Asian Growth Spurs Currency Rally

Another up and down day in the currencies on Monday. But, as the day ended, the currencies began to move higher once again versus the dollar. Overnight, Asian stocks rallied on speculation that the global economic recovery is gaining momentum… I’ve told you before about Asia and how strong the economic recovery is for the region… Well, that is except for Japan!

The euro (EUR) traded above 1.37 early… Mid-day it fell to 1.3660, then back above 1.37 to end the day… The trading looked quite lively, with the euro coming out on top versus the dollar, but… According to BNP Paribas, the euro is about to sink to the dollar. OK… I have to say right here, right now, that there are readers out there who accuse me of not printing news that doesn’t agree with me… So there! BNP Paribas thinks the euro is going to fall versus the dollar…

Apparently, they weren’t looking at the news yesterday, that Eurozone inflation was 2.4%, and the European Central Bank (ECB) isn’t going to sit around and wait to see if inflation runs away before they do something about it! OK… That’s my opinion, and like I always say, I could be as wrong as two left shoes! But, the idea here (mine) is that rate differentials could very well return to be the top dog of currency valuations, which would mean dog days ahead for dollars and yen (JPY)!

So, as I look at the currency screens this morning, all the currencies are gaining versus the dollar, including gold and silver, which have really been in the dumps recently. There are a lot of theories as to why gold and silver turned on a dime a few weeks ago. But to me, a correction was due, and when the price manipulators saw blood, they attacked…. I don’t see it as anything else than that… It’s not, in my opinion of course, a trend reversal.

I get emails all the time, telling me that gold and silver, and the other commodities while we’re at it, are going to drop like a rock as soon as the CABAL begins to raise rates. I say, Hmmm… They must be youngsters, for obviously they don’t remember 30 years ago, when gold soared to $850… What were interest rates then? Hmmm… I remember, as a young T-Bill and commercial paper trader, being able to put on trades for customers with 18% yields!

In yesterday’s currency round-up, I mentioned that the price of oil was moving higher again, due to the unrest in the Middle East, namely Egypt. Well, don’t look now, but even with oil backing off about $1 overnight, it is still up $5 from just a week ago… So…if the unrest in Egypt is pushing the price of oil higher, I don’t think you can just write this off as a short-term rise. Two weeks ago it was Tunisia, now it’s Egypt… That whole region is a powder keg, and one of the reasons I always say that gold is the uncertainty hedge… And things sure are uncertain now, eh?

I see where US spending kicked some tail yesterday, rising 0.7% (0.5% was forecast)… I talked briefly about this yesterday, folks… Once again, here we are at a place in the proceedings where we as Americans spend more than we make… And that’s really evident with December’s Personal Spending data. Spending was +0.7%. Income was +0.4%… You know… We should have learned a lesson about this and we haven’t… Lessons learned are like bridges burned, you’re only supposed to need to cross them but once!

Today, we’ll see the color of the latest ISM Manufacturing Index, which continues to recover, but at a snail’s pace… Personally, I see the dollar as the king pin here with manufacturing… Weak dollar, manufacturing gets a pulse… Strong dollar, manufacturing shuts down… You see, that’s the predicament that we as Americans have gotten ourselves into, with the wages… You could reverse the currencies, and have the dollar weaker than the Chinese renminbi (CNY), and it still wouldn’t make that much of a difference, because of the cost to produce goods…wages… So, what can be done? Weaken the dollar more…

Speaking of China… Don’t think that China announcing that it would support the euro has affected the psyche of the ECB? Check this out… For the first time since October, the European Central Bank refrained from purchasing government bonds, indicating that market confidence is growing about a resolution to the Eurozone debt crisis. The region’s debt markets have been relatively calm after a number of bond auctions were well-received by investors. I sure hope the ECB and the powers to be don’t get complacent about this situation… Now is no time to sit back and think that China will cure all that ails you… I don’t think the ECB would think of doing that, but it never hurts to give them a pinch.

The Reserve Bank of Australia (RBA) left rates unchanged last night, as well they should, given the recent floods and their affects on the Aussie economy. I was surprised though to see that the RBA said that there would be “minimal impact from the floods on their growth outlook and inflation outlook.” And that statement really got the Aussie dollar (AUD) going on a nice rally, climbing back to parity and not stopping there! The rally was so strong that it completely shrugged off the report that showed business confidence falling due to the floods.

Yesterday, I saw a news story flash across the screen that said the Brazilian government was going to buy dollars again in the markets to weaken the real (BRL)… Well, again, demand for the real is proving just too darn strong for intervention! The yield differential that real enjoys versus all other currencies, continues to be the light that draws the yield-searching bugs.

A currency that I just don’t like the fundamentals of – the UK pound sterling (GBP), or pound, or Cable, whatever you prefer to call it – really rallied overnight on calls from a think tank that UK interest rates need to rise by 75 basis points this year! WOW! Of course that’s not the Bank of England (BOE) making that call, but still, I pointed out that inflation was rising in the UK a few weeks ago, and that hasn’t changed… And again, for the past three years, what happens in the UK usually is about six months ahead of when it happens here in the US, which doesn’t bode well for the CABAL and their claim that inflation doesn’t exist…

Of course that surge in crude oil’s price doesn’t hurt currencies like the pound, Norwegian krone (NOK), Brazilian real, Mexican pesos (MXN), Canadian dollars (CAD)…

And speaking of Canada… First off, I don’t understand why it takes them so long to produce this data… But… Canadian November GDP was a very nice 0.4%, doubling the October growth, which was 0.2%. This should put fourth quarter GDP (which we’ll probably see around June! HA!) at about 2.3%… Not bad for a country that hasn’t spent one stimulus dime, one quantitative easing nickel, one loonie on bailouts… Their central bank hasn’t ballooned its balance sheet, and not one Canadian bank has had its doors closed… Hmmm… Sure seems to be a fiscally sound country, eh?

And then there was this… From Reuters this morning:

The world faces a growing threat of violent protest as economic imbalances beset the global economy, bringing with them higher prices and unemployment, said Dominique Strauss-Kahn, head of the International Monetary Fund. “As tensions between countries increase, we could see rising protectionism – of trade and of finance. And as tensions within countries increase, we could see rising social and political instability within nations – even war,” he said.

Hmm… Thanks, Dominique, for those uplifting thoughts today… NOT!

To recap… The currencies bounced around yesterday, but finally got some sustained wind in their sails in the afternoon, and overnight the dollar is getting sold versus all currencies including gold and silver! The RBA left rates unchanged, but was somewhat upbeat in their comments which sent the Aussie dollar on a strong rally… And the US is back to spending more than we make… Not a good thing.

Chuck Butler
for The Daily Reckoning