Chuck Butler

Front and center this morning, we are smack dab in the middle of a currency rally versus the dollar. It has all the makings of such, as the Japanese yen (JPY) is getting sold, along with the green/peachback. The improved economic data this week finally caught up with the dollar, as risk assets are back on the table.

The euro (EUR) is back above 1.43, and the Aussie dollar (AUD) is back above 84-cents. These two have become the two indicators of a currency rally… With euros being the offset currency to the dollar, and Aussie dollars being the proxy for global growth. The Aussie dollar is not part of the dollar index, so… If you just watch the dollar index, you won’t catch the global growth proxy in that figure. In fact, I’ve tried to tell people for years that the dollar index is not the “end all” to currency watching.

Let’s go through the dollar index, while we’re on the subject… Today’s lesson, if you will! The dollar index is made up of six currencies, euros, sterling (GBP), yen, francs (CHF), Swedish krona (SEK), and Canadian dollars (CAD)… It is heavily weighted toward euros, which took over from five currencies that used to be a part of this index… You know, the “legacy” currencies from the Eurozone that became euros.

So… If you just watch the dollar index, you’ll miss the moves of Aussie, kiwi (NZD), Brazil (BRL), South Africa (ZAR), and Norway (NOK)… Five of the six resource countries with Canadian dollars being the sixth.

OK… Class is over… Time to get back to work on what’s going on to end this last full week of August 2009.

Speaking of Aussie dollars, as we were above, it appears to me as though the Aussie dollar will put in a monthly gain for August, which, by my calculations would be the seventh month of gains for Aussie dollars. Even in the go-go days of the Aussie dollar, when it was amassing a 75% gain versus the US dollar (circa 2002-July 2008) it didn’t put together seven consecutive months of gains! It’s been 20 years since the Aussie dollar put together a string of monthly gains like that!

That reminds me of my trip to St. Petersburg last past March to speak at the Investment University Conference. I told people then that the dollar’s run since the previous July looked as though it was ending, as investors were growing tired of taking a beating with the “safe haven” trades that they went into the previous fall. Boy… That sure was “bang on”, eh?

Oh… I also said it in the Pfennig, but you have to remember, I was officially “on vacation” when I went to St. Petersburg, and therefore didn’t come back to the office to write the Pfennig for 10 more days!

A “new” reader sent me a note the other day, and said that the stock market was looking quite overbought, and asked me if a sell off in stocks would promote the “flight to safety” (Treasuries and dollar buying) once again. I told him that I had talked about this a couple of weeks ago… But, realized there are handfuls of new readers all the time… So… Just in case you missed class that day… I asked the question about whether or not everyone else was seeing this stock move and not believing it had legs. I then said that should stocks sell off and go into the dumpster like they did after the Lehman Brothers collapse, that a return to Treasuries just might be in the cards, and would adversely affect the gains the currencies have booked since March.

We’ve seen glimpses of such the past couple of weeks, when “risk assets” are shunned… But, each of those times, the selling didn’t last long.

Now that we’re beginning to see some countries like Australia and Norway, begin to talk about raising interest rates early next year, and some countries like Germany, France, and Japan, all pulling themselves out of recession, there’s a new feeling going around, that countries around the world, will be ahead of the US with regards to economic growth, and a return to higher yields. So… As a currency and precious metals holder, we all have to hope that this would be enough to offset a US stock sell off.

We would then be back to fundamentals… And oh what a happy day it would be! Oh happy day… Oh happy day! Something we could all hang our hats on, and each day say… Well, fundamentally speaking, this should do this, and that should do that! Not all this crisis, investing, hodge podge bundling of risk assets that have little or no correlation to each other, and different pricing mechanisms, and looking over our shoulders for the next shoe to drop.

There was a story in The Financial Times this morning, and it reminded me of something that Chris said last week, when I was in San Francisco. Chris had talked about how the Eurozone economy was pulling itself up from the ashes, and how he thought it probably reflected on how the European Central Bank (ECB) had dealt with their recession, which was quite a bit different than here in the US… The story in The Financial Times said about the same thing this morning!

Let’s see what the FT had to say… “As the European Central Bank prepares for its meeting next week, the 16-country Eurozone appears to be recovering, deflationary risks have subsided and an effort to bolster bank lending is in place. The economy appears to be vindicating the ECB’s strategy.”

Yesterday, the first revision to second quarter GDP here in the US printed and while I thought it would show a revision to -1.5% from -1%, it did not. It printed as unchanged at -1%. I don’t see the economy that strong, do you? I mean -1% is still a negative growth number, but it just feels to me like it’s weaker than that… You have to recall back to the months in the second, we were still booking some HUGE unemployment numbers each month, and the ISM Manufacturing Index was below 45, which you may recall 50 being the line in the sand to indicate expansion or contraction… But, I guess that’s what the government says GDP was, and you know me, whatever the government says I go right along with all the time…. NOT! Geez Louise… In my mind, would be a crime to do that!

The weekly Initial Jobless Claims hit 570,000 last week, with the previous week revised up to 580,000… So… The Bureau of Labor Statistics (BLS) may tell us next Friday that job losses continue to fall. They lie! Just do the calculations of the Weekly Initial Jobless Claims…

OK, today, to end the week, we get two of my fave reports… Personal Income and Spending. I saw a report that was calling for stronger personal spending, because of the “cash for clunkers” program. Well, let’s hope that’s the only reason spending is forecast to be higher than income once again! You may recall that in July, we saw personal income fall -1.3%, while spending rose 0.4%. That’s not good folks, and part of the reason we’re in this mess today!

Before I head to the Big Finish… I wanted to share this story with you… In the last month, Sweden introduced negative interest rates on deposits, to spur banks to lend more. I wonder how that’s working for them? Apparently, other central bankers are watching this to see how it works out. You see, they would follow this lead by Sweden, in a heartbeat if it meant they had a “tool” to remove the monetary medicine that central banks have given to the patients for a year now.

Chuck Butler

Chuck Butler is President of EverBank

  • VERNON MILLS

    Dear Chuck,You seem to be still up to date,and even looking around the corner, what sort of a life will we be living when it all blows up. Should I be moving to N.Z. now while there is still time?V. p.S. What has happened to my copy of the Daily pfennig? Please replace.Thanks

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