12/10/09 St. Louis, Missouri – A chill crept over the dollar bulls overnight, when Australia announced their latest jobs data. Since that time, the dollar has been sold – albeit not frantically, but sold nonetheless, and the high yielders, like Aussie dollars (AUD), have been the main destination of those funds created from the dollar sales.
For those of you keeping score at home, Australia added 30,800 “full-time” jobs last month, pushing the total in the past three months to 99,500 new jobs added. This figure of 30,800 new jobs blasted the forecast of 5,000 right out of the water! I think the Reserve Bank of Australia (RBA) is smiling like Cheshire Cats this morning, knowing that they were out in front of the curve with their rate hikes, and that this job creation – which could fuel wage inflation – will not, because of the RBA being out in front of the curve…
Could we trade central banks with the Aussies? No? Oh well, I tried!
I spoke at a conference here in St. Louis yesterday, and afterward I was surrounded by people who wanted to know more about the subject of diversification that I presented. The number one question was whether or not I think Australia could reach parity… Well… In my own way, I said that while the Aussie dollar had gained more than 30% versus the US dollar this year, it was still about 10% below the level it traded at before the financial meltdown in August of 2008… At that time, the Aussie dollar was around 98.5-cents – so close to parity it could spit in parity’s backyard. So… If the stars are in alignment, and the karma is flowing (which, in other words means if China keeps growing and demanding raw materials from Australia) then there’s no reason it can’t get back to the level it traded at before the financial meltdown, and then, it’s a hop-skip-and a jump away from parity!
Another question people often ask me is, “You’ve convinced me that diversifying a portion of my portfolio out of the dollar is a prudent thing to do… Now, how do I pick the currencies to buy?” Well, that’s easy… Simply look at each currency as the “stock of that country”… And value that currency the same way you do a stock… Balance sheet, yield, leadership, ability to attract investment, and so on… Their balance sheet is their deficit or surplus; yield is yield; and leadership is the central bank of the country… And there you have to ask whether they provide price stability for a strong currency, or if they promote growth “willy nilly” and forget all about price stability…
After you go through all that, you come up with a handful of currencies that meet your criteria… Of course, if I listed them, then you wouldn’t have to do your homework! But I can assure you that your list will be very close to my list if you follow those same criteria. And just as a starting point… The list will always include, Norway…
OK, enough of the lessons this morning… Did you see the news yesterday that US Treasury Secretary, Geithner, said the administration is extending the financial bailout program (TARP) until October 3, 2010. In a letter to House and Senate leaders, Mr. Geithner said the extension is “necessary to assist American families and stabilize financial markets.”
Yes, you didn’t think for a minute that the TARP money that wasn’t spent, is going back to pay down the deficit did you? This is being extended so that the money can be spent accordingly! Once the government gets their hands on money, they are not going to give it back… They will find another “need” for those funds.
And… That’s too sad, folks… The deficit spending that has been going on for the past decade is getting completely out of hand… But for those of you who still think I’m being “the boy crying wolf” over this deficit thing, you should click here.
Now… I’ve talked about the $12 trillion national debt thing for some time now… Instead, I want you to scroll down, and check out the US unfunded liabilities… The liabilities per citizen are greater than the assets per citizen, which, if you showed that to your banker when attempting to obtain a loan, he would say you were bankrupt.
I suggest you keep that link, and check back every now and then… But again, make sure you put away all the sharp objects before clicking on it!
OK… Today we’ll see the latest rot on the trade deficit’s vine… The Big Boss, Frank Trotter, also spoke at the conference yesterday, and talked about the trade deficit. He calls it an “overhang”… Because with a recession, the trade deficit was supposed to go away, right? Not so fast, my friend! There’s this little thing called oil, that we use whether we’re in a recession or not! And… Given the fundamentals in the US the dollar, to me – and probably to every foreigner who looks at US exports – it is still overvalued… Get that dollar down to a level that allows US exports to be competitive, and you’ll see some traction in the trade deficit, but make it go away completely? No way! Not unless we, as a country, decide to stop using oil, and go nuclear!
We’ll also see the monthly budget statement, which is more important these days, for all of the deficits we keep adding to the national debt. Last month, the budget deficit was $125 billion. And the forecast for this month is even worse, at $131 billion!
And today we will have the Weekly Initial Jobless Claims print as usual. Last week, the jobless claims fell below 500,000 for the first time in a month of Sundays… But again, one has to ask themselves if, as a country, we’ve come to a point where there just aren’t that many jobs left to cut… If the country is going to remain working at all…
Tomorrow is “retail sales” day… The Butler Household Index (BHI) tells me that while retail sales will be positive, they won’t be “celebration time, come on!”… This data will include the Black Friday, after Thanksgiving sales, so it shouldn’t be too bad!
The Reserve Bank of New Zealand (RBNZ) met last night and left rates unchanged, as expected… But… The RBNZ dropped their stupid insistence that rates will remain low until the second half of next year. Instead they said that “conditions” might support removing the stimulus of low rates around the middle of 2010… That’s HUGE, folks, because while the Fed may be ready to raise rates by then, they aren’t saying they are. In fact, Big Ben Bernanke just said the other day that the low rates would remain in place for some time.
So… Kiwi (NZD) jumped from 0.7070 yesterday, to… Drum roll please… 0.7280 this morning! WOW! A full 2-cent move overnight!
I always say the interest rate differentials aren’t the “end all” for currency valuation, but they can go a long way! And it’s obvious that Australia and New Zealand are in the camp of “they can go a long way”!
The other central bank to meet yesterday was the Swiss National Bank (SNB) and here, it seems the SNB is backing off their previous statement of doing whatever is necessary to keep the franc (CHF) from appreciating versus the euro (EUR)…
The SNB Governor Roth, said, “[The] SNB will continue to act decisively to prevent any ‘excessive appreciation’ of the franc against the euro.” The key here is the word “excessive”… In other words, the SNB wouldn’t mind seeing the franc slowly move higher versus the euro…
And while that’s going on, the franc continues to bump up against parity to the dollar…
The Bank of England (BOE) is meeting this morning… Talk about a mess… I wouldn’t want to be in their shoes! The BOE has painted itself into a corner, and the only way out is to get covered in paint… And just to be clear… That paint represents some very bad things…
I know that the pound sterling (GBP) has been quite resilient in recent months, but I truly believe this is just a by-product of the dollar weakness overall, and not any endorsement whatsoever of pound sterling or the UK.
The BOE just announced that it would not move rates… And that there would be a continuance of their bond purchase plan. Quantitative easing, folks… Like I said, they are in deep dookie.
And finally, Brazil’s central bank met, and kept rates unchanged… I found this to be a little questionable, given that the Brazilian economy grew at 1.3% in the previous quarter, during a global recession! The central bank also said that rates would remain in place for “quite awhile”… UGH!
That’s not surprising, though, when you go back and listen to the words of the central bank Governor from a few months ago, when he stated that he would do everything in his power to keep the real from going below 2 versus the dollar… And the real immediately did go below 2, and has stayed there for months now… So, why would the central bank Governor look to raise rates, and make the real even more valuable?
He’ll have to raise them eventually… I’m sure he can see the writing on the wall.
Gold is down another $5 this morning to $1,123… A man sitting at my table asked me why gold had fallen so much the past week, and I said, “because it had gained so much the weeks previous to last”… Think of it as “healthy” for gold to come back like this… And… Look at it as an opportunity to buy at cheaper levels!
To recap… The Aussie jobs data was very strong, and lifted the high yielders to a strong overnight performance versus the dollar. Kiwi was the overnight winner, as the RBNZ softened their tone on the next rate hike, and the Swiss National Bank softened their stance on franc strength.
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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Thanks for a good read, and happy 2010 from one of your kiwi readers.
Sure, the dollar (NZD) does seem to rise/drop on job info, I’ve seen it a lot. I think the question is will it reach the heady 1GBP/297NZD as last year!!