Global Growth Currencies Feel the Pinch of the Oil Price

Well… It appears that the driver of the higher-priced euro (EUR) – the threat of a rate hike – is beginning to fade, as the single unit really slipped overnight. Now, wait a minute, Chuck… “Really slipped overnight?” that doesn’t appear to be a proper statement, my friend! OK… Let me amend that by saying there was some “slippage” by the euro overnight, from the 1.40 level to 1.3945, so about 1/2-cent. I look at this as a “pause for the cause” because it’s been a real shot upward for the single unit lately. And so, I turned to the charts to see if there was anything there for me…

So… Here I go again with my attempt to be more versatile and to use charts… Remember about six weeks ago, when I told you about the dollar index getting to a tipping point, then it was 78.25, and if it traded through that level, and remained there for a close, we could very well see another dollar rout… And that played along pretty well… So… My charts friend sent me a note yesterday, and said the dollar index was nearing another tipping point – this time at 76.20… A daily close below this figure could bring about a significant shift in positive sentiment toward the dollar… (The dollar index is around 76.67 this morning, and got as low as 76.40 yesterday)

You may recall me telling you in the past that the dollar index is not a true indication of currency moves against the dollar… But, since the markets use this index as a pulse to dollar health, we use it… The dollar index indicates the general international value of the dollar by averaging the exchange rates between the dollar and six major world currencies – the euro, yen (JPY), pound (GBP), loonie (CAD), franc (CHF), and krona (SEK)… The problem, as I always point out here, is that the euro is so heavily weighted in the index, representing 57.6% of the index… Notice that currencies like Aussie (AUD), and Norway (NOK) aren’t here… Which is why I tend to overlook the dollar index…

I talked to a reporter from Reuters yesterday, and he wanted to know my thoughts on why the euro was still in rally mode after the Moody’s announcement of a 3-grade downgrade to Greece’s debt. I said that I thought that the markets were giving the potential interest rate hike by the European Central Bank (ECB) a ton of credit… It’s been so long since a major country, (US, Japan, Eurozone) raised interest rates. And now that it looks like the ECB is going to hike rates, they’ll get the “street cred”…

But, there are other things helping the euro… Remember that the euro is the offset currency to the dollar, so dollar selling reflects favorably on the euro’s value. Commodities continue to rise in price, which erodes dollar sentiment. The potential for yield spreads versus the dollar erodes dollar sentiment, and then there’s the fact that the US stock market isn’t the only stock market in rally mode these days… In fact, some of them are outperforming the US stock markets!

The “global growth” currencies of Australia and Brazil (BRL), are feeling the pinch of the higher oil price, while the Canadian dollar/loonie loves the higher oil prices… But think about this for a minute, folks… The soaring oil prices will squash the global growth that’s going on right now, especially in the emerging markets. So… I’m a bit concerned about global growth right now. And not just global growth… Shoot Rudy, the nascent economic recovery going on here in the US will also be squashed. I see that the price of oil dropped a bit yesterday, as after climbing to $107 it has dropped back to $104… I would think just on the thoughts that the US could tap the oil reserves they have to stem the rise of the price of oil… Hey! I just want it to keep dropping!

With the euro slipping a bit overnight, the rest of the currencies that follow the Big Dog are also slipping… Like I said above, it appears to me as though it’s just a “pause for the cause” but then, maybe the fact that Moody’s dropped a led balloon on Greece yesterday, downgrading their debt by 3 grades, has finally sunk in, and is outweighing the thoughts of a rate hike in the Eurozone. I guess we’ll have to see how this plays out today and tomorrow, eh?

A reader sent me a note yesterday after I mentioned that I would be speaking to a reporter today about China… And the note was a link to a story that got very little airplay by the markets – as if it slipped by them in the dark of the night… Apparently, China made some announcements over this past weekend, about how they intend to allow a greater distribution of the renminbi (CNY)… Here’s what can be found in the story, which received but a blurb on Reuters….

China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency’s international role. In a statement on its website…the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily.

So… Now, who out there has laughed and scoffed at my calls for the Chinese renminbi to be the next reserve currency of the world? I have to think that by China making a vocal call like this, they are bound and determined to move along this road to reserve currency status, right now!

And no… It’s not going to take place this year, or next year, or even the year after that, but it’s coming, and in the scheme of things, when it happens, it will appear to have happened overnight… Remember what I said above about appearances… For, it will not have happened overnight, it will have been going on with baby steps, like the currency swap agreements, where dollars were taken out of the terms of trade, between China and the counterparty they signed the currency swap agreement with… Or like China repeatedly calling for a change in the reserve status for the dollar… And now this statement by the Chinese… It will creep up on you, and then one day, bite you in the… But only if you have allowed yourself to become someone who did NOT diversify their investments so that their entire investment portfolio wasn’t dollar denominated!

I’m not kidding around, folks… I know tons of people who have not taken the steps to diversification and an allocation of currencies and metals for their dollar-denominated portfolio. So when it happens, and the dollar is reduced to second place status, we as an economy will become dragged down by the fact that our dollar is no longer the reserve currency of the world… If you want to hear more, come to the Las Vegas Money Show, May 5-9 at Caesar’s Palace where I’ll be talking about this and the effects of not having the reserve currency of the world…

Whew! I was really pounding away at the keyboard there for a minute… I can get so riled up about this stuff, but then I realize that, for the most part, I write this stuff, and people read it, and delete the email, and go on with their lives, and I think, Shoot Rudy, no reason to get your blood pressure rising, and ruin another keyboard! I’ve slowed down the ruining of keyboards… But for a while, there, a few years ago, I was going through them like a hot knife goes through butter! The IT people always had extra ones for me because they knew… But like I said, I’ve gotten better, and have only needed to replace one keyboard in the past couple of years!

OK… Let’s go on to something else… Hey! For a chuckle… Did you see what Bernie Madoff said? He said the “US Government [is] a Ponzi Scheme”… I guess the phrase about how it takes one to know one, comes to mind here, eh? I also saw a quote from the well-known and respected analyst, Marc Faber, who said something about how another crisis would happen once the Fed stops their bond purchases…. I would agree with that, which is why, even though the Fed Heads are making some noise about not supporting more bond purchases, I think it’s all window dressing, or rearranging the deck chairs on the Titanic… More quantitative easing is in our future, folks… Can you say QE3 or QE4?

Have you seen that commercial that the US government wants to ban, that shows the Chinese laughing about owning us now? Pretty truthful… They talk about how the US took the road to spend and stimulate to get out of their recession, and now are saddled with exploding debt… It’s all true stuff, it’s just hard to swallow, as an American…

As I said above, the Aussie dollar is feeling the pinch of the higher oil price… That’s pretty evident in the price action this morning, with the Aussie dollar slipping after the news that Australian Business Confidence rose to the highest level in almost a year during February! In Queensland, where not only floods, but a cyclone the size of the US ripped through, leaving devastation all around… I’m hearing reports from “on the ground” people that the business community is looking forward to reconstruction, and thus the rise in confidence… So, if we can get the price of oil to stabilize, the Aussie dollar can get back on the rally tracks!

Then there was this…from a trader friend at RBC….

If the Fed truly is concerned with the employment backdrop, they will most likely refrain from tightening policy until the unemployment rate enters a given sweet spot. In the past two post-recession tightening cycles, the Fed waited for the unemployment rate to get relatively close to the so-called natural rate before raising rates (within 1.13ppt in 1990s and 0.60ppt in 2000s). Several Fed officials have brought up the notion of a higher natural rate of unemployment (between 6.5-7.0%). Comparing this with our forecast of the unemployment rate suggests we will not be within this sweet spot until late 2012 to early 2013.

Yes, I agree… But we have to keep an eye on those Fed Heads, for they could throw us a curve at any time…

To Recap… The rate hike talk in the Eurozone appears to have faded as the euro slips to 1.3920 in overnight trading, dragging all the currencies that follow the Big Dog downward versus the dollar. The price of oil also slipped downward overnight by $3, probably on the jawbone effect of tapping our oil reserves. The global growth currencies of Aussie and Brazil are feeling the pinch of the higher oil prices and their affect on global growth. The emerging markets are really feeling queasy about the higher oil prices! And China makes a big announcement that receives very little airplay… Doesn’t that tell you the announcement is worth reading?

Chuck Butler
for The Daily Reckoning