Monday, June 1, 2009

Also In Today’s Letter…

• Massive Currency Rally Continues As Dollar Suffers
• It Will Be Business As Usual in China after Tim Leaves
• What’s Usable Margin Again?

By Chuck Butler Welcome to June…

Tradition says we should kick off the month with a quick rendition of: “June is bustin’ out all over… All over the meadow and the hill!”

“Buds’re bustin’ outta bushes… And the rompin’ river pushes… Ev’ry little wheel that wheels beside the mill! And you thought I was a just an old Rock-n-roller!”

Well, on Friday I left you with the story of a currency rally for the ages… And it didn’t let up there! There was a bias to sell dollars all day Friday. But, the real move happened last night in the Asian markets. The dollar lost a huge chunk of value overnight.

So what’s happening here? In a word…

Fundamentals! The fundamentals are coming home to roost, and the rot on vine is being exposed in the U.S. economy…

Just an example of what I’m talking about…G.M. will file for bankruptcy today. Soon, the company will become the new GM… And not “Government Motors.” (A reader gave me that line!)

But more importantly, Treasury buying has been pushing the dollar’s value higher since last July (at until March of this year).

And now those Treasury purchases are showing HUGE losses for buyers who thought they were “safe!” And, as I kept telling you, once holders grow weary of paltry yields, or the losses, the reversal of those Treasury purchases would be as swift as the move to Treasuries last summer. That’s exactly what’s happening.

So the move in the Big Dog, euro, overnight in Asia and now in the European session has produced yet another move through a line of resistance at 1.42. And we all know that when the Big Dog leaves the porch, all the other smaller dogs get to stretch their legs too. And so it is: Swiss francs are 94-cents, Aussie 81-cents, and so on…

And, as Hannibal Smith used to say… I Love It When A Plan Comes Together! Not that I’m cheering on the losses in Treasuries. But it makes perfect sense to me why they’re faltering.

It Will Be Business as Usual in China After Tim’s Visit

So I see our esteemed, diligent tax payer (NOT!), U.S. Treasury Sec. Geithner, was promising the Chinese that the U.S. “wants to shrink the budget deficit.” I doubt the Chinese believed him. Of course I’m not a Chinese official, so I don’t really know what they are thinking.

But I did watch the Chinese dealings with former U.S. Treasury Sec. Paulson (“Mr. Bailout”). I watched them smile and promise Paulson they would allow greater currency flexibility. Then Paulson boarded his plane, and it was business as usual once again in China.

We saw the same thing for Graham and Schumer who thought their prestigious status as lawmakers would get them some pull with the Chinese… I’m guessing the same thing will happen with Geithner.

It all comes down to the fact that the U.S. needs China, more than the other way around. Sure it would have been sweet for China if the previous boom went on forever and ever. But that’s not the way markets work. Booms are followed by busts.

For all you youngsters out there, who didn’t believe this could really happen, even though you might have spent 5-minutes on it in college. Booms really are followed by busts… The secret to preventing them is to not allow the boom to get out of control. Irrational exuberance, eh Big Al? I’m choking on that, because he’s at the root of this problem!

Three Currencies that Will Profit When China Recovers…

And China? Well as I boldly told you months ago, the Chinese will be the first to come out of this economic malaise. The rest of the world has caught up and now the optimism for China is spreading.

This is perception folks… And you are what you are perceived to be.

And in China’s case, they are perceived to be an economy on the mend, which means their strong growth might return. Well, when China’s growth is strong, they have outrageous demands for commodities, raw materials, and the rest of the lot.

China needing commodities is Australia’s manna from heaven. And to a lesser degree, New Zealand and Canada. But when commodities rise, all the commodity currencies rise too. That’s because they have higher than the average bear interest rates (with the notable exception of Canada).

Suddenly everyone wants that higher yield. It becomes the pet rock of the 70’s, the cabbage patch doll of the 80’s, and the tickle me Elmo of the 90’s, everyone has just got to have it!

Aussie and kiwi currencies are approaching 8-month highs. The difference here is that 8-months ago, these two were on the slippery slope down, and now they are on the escalator going higher, and higher…

Why the Euro Can Rally Straight Through a Recession

And the euro… The Big Dog’s three-month rally (recall I pointed out weeks ago that the turn happened around March 1st) is the steepest rally for a three-month period in the last seven years. The thing though that’s really stuck out for everyone to see is how the move in the past week has been really swift, and the momentum seems to be picking up steam.

I made a bold forecast to the people on the desk the other day… I’m not going to go too depth into it here. But let’s just say the move to 1.42 and change is a move in the right direction!

This rise in the euro comes with the Eurozone economy in a recession. But for all those out there that think this “can’t happen,” there is precedence here. Back in 2002-2003, Germany, the Eurozone’s largest economy, was in a recession, and yet the euro posted large gains in those years of: 17.96% and 19.59% in those respective years.

As long as the euro is the “offset” currency to the dollar, it will retain this ability to gain in value even with the Eurozone’s economy in a recession. The other title, besides “offset currency to the dollar” that the euro has picked up, is the one people are using currently, calling the euro the “anti-dollar.”

Some “Funny Business” in Canada Could Lead to Quantitative Easing

We have several Central Bank meetings this week… The Reserve Bank of Australia (RBA), Bank of England (BOE), European Central Bank (ECB), and Bank of Canada (BOC) all meet this week to discuss rates.

I read a funny note the other day from the Finance Minister in Canada. When asked about the recent rise in the Canadian dollar / loonie, the Finance Minister, Mr. Flaherty said…

“We’re always concerned when there are fluctuations in the value of the Canadian dollar, and it has been relatively rapid in the past few weeks, and I know that the governor of the Bank of Canada is monitoring that as it’s his job.”

What’s so funny about that? Well I think it’s funny when people in power give others ultimatums only not in so many words. In this case, Flaherty is telling Mark Carney (the Gov. of the BOC) that he needs to do something to halt the loonie’s rise. His choice would be to cut rates, but interest rates already near zero, I think he’s giving Carney the “high sign” to implement Quantitative Easing. As you can see what that’s done for the U.S. dollar!

The RBA is the only Central Bank that has been reluctant to cut rates. It will be interesting to see if the RBA keeps their interest rate arrows in their quiver. I tend to believe they will hold on to them. But that’s just a hunch…

Has the Old Give & Take with the Euro/Dollar Started Again?

I’m seeing what is probably profit taking as the NY trading desks come in and see the 1.42 handle in euros. The euro has backed off its level of 1.4235 from when I came in and turned on the screens.

A couple of years ago, we had this game of give and take going on between the U.S. players and Asian players. Overnight, Asia would push the currencies higher and sell dollars, only to see that wiped out by the U.S. players. I sure hope we don’t see a return bout of that game of give and take. It sure gave me a rash watching that each day!

Before I head to the Big Finish… Gold and silver have really jumped on the risk assets rally’s bandwagon. Gold is US$985 this morning. A mere hop, skip and a jump from US$1,000. You know, maybe we’ll get to talking about how buying gold on the dips below US$1,000, like I used to do with the dips below US$900!

That’s it for today… An absolutely fabulous day yesterday here in St. Louis, the sky was so blue, and the sun was warm! And I had the pleasure of cooking for a family birthday party for my darling daughter’s husband, Jerry… (He’ll get a big kick out of being mentioned!)

My beloved Cardinals had a not-so-good trip to one of my fave cities, San Francisco this past weekend. The Stanley Cup Finals are going on, and the Basketball Finals will start this week. So it’s not like there’s nothing on TV to watch! HA! Come on… It’s gotta be better than watching a cable financial news station that I refuse to name! Okay, running late, so I bid you farewell for today…

I hope your Monday is absolutely Marvelous!
Chuck Butler

P.S. Apart from Australia, New Zealand and Canada, there’s still one more country that promises to rally on China’s recovery. My colleague Ashish introduced this currency in the June issue of Currency Capitalist. Ashish also gave you the easiest way to buy this currency for the long run, and earn some healthy interest as this currency basks in the sun reflected off China. Members, please be sure to read your recent issue (just released two days ago if case you missed it!). Not a member yet? Click here to see what we have to offer.