More Treasuries to Auction

07/07/09 St. Louis, Missouri

There’s more Treasury supply for the markets to choke down, and the whispering campaign regarding China is growing louder… Those things and more, in this edition of A Pfennig For Your Thoughts, Tuesday, July 7, 2009… And here’s our host…

Hello! Everyone! How nice it is to be with you again today! We’ll start out with a recap of yesterday… When I signed off the airwaves yesterday morning, the dollar was having its way with the currencies, and the euro (EUR) was about to give up the 1.39 handle. Apparently, 1.39 proved to be a strong line of resistance, and the euro actually moved higher on the day.

Yes, the bias to sell dollars was there, just not very strong or committed to selling dollars… And in the overnight markets, the bias to sell dollars has remained, but again, not a very strong bias… But a bias nonetheless! Which is a good sign to me, because U.S. stock futures are down this morning, which would normally mean, risk assets, like currencies, are going to have a tough row to hoe today… But, not so, at least while I’m writing the Pfennig!

Could the nascent bias to sell dollars be a result of the fact that the United States will once again depend on the ignorance of strangers (foreigners) and issue $35 billion in 3-year notes today? But then, with the “new” way the Treasury allocates “who buys” the Treasuries, the Fed could step in, buy up a HUGE chunk, and make it look like “outsiders” bought them, which would make the “deficits don’t matter” flag-wavers run into the streets shouting to the tune of Jimmy Crack Corn… We issue debt, and the foreigners don’t care, we issue lots of debt, and the foreigners don’t care…

I told you yesterday about the sizes of the Treasury issuances that had happened, and are scheduled to take place… If that doesn’t scare the bejeebers out of dollar bulls, then I don’t know what will!

Oh! Maybe this will! Yesterday, I told you my opinion on the Chinese moves recently… 1. Calling for a replacement reserve currency… 2. Calling for the use of SDRs… 3. Signing currency-swap agreements with countries… I said that the use of SDRs was a stalking horse for China’s plan to gain wider acceptance for the renminbi (CNY)… Which in turn, would set the renminbi up for an alternative world reserve currency.

Now, China won’t admit to this… But as the Big Boss Frank Trotter mentioned yesterday in our brief conversation, “China thinks in centuries.”

Well, in this case, I believe China will move faster than that, and faster than most observers think they will. I think this will all take place within the next three years… And why do I say that? Do you remember when I told you a couple of months ago, that China has “shortened” their Treasury maturities? Yes, China had, under the dark of night, quietly shifted out of long-dated Treasuries, to ones with an average maturity of 3-years!

At the time, we thought that China just didn’t want 30-year paper, for in 30-years, the US fiscal situation will be very dire, unless something changes drastically, given the baby boomers and their draw on entitlement programs. But now… Maybe the Chinese shortened their maturities to line up with their big plan to gain wider acceptance for the renminbi!

And don’t forget those currency swap agreements they’ve signed with countries in Southeast Asia and Argentina… (It’s rumored that Brazil is close to signing one too!) As they spread those currency swap agreements around the world, they remove the dollar from the settlement, and replace it with renminbi, folks. I read a story that was talking about trade, and never put these things together, but that’s OK, because the data on trade was good… The story reported that these currency swap agreements could total half of China’s total exports, which is equal to about $2 trillion in annual trade flows! If they do that each year, within three-years they would have one of the top three currencies in global trade!

And… Don’t forget the fact that they have effectively removed the dollar from those trade settlements!

So… I do believe the writing is on the wall here… And yes, the dollar will have its fun from time to time, enjoying rallies… But they will be short-lived, as the die is cast on this, folks… I do believe so…

So, what does this mean for us? OK, first of all, this is just my opinion on what’s going on, there are no “guarantees” that it will happen this way! So, let’s not run out into the streets doing out best Chicken Little! Let’s just calmly move to the exits, in an orderly fashion… If you get my drift there.

OK, let’s talk about something else, eh? Oh! How about the Reserve Bank of Australia’s (RBA) meeting last night? Yeah, that’ll work! The RBA left rates unchanged (as I suspected they would), and the accompanying statement was a strong endorsement for maintaining the RBAs easing bias (as I suspected they would do!). It’s like a young couple that knows they are in love, but are too scared to admit it… The RBA knows they are finished cutting rates, they are just too scared to admit it! Because all this talk of China’s trade supports their export side, and once again drives the Chinese economy… As long as China is in good shape, the Aussie exports will be in good shape, and if the Aussie exports are in good shape, the RBA won’t cut rates, and all this should lead to a stronger Aussie dollar (AUD)! Notice I said “should”!

I get emails from time to time telling me how wrong I was about something, and that’s fine, when I’m wrong I’m wrong, there’s no two ways about it! But, I always say… I was only speaking from a fundamentals standpoint, and the fundamentals said something “should” happen… Or, like I said the other day… “The markets always do what their supposed to do, just not ‘when’”!

Oh, and how about this to brighten your day! Moody’s announced last night that they are placing Brazil’s rating on review for a possible upgrade! Now when was the last time we heard the word upgrade used? (And not the Beyonce commercial for direct TV!) I’m talking about a country here! Brazil! Part of the BRIC’s that are putting so much pressure on the dollar these days!

And then there was this… Recall how I told you that the President had given me the feeling that there was more stimulus on the way for the U.S. economy? Well… Now we have a Presidential advisor making that feeling even stronger! Laura D’Andrea Tyson, a Presidential economic advisor said yesterday, “We should be planning, on a contingency basis, for a second round of stimulus.”

Oh great, just great! NOT! For you and I know all too well, that when the government starts planning something, they do not do so with the thought of “scrapping” the whole idea! More stimulus will mean more deficit spending, which means more Treasury issuance… I can hear the foreigners saying… No Mas! No Mas!

I read a story yesterday, (thanks Ann!) about Big Ben Bernanke, and his upcoming reappointment. Most observers believe that Big Ben will get reappointed for another term as Fed Chairman, but not without a fight, for Big Ben has many detractors these days, that have too many questions about how the Bank of America/Merrill Lynch thing came about, and his money supply. While there are others who somehow think that he is a “hero” for saving the economy. Of course, all they would have to do is check with Ms. Tyson as she would tell them that the economy is probably in need of more stimulus!

I’ll head to the Big Finish on that note, I don’t want to end the Pfennig with a tirade on Big Ben! All I’ll say is let’s see him remove the $1 trillion in stimulus/money supply without pushing the economy back into a recession… Yeah, that’s the ticket! Let’s see him do that, before you give him accolades!

And looky here! While I was writing, the euro steadily climbed back above the 1.40 handle! I guess that bias to sell dollars is growing, eh?

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.

For additional information visit EverBank

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