Chuck Butler

Good day. I got all my “home alone” chores done last night, of course after going home and taking a nap! It’s still blazing hot here, but when you work inside all day, it doesn’t matter much. But since I once had a job as a young man, in the hot Oklahoma sun, building in-ground swimming pools, I always worry about the people that work outside all the time in this heat. Like roofers, and a host of others, of course!

We almost had a four-day healing session for the currencies, as things began to turn positive yesterday morning after I hit “send.” Could it last? NOOOOOOOOOOO! The rating agency Egan-Jones downgraded Spain’s debt, and that sent the risk assets of currencies, stocks and commodities like gold and oil reeling! This was akin to throwing a cat among the pigeons, folks.

The euro (EUR) plunged, taking the rest of the currencies with it. Oil, which was trading back above $92, got sent to the woodshed, and gold saw red numbers for the first time in nearly a week!

OK, I get it, about Spain, but what I don’t get is that the markets paid attention to the Egan-Jones (EJR) downgrade like nobody’s business! But a month ago, when EJR downgraded the U.S. debt rating, the markets decided that they were no Fitch or S&P, and therefore paid no attention to the downgrade.

And this wasn’t the first downgrade that EJR made to the U.S! What was once a pristine AAA rating for the U.S. has fallen first to AA+ and then last month to AA. So I don’t get this. I get Spain. I don’t get the markets ignoring the U.S. downgrade.

It’s been like death by a 1,000 knives for the euro. Every time the single unit gets a ray of sunshine, and some healing, the euro receives another stinging cut. It could be from a ratings agency or a number of places. Every day brings us something new, and most days, it’s just not good for the euro, and therefore all the other currencies.

And with the euro falling out of bed yesterday, the cross to the Swiss franc (CHF) was getting a little juicy (remember, the floor was set at 1.20). And then right out of left field, we saw the franc sliding on the slippery slope, too. “What could have caused that?” you ask. Ahhh, grasshopper, I would bet a dollar to a Krispy Kreme that the Swiss National Bank (SNB) entered the market and began selling francs. I mean, why else would the franc take a ride on the slippery slope? Isn’t it a so-called safe haven like dollars and yen (JPY)? Dollars gained yesterday, yen gained yesterday, but not francs. Central bank intervention, one of my archenemies!

While the markets were getting all lathered up about the EJR downgrade for Spain, there were two very important announcements being made out of China. I tell you this, these Chinese are wily old veterans.

China continues to remove the dollar as the reserve currency of the world, by first removing its place as terms of trade, and gaining a wider distribution of their own currency. I’ve documented these over the past couple of years.

Yesterday, China signed an agreement with Australia! And then they announced that they had signed a currency swap agreement with Japan. In both of these cases, the dollar will no longer be used as the clearing mechanism in the terms of trade between China and these two countries. Instead, they will simply swap each other’s currencies.

China’s roster of currency swap agreement partners is growing by leaps and bounds, folks, and just because the markets have their blinders on, and one day they will wake up and say, “Hey! How’d this get past us?” Yes, the dollar may be making a bear market rally right now, but its future is getting fuzzier with each currency swap agreement China signs.

Look, I’m not just saying this because I offer Chinese deposit accounts. I’m saying this because it’s all out there for everyone to see, and no one sees it but me — sort of like the UFO I spotted the other… no! I’m just kidding there. The point is — and this is serious — you have to take what the Chinese say seriously, and I called this “the dollar hears a Hu.”

Chinese President Hu Jintao said over a year ago that the “dollar system is a product of the past.” Up to that point in time, the Chinese had signed quite a few currency swap agreements, so I do believe that he was firing a warning shot across the dollar’s bow. But who paid attention? ME!

OK, let’s talk about something else, because I’m getting a rash from all this stuff that no one pays attention to. I do want to thank reader Russ for reminding me of what I was going to talk about this morning… China’s swap agreements.

In Australia overnight, the Australian dollar (AUD), already reeling from the Spain downgrade and euro weakness, received its own bad news in the form of a weak retail sales number. April retail sales fell 0.2% versus March. Construction work was stronger than expected, but just wasn’t enough to help the sliding A$.

I had a reader/client send me an email to say that he had lost $750 on his A$ investment and he was done with it. Hmmm, the A$ had risen from 50 cents a decade ago and last summer hit an all-time high of $1.10. At today’s level of 0.9770, that’s quite a loss from $1.10, but looking at it differently, you could say that at 0.9770 it has gained nearly 50% from 2002. But if we close that chart date down and go back to March of 2009, when QE was kicking and screaming, the A$ was 0.63 cents, to 0.9770. That’s a 55% gain! So I guess it’s all about when you buy and how long you hold it. I’ve always contended that currencies make long sweeping moves within trends and the trend is NOT a ONE-WAY street, that there can be volatility within the trend like we’re seeing right now.

The Swedish krona has actually been a winner versus the dollar and euro overnight. Sweden printed a strong — for them – first-quarter GDP overnight, which has given the krona a lift. Swedish first-quarter GDP printed at +0.8% versus the previous quarter. The “experts” were looking for +0.2%, so this number was impressive, indeed!

The Chinese are attempting to throw the markets off the scent of further stimulus for the Chinese economy by stating that “China plans no large stimulus to counter slowdown.” Of course, that counts for just now. You can bet your sweet bippie that China will do everything they can to counter a major slowdown in their economy. The Chinese leaders can’t have the types of people in the streets that the Middle East had last year. And as I’ve explained before, at least China has a treasure chest of reserves to use. They don’t have to go into debt to stimulate their economy.

Did you see where consumer confidence for May fell? And March’s previous reading was revised downward? Of course, I’m one of those that doesn’t get it when consumer confidence rises in these times. And the S&P/Case-Shiller home price index fell 2.57% in the first quarter versus a year ago. But what I was talking about yesterday is illustrated here, or at least the first part of what I was talking about: The fall in home prices in the first quarter was less than it was a year ago, so obviously, there’s been some healing going on here. And that’s the first part of what I talked about. The second part is that I don’t believe this can continue to get better, not with the unemployment problem in the U.S.

The U.S. data cupboard gets a break today, having only to deal with pending home sales. So the Spanish downgrade will be a bad taste in the mouths of currency traders today, as no data will offset that move from yesterday. I would think that yesterday’s selling was overdone, but maybe the markets aren’t of the same mind. (Geez, Louise, I sure hope they aren’t! I always want to be the guy that doesn’t think about stuff like the others do.)

Then this section will be different today as I talk about a new book that’s available on Amazon and other places written by my friend Addison Wiggin titled: The Little Book of the Shrinking Dollar. I contributed to the book, but that’s not what is important. As Marc Faber said about the book: “The Little Book of the Shrinking Dollar is not an academic paper published by some ignorant economists. Not only does Addison convincingly and disturbingly argue that ‘every paper currency in the history of civilization has eventually lost its entire value,’ but he also offers ways to protect our wealth.”

I strongly recommend this book, and at 223 small pages, it’s a quick read. It’s all spelled out for you. Things I’ve talked about for years, and now it’s right here in a great book! Kudos to Addison Wiggin!

To recap: The nearly four-day rally and healing for the currencies was wiped out in a New York minute by the EJR debt rating downgrade of Spain yesterday. The euro plunged and took most currencies with it. China announced two more currency swap partners, Australia and Japan, and the phasing out of the dollar as the reserve currency continues. Sweden saw a stronger-than-expected first-quarter GDP, and Australia saw a very weak retail sales figure, which didn’t help the A$.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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