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Fundamentals NOT Charts

jhaddock (April 24, 2009)

Issue #67: Thursday, April 23, 2009

What Truly Drives Foreign Currencies

Also In Today’s Letter…

By Chuck Butler Yes, it’s a Tub Thumpin’ Thursday because it’s finally supposed to be warm here today, and the Cards and Mets have a day game at Busch today… (Wink, wink!)

Well, we had a rally in foreign currencies yesterday and this time the rally didn’t reverse in the overnight markets. Wow! It’s been some time since we could say that.

Currency Karma Rewarded Key High-Yielders

Maybe it was the good karma from my little buddy Alex’s base hit last night that drove in two runs. Or, it could be good karma from a starting Cardinals pitcher staying on the mound till the 9th inning. Or maybe, just maybe, fundamentals are finally creeping back into the currency markets.

We’ll have to wait and see. As I always say, a-one day rally does not make a trend. Nor does a bear market rally that lasts nine months.

Fundamentals dictate long-term trends – not charts, and certainly not bear-market rallies. Chart patterns and bear market rallies are built on short covering, deleveraging, safe haven flows, and profit taking (not fundamentals). They can show you where we may be headed in the short-term, but fundamentals are how I like to gauge the long-term trends.

I’ve wanted to get that off my chest for some time now.

I know, I’ve explained this before, but it’s been awhile, and thought it needed to be said once again for a refresher or for the new readers! On that note, did you know that tens of thousands of currency enthusiasts like yourself receive my articles every day?

It something to behold, for your humble writer, especially considering I began this endeavor with hand written notes about the overnight markets that I sent to bond salesmen so they didn’t have to spend their mornings trying to catch up!

EU Out of the Woods Yet? I Don’t Think So.

Okay, back to the task at hand… Well, I see Commerzbank is telling their clients that these rallies in the euro are opportunities to sell their positions. Hmmm…of course they must be talking about “trading positions” clients. Not investment portfolio diversification clients.

The euro, which tried for a week to get back to 1.30, finally climbed above the figure yesterday morning, and remained there as of this morning. The single unit received an additional boost this morning from the European Manufacturing Index rising (and that was on top of the Good ZEW Business Confidence report that printed earlier this week).

www.europeanavenue.com

Does this mean the Eurozone’s recession is easing? Hmmm… I don’t think so. I just think it shows what I’ve been talking about for some time, and that is the fact that in the Eurozone, 80% of their trade is among themselves.

But! You have to like the resiliency, eh?

The Big Dog (euro) was off the porch yesterday chasing the dollar down the street, which means the rest of the smaller dogs got to stretch their legs too! And currencies like Aussie, Swiss, kiwi, rand, and real all enjoyed the exercise.

Central Bank Double-Speak Shows Intervention Is Ahead

But one currency running with the pack isn’t like the others. Can you guess which one it is? The Swiss franc…a low yielder.

All other currencies mentioned above are traditional high yielders. So, what’s with the Swiss franc getting mixed in with the high yielders? Ahhh grasshopper, Credit Suisse posted a return to the black. A profit…And that’s a good thing for Switzerland, as Credit Suisse, and UBS really pulled the franc down in the past quarter.

But don’t look for any sustained gains here, as The Swiss National Bank’s (SNB) vice-chairman, Hildebrand, said that the bank would continue to limit gains in the franc. That’s Central Bank parlance for they will intervene, and sell francs to keep it weak.

Now, I find that statement by Hildebrand very interesting because just last week, the SNB issued a statement that said they didn’t think it was a competition by countries to weaken their currencies. Hmmm…

When a Central Bank makes two different statements within a month talking about how they will extend currency purchases as long as necessary to prevent appreciation of the franc to ward off deflation, then you’ve got to wonder how many other Central Banks will follow?

Just to explain further for those of you new to class: A strong currency goes a long way toward fighting inflation. Well, if inflation isn’t your concern, and you would like to actually see some inflation in your economy (not deflation) then a weak currency would go a long way toward achieving that goal.

I think the U.S. Fed and Treasury would love to follow, but they just can’t right now, with all the safe haven flows into the U.S.

“Gold Will Hit $1,500″

Gold pushed higher yesterday and then again this morning at the London fixing. There’s a great story on the U.K. Telegraph regarding Gold, and how it could rise to US$1,500. But for those of you with no spare time to check it out, here are the highlights…

“In normal times, gold mining companies sell – or “hedge” – a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 Tonnes each year until the start of this decade.

“Low real interest rates have caused the process to reverse, creating a shortfall of about 500 Tonnes. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.”

Okay, back to me. I’ll follow that up with a story I read the other day that the claims that the NYSE-Liffe futures exchange has, it seems, run out of 1 kg bars of gold. Wow! This physical demand for gold is really beginning to get very serious.

I just finished an outline for a gold presentation I’m giving soon. And in the presentation, I talk about these uncertain times, along with the fear running through the world, from the crackpots shooting missiles, to those gearing up nuclear capabilities, to those throwing good money at bad situations.

Gold is the answer to all the problems…

Think China’s Call for a New “World Reserve
Currency” Is Over? Think Again

Think the call for an alternative reserve currency by China is a thing of the past? I think the Chinese are just getting warmed up!

The research folks over at ING said that they believe with China’s Trade Surplus swelling to US$325 Billion this year, thus boosting their currency reserves (read dollars,), it will add pressure on the Chinese to push for an alternative reserve currency, other than the dollar.

A NEW World Reserve Currency Still a Possibility?
www.examiner.com

Recall, that the Chinese earlier this month threw a cat among the pigeons by saying they wanted to create SDR’s (special drawing rights) that would include a number of currencies, and that would be the global currency.

The G-20 met that call with a cold shoulder… But for how long? With that kind of a war chest of dollars, the Chinese could really start

throwing their weight around. Recall that Chinese PM Wen Jiabao said earlier this month that he feared that the dollar was going to weaken given the spending, and thus their need to borrow in the U.S.

That’s it for today… Do you Twitter? I keep getting asked to join people’s twitter conversations. I understand what it is, but don’t understand the need. And, think about it, the base word to Twitter is Twit. That cracks me up! Of course there’s more to that discussion but not here.

Late game for my little buddy Alex last night and on a school night. Good thing I got a 3-hour nap in when I got home! Okay, time to get going if I’m going to sneak out of here and head to downtown. Ooops! Guess I let the cat out of the bag! Oh well, I’m sure you figured that out when I first told you there was a day game today!

I sure hope our Thursday is Tub Thumpin’!
Chuck Butler

P.S. Speaking of gold, my colleagues at The Sovereign Society just uncovered a new stealth strategy to buy before gold tops US$1,000 again. And get this: It’s all because the Treasury Department made a colossal mistake. Get all the details here.