Monday July 6, 2009

Some people have the day off today, so we probably won’t be back in full force until tomorrow. Not that the U.S. has been in full work force for some time, but that’s another story for another day! Today is a new day, and a new week!

Friday’s thinned out markets definitely didn’t help the majority of foreign currencies. The bias to avoid risk was magnified in the thinned out markets. This only made traders want to sell foreign currencies even more.

Certain currencies hit a few key “levels” in Friday’s thinned out markets. This caused even more selling in the overnight markets as Japan and the rest of Asia came on board.

I’m really kind of shocked at the Asian selling. You may recall that last week we had the wild swing Thursday, after reports hit the news that China had obtained approval to attend the G-8 meeting this week in Italy, and discuss replacing the dollar as the world’s reserve currency.

Traders sold the dollar off like funnel cakes at a state fair, after that report hit the news wires. But it was quickly turned around when the Chinese denied they knew anything about the report’s contents.

Currency Traders Are Starting to Believe China’s Bluffing
(But Here’s the Real Truth…)

This weekend, while barbeques, swimming pools, and fireworks had everyone’s attention, the Chinese admitted that they were going to the G-8!

Where’s the selling now? Isn’t this confirmed now? Has something changed?

The answer is yes, something has changed. Currency strategists have come to the conclusion that China won’t get anywhere with their desires to replace the dollar with SDR’s (special drawing rights).

Even with France throwing their two-cents into the discussion, and having their Finance Minister (Lagarde), and Bank of France Governor (Noyer) calling for an increased discussion of currency coordination, the currency strategists just aren’t budging. They believe there’s no way China, even with the backing of Brazil, Russia, and India, will get any traction.

So is this over? No, hardly folks! The French officials said, “We need to give the emerging markets more say in how the world’s economy is run.”

In other words, they need a foot in the door, if you will. And when you have the war chests that Brazil, Russia, India and China have, a foot in the door could be a large enough space to drive a Mack Truck through!

So we begin the week with the currencies weaker than they were last week, and the euro about ready to lose the 1.39 handle. The high yielders are taking it on the chin too, with the exception of Brazil. But we could very well see the real play catch-up.

The data cupboard is relatively empty this week, so, the G-8 meeting on Wednesday will have center stage. Any comments from the “outsiders” (China, etc.) will create pressure points for the dollar this week.

Who’s to Blame for the Yo-Yo Oil Prices

One of the worst performing currencies in the past couple of weeks is the Canadian dollar (or “loonie” in Forex speak). It’s no wonder, with the oil prices dropping and gold stuck in a rut. There’s nothing to give the loonie a boost. And overnight, the price of oil has “gapped” down to $64. That’s putting even more pressure on the loonie.

Let me explain what’s happening with oil prices right now.

I believe investors caused a large part of the run-up in oil prices. Investors around the globe took positions to hedge against inflation.

And in recent days, those inflation fears have been put on hold. But these investors have no patience. So, they’re selling their energy positions. That’s what’s pushed oil down so much in the past week.

My Prediction for This Week’s Aussie Central Bank Meeting

Tonight, the Reserve Bank of Australia (RBA) meets to discuss rates.

I fully expect the RBA to keep rates unchanged at an internal level of 3%. But, I also expect them to muddy the euphoria of unchanged rates, by leaving their easing bias intact.

Put yourself in these central bankers’ shoes for a second. You may want to say we’ve seen the last of the rate cuts, and the next interest rate meeting will be a rate hike. But! You don’t want to open Pandora’s Box of currency rallies.

The RBA would be the only central bank in the world to remove their easing bias, with an eye on higher rates. The floodgate of investors seeking a currency that will be raising interest rates would be thrown open, and we would see an unwanted run-up in the Aussie dollar.

So the RBA will be cautious with their words, and keep their rate hike cards in their back pockets for now. Waiting for the right time to pull them out and throw them on the table!

SDR’s Were Just a Smokescreen…

Did you hear about China and Hong Kong agreeing to settle cross-border trades in renminbi?

I know, you’re scratching your head and saying, but Chuck, isn’t Hong Kong a part of China? I could swear I saw the U.K. hand it over to China years ago! Ahhh grasshopper, you are correct…

But, Hong Kong retains their own currency, the Hong Kong dollar, or “honkers” as currency traders call them. And renminbi has never been allowed outside of the mainland China. But now Hong Kong Banks will be able to borrow or buy renminbi!

I know this all sounds like small potatoes. But, these are China’s baby steps to a greater goal: To gain wider acceptance for their currency. It’s how they will be able to spring the coup someday to replace the dollar as the reserve currency.

I truly believe their call to use SDR’s is just a smokescreen. These currency agreements that China has signed with Argentina, and the Southeast Asias countries, and have on the table with Brazil, is the real thing to watch. I see the SDR’s as a sort of stalking horse for China’s wish for wider acceptance for the renminbi.

That’s it for today… I hope you all had a grand 4th of July holiday! It was pretty low key at the Butler House. My little buddy, Alex was suffering from a case of swimmer’s ear, and the weather did not cooperate. It rained, and rained hard, all weekend. I did get to spend some time with good friends on Friday night before the rain came. The rain didn’t stop me from putting my Weber grill to use all weekend! Time to go.

Tell yourself that today will be a Marvelous Monday!
Chuck Butler