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One More Country in China’s Pocket

Chuck Butler (June 30, 2009)

Tuesday, June 30, 2009

Brazil Agrees to Cut Out the Buck

Also In Today’s Letter…

By Chuck Butler Well, let the data flow begin! And let Big Ben Bernanke’s “green shoots” wilt under the bright summer sun.

Now, I don’t want to see the U.S. swimming in economic muck, but come on! Big Ben has been banging the drum for these so-called “green shoots” for months. All the while, these green shoots have looked more like weeds to me.

I just think for him to say those things when I believe he knew better was wrong… Very Wrong!

I came in this morning, and turned on the currency screens to see that the dollar has taken a step back for the fourth consecutive day vs. the euro. The single unit was up to 1.41 this morning (at least before London guys started selling off their assets later today).

Yield demand is what has driven the dollar lower in the past few days. While the euro doesn’t exactly have a “yield differential” to the dollar right now, you still need to remember that the euro is the “offset currency” to the dollar. Just by nature of its relation to other currencies, the euro benefits whenever traders sell the dollar.

A month ago, I was telling you about the currency gains vs. the dollar since March 1st. Well, an updated look at the three-month gains tells us that the move against the dollar has continued. Albeit with several steps backward along the way!

Shoot Rudy! Even the beaten and left for dead Mexican peso has rebounded in recent days as the “other” high yielders drag the peso along for the ride.

Now, four months of a sinking dollar doesn’t exactly qualify this move as a “trend.” A new trend is normally associated with long sweeping moves. However, to me, this does look as though it could become a “trend,” as it has all the qualities of a long sweeping move, just concentrated in a four-month span.

Keep in mind that no trend is a one-way street. There’s volatility within the trend. And we’ve certainly experienced that! Personally, even if this does turn into a long sweeping downward move for the dollar, I would just say that it’s a return to fundamentals, and not a new trend.

I would call this just a return to the underlying weak dollar trend that began in 2002 and saw a pause in 2005, and again last summer.

For more on trends, be sure to check out my colleague, Sean Hyman’s article below…

It’s Official: Brazil and China Cut the Dollar Out of Their Trading

Remember when I made such a BIG DEAL out about China making swap-line agreements?

In case you missed it, China has been making several swap-line agreements with six different nations around the world since December. A swap-line means that these countries can now trade in their own domestic currencies, without switching to dollars first. In other words, countries are taking steps to ensure they don’t need dollars as much in international trading.

At first, China started making swap-line agreements with nearby countries including Belarus and Indonesia. Seemed innocent enough.

Then China made a swap-line agreement with Argentina in March…the first country in South America to cut the dollar out of their trading. At the time, I told you then that China was trying to gain a wider acceptance for their currency, the renminbi.

I also told you once China had locked up Southeast Asia with similar agreements, Brazil could be next in line. And, the rumors began circulating…

Now I can report that China and Brazil have agreed in principle to remove dollars from trade settlement. They’re planning to replace them with renminbi and real’s respectively! China has already become Brazil’s number one trading partner, and knocked the U.S. down a notch. So if that’s so, it’s not like we’re talking small sums of money folks.

No, this is the BIG KAHUNA for China, and a not so big Kahuna for the U.S. and the dollar.

China claims to be on the dollar’s side, and “sees no alternative currency” as the Bank of China Governor Zhou Xiaochuan implied over the weekend. But in reality, the Chinese are working to get their own currency in the mix.

Looks like it’s all a “plan” to me, folks… Before we know what hit us, renminbi will be everywhere!

For now though, the Chinese renminbi (aka the yuan) is a still a manipulated currency. It’s controlled by Chinese officials. And I don’t see this changing anytime soon.

So you should NOT sell everything you own and go out and buy truckloads of renminbi. I think you would find yourself to be a bit disappointed. The renminbi simply won’t move fast enough to make it worth your while. That is, unless you have time on your side…

On the other hand, the Chinese throwing their support behind the Brazilian real is very interesting. Something to keep in mind.

Commodity Currencies Catch a Break Especially…

This morning, Norway got the data flow going early with Norwegian retail sales rising 1.9%! The experts had forecast a -.2% decline. This rise in May brings the year-on-year figure to a negative -1%, which still sounds bad. But much better than the forecasted -3.2%!

Norway seems to be just sailing along, out to sea, without any wind in its sails, not joining the other commodity currencies like Aussie, kiwi, and South Africa and Brazil. I don’t think this will last too much longer.

You see, Norway had a governor put in its currency when its neighbor, Sweden experienced bad times due to the Latvian banking crisis. So, as more and more miles of road get put between the thoughts of Latvia and Sweden, the better it will be for Norway…

That and oil prices are back in rally mode!

Canada is another currency that is not gaining along with the other commodity currencies, even with oil moving higher again. Here’s the difference: Those other commodity currencies all have YIELD! While Norway and Canada do NOT! However, having said that, I just don’t see these two energy driven currencies wallowing around in the mud too much longer.

Playing catch-up with Aussie and the rest of the bunch will be difficult though, and the “other” commodity currencies have such a big thead start!

Telling it Like It Is (Without the Rose-Colored Glasses)

Okay, time for the data set-up for today…

The S&P/ CaseShiller Home Price Index for April already printed this morning. It was expected to decline -18.6%. (In reality, it printed at -18.1%.) Those that wear rose colored glasses will say, “Hey, Chuck, that’s down from previous declines.” To which I respond, “Yes it is, but not by much.”

And if you chart out the monthly prints you’ll see that it hit the low of -19.01% in January. February’s print was -18.67%, and March’s print was -18.7%, you’ll have to agree with me that the move to “down from previous declines” has been quite slow, eh?

At this pace it would take until 2011 before we reach 0%. Yikes! So while you’re wearing those rose colored glasses you might, just might, want to dig deeper into the data before you start sounding the “all’s clear horn!”

We’ll also see Consumer Confidence, which is expected to inch upward to an index number of 55.3 VS 54.9 in May because of the stock market rally. While this data is more like what I believe it should be, it’s still higher than I would think. But then, so are stocks!

That’s it for today… Whew! What a spanking by the Giants last night! OUCH! It’s bad enough to get shutout on two hits, but when the other team hangs 10 on you. Like I said, OUCH! Now that’s going to leave a mark! Tomorrow, we turn the page on the calendar to July, which means the All-Star Game is almost here! I’m as excited as a kid at Christmas for this. You’ll have to look for me at the Home-Run Derby, and All-Star Game. I’ve got some primo tickets right at the end of the visitor’s dug-out (third base line), second row! Now, you know why I’m so excited!

Let’s make this Tuesday Terrific, eh?
Chuck Butler

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