-Gerald believes the Chinese have a long-term plan to replace the dollar as the international reserve currency.

“The Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle,” Fitz-Gerald wrote in a column last year for Money Morning. “At the very least, China’s currency is likely to be granted a global status on par with the current major currency trading pairs for purposes of settling international transactions, whether the West wants that to happen or not.”

China also is turning more bullish on European and Asian economies.

China said earlier this week it had been buying “quite a lot” of European bonds, and Japan’s Ministry of Finance said on Aug. 9 that China bought $20.3 billion more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.

Additionally, China has more than doubled South Korean debt holdings this year.

China [will] allocate some reserves to “financial assets in major Asian economies,” Ding Zhijie, a former adviser to China’s sovereign wealth fund, told Bloomberg in an Aug. 16 interview.

“The significance of both the dollar and euro has declined because of the global financial crisis and the European debt crisis, while the role of some emerging-market currencies rose,” said Ding, dean of finance at Beijing’s University of International Business and Economics.

While China may have long-term ambitions for its currency, some analysts think the Treasury sales are a simple reaction to shorter term developments – cashing in on an investment that has appreciated significantly since the U.S. began buying its own debt to keep interest rates low.

“This may have been opportunistic,” James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley (NYSE: MS), one of 18 primary dealers that trade with the Federal Reserve, told Bloomberg News. “Look at the level of yields. If you’ve held a lot of Treasuries, you’ve done well.”

Also, with rates at record lows, buying more treasuries now could be a losing proposition for China. Two-year rates will climb to 0.85% by year-end, according to a Bloomberg survey of financial companies. The two-year note yielded a record low 0.48% earlier this week.

Investors who purchased the securities today would lose 0.4% if that projection proves correct.

“Buying now is a big risk,” Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank told Bloomberg. “I don’t recommend it.”

News & Related Story Links:

Bloomberg:
China Reduces Long-Term Treasuries by Record Amount
Financial Times:
Beijing looks to broaden renminbi use
Money Morning:
China Seeks to Dethrone the Dollar, Transforming the Yuan into the Dominant Global Currency
Bloomberg:
China Doubles Korea Bond Holdings as U.S. Debt Sold

Overview of the Markets

Puru Saxena — Wed, 17 Mar 2010 07:33:34 +0000

OVERVIEW OF THE MARKETS

The ongoing bull-market in global stocks is gathering steam and over the past few days, the momentum has shifted in favour of the West. Yesterday, the S&P500 Index closed at a 17-month high and we expect further gains over the following weeks. Over in Asia, our preferred markets are performing well, with India leading the way. Furthermore, it seems to us as though China and Vietnam are also about to commence another upleg within their primary uptrends. Given the fact that the Asian economies are in a much better shape than the West, we continue to believe that stocks in India, China and Vietnam will produce solid growth over the course of this business cycle. Therefore, we are holding on to our positions and believe that near-term weakness represents a buying opportunity.

As far as the technical picture goes, it is notable that the market’s breadth is extremely strong and the Advance/Decline line on the NYSE has broken out to a new high. Furthermore, the number of new highs is significantly greater than the number of new lows, the bank index has started outperforming the broad market, volatility has subsided and the yield curve is very steep. All these are positive signs and suggest that we are still in the early stages of the ongoing bull-market. Remember, interest-rates are very low in most nations and the monetary backdrop is supportive for asset prices. As long as the interest-rate environment is favourable, we will maintain our growth seeking investment positions.

Over in the commodities complex, the price of crude oil is trading above US$82 per barrel. This is in line with our expectation and as long as the economic recovery is intact, we should see more upside. Regardless of what you might hear in the mainstream media, hard data confirms that the world will struggle to produce more than 89 million barrels per day of crude oil and with demand rising in the developing world, the stage is set for a serious oil crunch. Our view remains that the price of crude will rise significantly and we have allocated roughly 35% of our clients’ capital to superb energy companies. Apart from upstream oil companies, we have stakes in world-class solar, wind and power companies. Moreover, we have recently acquired a stake in a railway company which should be a prime beneficiary in an era where trucks will prove to be big losers.

In the metals arena, base metals are holding steady and this is despite the big build up in inventories. In our view, this rally is mainly due to speculation via ‘long only’ commodity trackers and at some point, we will get a nasty correction. Accordingly, we have recently liquidated our positions in the base metals miners and have allocated capital elsewhere. With so many opportunities around, we do not see the point in making a speculative bet when the supply/demand fundamentals do not support base metals.

As far as precious metals are concerned, gold and silver are trying to build a base. It is worth noting that precious metals are in the seasonally strong time of the year and a spring rally is still possible. As George Soros stated in Davos, “with near-zero interest-rates, gold is the ultimate asset bubble”. We agree with his assessment and believe that monetary inflation together with the massive debt overhang in the West will propel gold and silver to new highs. Accordingly, we are holding on to our positions in our preferred gold and silver mining stocks.

In the world of money, the US Dollar Index is trading in a tight range and it is struggling to break above the 81 level. Furthermore, the Euro and the British Pound are now extremely oversold, so a sharp rally cannot be ruled out. Amongst the paper currencies of the developed world, we prefer the Canadian, Singaporean and Australian Dollars. And in the developing nations, we like the Indian Rupee and the Chinese Yuan.

The above ‘Weekly Update’ was sent out to subscribers of Money Matters on Friday, 12 March 2010.

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

WANT A HARD-ASSET-BACKED CURRENCY? HERE IT IS

DailyWealth.com — Thu, 04 Mar 2010 15:05:45 +0000

WANT A HARD-ASSET-BACKED CURRENCY? HERE IT IS

Yesterday, we studied the horrible price action in the British pound… one of the worst-performing currencies in the world. Today, we study a currency enjoying a far different fate: the Canadian dollar.

Traders call the Canadian dollar a “commodity currency.” Reason is, a large portion of Canada’s economy is devoted to exporting commodities. Canada is the sixth-largest oil producer in the world, and the No. 1 foreign supplier of oil to the U.S. Canada is also a major producer of gold, copper, wheat, aluminum, and timber.

This “resource factor,” plus the soundness of Canadian banks, has sent the Canadian dollar soaring… while the British pound and the euro are tanking. The value of the “Candol” has gained more than 20% in the past 12 months. This is an enormous move for a major currency.

Many people would like to see a world with currencies backed by “real assets” like gold and silver… rather than ones backed by “full faith and credit.” That might happen someday. But for now, the Canadian dollar is about as close to a “backed by hard assets” currency as you can get. This underpinning of value supports the uptrend you see below.

Why you Should be Worried about China

MoneyandMarkets.com — Sun, 28 Feb 2010 05:24:33 +0000

By Bryan Rich

Originally Published Here

Toward the end of last year, many market followers were speculating on a Fed hike as early as the first half of 2010. Global stock markets had experienced explosive bounces, commodity prices had surged from the crisis lows, and risk spreads and market volatility had all subsided.

In short, markets were pricing in a very optimistic outlook for global economic recovery — a return to normalcy.

But just two short months into 2010, the exuberance about recovery has deflated. As I’ve explained in many of my Money and Markets columns, the world is still saddled with problems and vulnerable to lurking threats …

In the U.S., unemployment is sustaining high levels, the housing market continues to weigh on consumer balance sheets and confidence has again taken a dive.

There is more uncertainty, which is likely to impact the prospects for global growth. People are waking up to what’s likely a long road to recovery, given the damage from, what Alan Greenspan calls, “the worst financial crisis ever.”

And for now, the global financial markets are taking cues from three key themes …

Theme #1:
Sovereign Debt Problems

Fiscal problems in Greece are mushrooming into a global, sovereign debt crisis.

The saga surrounding Greece’s finances has created tremors in the European monetary union. And the speculative pressures on countries surrounding their fiscal challenges will likely find bigger targets in the coming months, namely the UK, Japan and the U.S.

The impact of this theme on global growth prospects: Negative.

Theme #2:
China Tightening Credit

The bubble alarm for Chinese authorities was the massive surge of new loans in the first half of January. New bank loans last month approached levels of last year, when liquidity pumping was in emergency mode. Now China is tightening up bank reserve ratios and curtailing easy money programs, fearing a bubble burst of its own.

The impact of this theme on global growth prospects: Negative.

Theme #3:
Fed’s Exit Strategy

The Fed’s move in the discount rate last week was the first active step it has taken toward reversing its emergency policies. Up to that point, the Fed had only guided (or allowed) the programs in place to either expire or mature — indeed, passive steps. And the timing was a surprise …

The Fed’s bumping up the discount rate was a growth positive sign.

The move came only eight days after the text of a Bernanke speech that said the discount rate would start moving higher “before long.”

To act so soon after making that comment will create loads of excitement and speculation whenever the Fed chooses to drop the magic words — “extended period” — from its guidance on keeping the benchmark Fed Funds rate at current levels.

The impact of this theme on global growth prospects: Positive.

Overall …

A Sentiment Shift
Has Taken Place

These three themes are keeping the dollar on solid footing and keeping pressure on European currencies and those currencies that are dependent upon sustained growth and demand from China (i.e. the Australian dollar, the New Zealand dollar, Brazilian real).

With all of that said, there is clearly a sentiment shift that has taken place when it comes to the recovery prospects for global economies.

Now the growing consensus is shifting away from the theories of a V-shaped economic recovery and toward the alternative scenarios … most visibly, a sovereign debt crisis.

But while a sovereign debt crisis is already underway and will likely continue to spread, I don’t think it’s the biggest threat to the global economy.

Rather, the biggest threat will likely come from growing trade tensions between China and the rest of the world.

That’s because …

China’s Currency Is
Enemy #1 to Global Recovery

Over the last 14 years, China’s economy has grown a whopping eight-fold, to $4.9 trillion, and has quickly ascended to become the world’s third-largest economy.

During the same period, the U.S. economy has only doubled in size.

As far as currencies are concerned, the dramatic outperformance of the Chinese economy relative to the U.S. economy would normally be reflected in a much stronger Chinese currency.

But, of course, China controls the value of its currency. They allowed it to strengthen only 18 percent during those 14 years — a mere drop in the bucket.

And that’s where tensions are threatening to boil over. It’s not just with its key export market, the United States, but equally as tumultuous with its Asian neighbors.

Just how out of line is China’s currency?

Let’s take a look …

In the table below, you can see on a purchasing-power parity basis, the Yuan (China’s currency) is 40 percent to 50 percent too cheap relative to the U.S. dollar.

Source: IMF

You can also see how China’s export-centric neighbors are feeling the pain of China’s artificially cheap currency, too. For example, based strictly on currency values, it would cost 37 percent more to import identical goods from South Korea than it would from China.

Threat of Protectionism

In my September 19 column, Protectionism an Enemy of Recovery, I wrote extensively about the threats that protectionism represents to the global economy.

And it’s widely believed that the world economy cannot find a path of sustainable growth until those key countries with lopsided trade become more balanced.

Consequently, the G-20 has made Chinese currency policy its number one agenda, under the code word “rebalancing.”

China’s unwillingness to let the Yuan strengthen could hinder global recovery.

As it becomes increasingly evident that China will not play ball on allowing its currency to appreciate to a fair value, expect the geopolitical tensions to rise and expect to see two forms of protectionism follow: Trade tariffs and currency devaluations against major currencies, to which the value of the Yuan is primarily linked.

And while a global economic recovery is already beginning to look like a longer road than many have expected, an outbreak of protectionism would likely derail recovery all together.

That’s why I continue to think that safety and capital preservation will re-emerge as the primary driver of capital flows around the world towards the U.S. dollar.

Regards,

Bryan