Currency Wars?

Yesterday, we watched the currencies and precious metals rise all day long, in small increments. But the overnight markets have taken the currencies even higher! For instance, the Aussie dollar (AUD) is near 99-cents, and a new all-time record high! And gold is up another $9 this morning to $1,358!

What’s the muscle behind this push of the dollar to levels we’ve not seen before? Well, I personally think that the main muscle is what’s being termed as a “currency war”… And then there are other items that are helping push the dollar lower, like the German Industrial Production report that printed this morning, and showed an increase of more than three times pace the “experts” forecast! German Industrial Production surged 1.7% in August!

But let’s get back to this so-called “currency war” (I keep hearing the theme to Star Wars in my head!)… US Treasury Secretary Tim Geithner said Japan didn’t fuel international tensions when it intervened in the foreign-exchange market last month.

The Treasury chief said today that there’s a “damaging dynamic” at work in currency markets as countries race to limit appreciation. When asked whether he thought Japan had “set the fire” for this dynamic, Geithner responded, “I don’t, no” in remarks at the Brookings Institution.

Instead, Geithner kept up his calls for China to let the renminbi (CNY) rise against the dollar. He said the “main problem” facing foreign-exchange markets is “a set of emerging-market economies that both remain undervalued and are leaning heavily against the pressures for appreciation.”

In other words… He’s talking about China… And maybe even throwing India under the bus too…

Geithner then stepped up the pressure on China, effectively blaming the world’s number-two economy for the emergence of what some are calling a “currency war” ahead of a G-7 meeting.

And China’s Premier immediately answered saying that the demands to appreciate the renminbi would be disaster for his country…

Why can’t we leave the Chinese out of this? They have their country to run, and we have ours… If we had taken better care of our country’s finances, we wouldn’t be in this mess. I think we would be better off taking care of our own house, and leaving China to take care of theirs. If you rile them up too much, you risk the chance of them telling you to finance your own deficit!

OK… Enough on that… But I can tell you that at no time in the past weak dollar trend, has the negativity been so strong against the dollar as it is at this time. I get all caught up in thoughts on this kind of move, and the thought that keeps coming to me from the back of my brain is that “a star burns the brightest right before it burns out”…

So… What are your thoughts? Is this the end of the run for the currencies? Or… Is there still more weakness for the dollar in store? I truly believe there’s more weakness, but… That’s in the long run… For now, I’ve got to think that we’ve come so far, so fast, that there has to be a pause for the cause. A “filling in of the gaps” and all that! Nothing in the markets is a one-way street…

I yelled out across the desk yesterday that after all the intervention, quantitative easing, and interest rate cutting, the Japanese yen (JPY) is right back to pre-intervention levels of 82.50! So, once again, it is proven that intervention is just wasted money… And that also brings up a point that I think the government of this country, and that probably all countries miss… And that is that the government doesn’t have money! The only money they have is taken from taxpayers… So… When a government says something like, “we’re going to give you money” all they’re doing is letting you keep more of what you had!

Whoa there, partner! I really went astray there! Let’s see… Currencies… Oh yeah! I was writing for a publication yesterday, and made the point that in March of 2009, the Fed/Cartel implemented quantitative easing (QE) and the dollar spent the next eight months in the dumps, much like the move we’re seeing this week. The only thing that saved the dollar, which was teetering on the cliff’s edge in November, was the “discovery” of the Eurozone GIIPS deficit problems… But once those Eurozone countries announced austerity measures, the focus came back to the dollar’s problems.

Now, I’m not here to say that those austerity measures are the cure to all that ails the GIIPS problems… Which is why I continue to say that the euro is not out of the woods… And the media could whip the markets into a frenzy on this subject in a heartbeat.

Getting back to yen for a second… Japanese PM, Kan, said that his “government will take decisive steps when necessary in dealing with a strong yen”…  And then showing that everyone in Japan is not singing from the same song sheet, Vice Finance Minister, Igarashi, said, “Japan won’t weaken yen to become more competitive with other countries in trade and any currency intervention would be at restraining excessive moves. It’s not our intention to engage in a currency devaluation race for the sake of national interest.”

So… Gold is kicking sand in the dollar’s face again this morning, along with gold’s trusty sidekick, silver! I saw my friend David Galland refer to comment by the “Godfather” of newsletter writers, Richard Russell, who was speaking at the Casey Summit held last weekend, and who had this to say about gold… (This is good, so you’ll want to remember this line…)

“Some people refer derisively to gold owners as ‘gold bugs.’ Turning that idea around, legendary investor Richard Russell, in a rare public appearance at the summit, used the term ‘dollar bug’ to describe those who would foolishly prefer holding paper currency over gold. I think that’s a very good way of looking at the gold versus dollar argument.”

So… I’m taking that one to heart… From now on, I’m going to refer to dollar buyers and “dollar bugs”…

OK… Let’s get back to the Aussie dollar, for it was the best performer last night, and is now at an all-time record level versus the dollar. The Aussie dollar got a boost from yet another spike in employment. Full-Time Employment in Australia was 55,800 in September, which was the most workers taken on in eight months… I would have to think that the Reserve Bank of Australia (RBA) members are kicking themselves right now, for not hiking rates earlier this week when they had the chance. Now they’ll have to wait for their November meeting, and that could put them behind the inflation 8-ball… But I doubt it… The RBA has done a good job of being proactive with their rate hikes that go back to last year. Oh, by the way, the Aussie dollar did trade to 9915-cents overnight, slipping back just a bit on profit taking.

The “QE is coming soon to a central bank near you” campers, like me, will probably have to think about it more after today, as Fed Head Fisher (from Dallas) is scheduled to speak, and is a non-believer in the usefulness of QE… And then the lone hawk on the Cartel, Fed Head Hoenig will also be speaking. You can always count on Hoenig to deliver some good sound bites that differ from the rhetoric heard from the Cartel.

I had a nice talk with a reporter yesterday regarding Brazil… We talked about the prospects for a stronger real (BRL), and so on… The real, after getting caught up in the currency rally, had ignored the latest measure the government had undertaken to stem the real’s weakness, but it all caught up with the real yesterday… But today… I’m waiting for the Brazilian market to open, because… Given the price action in currencies versus the dollar overnight, I would suspect that real opens strong!

With the other emerging market currencies rising versus the dollar overnight, I would think that real join that move. But we’ll have to wait-n-see, eh?

And oil continues to show price increases… With black gold (Texas tea), now regaining $83 per barrel, the Canadian dollar/loonie (CAD) is nearing parity to the green/peach back (US dollar).

And here I am ready to go to the Big Finish, but just remembered that there are two Central Bank meetings going on as I type… The Bank of England (BOE) and the European Central Bank (ECB) are meeting this morning… I guess the most important thing to come from these two meetings will be the ECB statement at the press conference following the meeting. The ECB seems to be champing at the bit to remove stimulus, but just can’t pull the trigger.

If the ECB is seriously concerned about the strength of the euro – remember they were elated for manufacturing and exports to see the euro drop to 1.20 – then they could trip the euro up with a statement about removing stimulus… Otherwise, there won’t be any mention…

And a currency that I don’t talk much about, but I’m always thinking about, the Singapore dollar (SGD), has gained over 3% in the past month! And why not? Japanese yen is at a 15-year high versus the dollar, and the Chinese renminbi has gained 1.5%… Gotta keep up with the Joneses!

I’ve explained this before, but for all the new readers… The Monetary Authority of Singapore (MAS) is the gatekeeper for the Singapore dollar. The MAS meets twice a year, and issues a statement about their wishes for the Singapore dollar… Five months ago, the MAS issued a statement that called for a gradual strengthening of the Singapore dollar… I’m thinking that the MAS will retain that policy at their next meeting, which takes place next week.

Then there was this from The Economist

The US doesn’t have to rely on negotiations or a trade war to overpower the harmful effect of China’s currency policy on the US labor market and trade, according to The Economist. The most powerful tool the US can bring is to pursue adequate monetary and fiscal stimulus at home. “At the present nominal exchange rate, expansionary monetary policy in America would prove highly inflationary in China, which is a darn good reason for everyone in China (including those pesky exporters) to favor appreciation,” the magazine notes.

Yes, that’s all good, but it’s easier said than done!

To recap… The currencies and precious metals have taken their assault on the dollar to new heights overnight with both the Aussie dollar and loonie nearing parity to the dollar, and the euro moving toward 1.40. Gold is $1,360 this morning, and doesn’t appear to be looking in its rearview mirror for profit takers. The so-called “currency war” is a key driver to all this dollar weakness… And after all the money spent on weakening the Japanese yen, the yen is back to pre-intervention levels!

Chuck Butler
for The Daily Reckoning