Profit Taking Squashes Currency Rally

Front and center this morning, we saw a ton of selling pressure in the currencies and precious metals yesterday, starting about mid-morning and going on throughout the day. So…. The dollar rallied on a Thinking Thursday… Does that mean the negativity towards the dollar, the deficits and the upcoming quantitative easing is all swept under the rug? I don’t think so, folks… I truly believe that we had a couple of forces at work yesterday and being the writer my mother always wanted me to be, I’m going to go through these forces for you.

1. Profit taking… And why not? The currencies and precious metals were on the verge of a real breakout, with some very lofty levels… Now, you and me, and the guy down the street aren’t taking part in this profit taking, because we didn’t buy our diversification tools to “trade them”… But the Hedge Funds, Pension Funds, etc. they did…

2. Questions about whether the FOMC is really going to implement quantitative easing (QE) or are they just doing the jawboning in a run-up to the G-7 meeting, so they can accuse everyone else of their problems. Comments from Fed Heads, Fisher and Hoenig suggest that not all of the Fed Heads are in favor of more stimulus. I still believe the FOMC will go to QE… More on that in a bit.

3. Position squaring ahead of today’s Jobs Jamboree… Hmmm… The ADP Employment report yesterday showed a drop of 39,000 in payrolls during September. You have to wonder just how that ADP report will play with the Jobs Jamboree… Personally, I think the BIG BOYS should have squared their positions ahead of the Jobs Jamboree, because I get the feeling that it’s going to be quite disappointing, even more than forecast…

OK… Notice not one of those forces said anything about the end of the dollar selling!

Yesterday, it was all going bad for the dollar, the euro (EUR) had reached 1.40, the Aussie dollar (AUD) and Canadian dollar/loonie (CAD) were nearing parity to the US dollar, and gold reached $1,364.77 while silver was well into the $23 handle… But then it stopped on a dime, and the reversal of these trades was going fast. Now, remember I said that these diversification tools of currencies and precious metals had gone too far, too fast, and a pull back was a possibility? Well… Here you go!

The Asians came back from a week of holidays, and tried to get the currency rally going again, for they had missed all the action this week… And the Chinese renminbi (CNY) was pushed to a level versus the dollar that has not been seen since 1993! But, when the Europeans took over this morning, they wiped out the gains (except in renminbi) the Asians had booked in the currencies.

So… The dollar buying is still in place this morning… HEY! This currency and precious metals buying is not a one-way street! So, listen to me now, and hear me later… Even the biggest dollar bear doesn’t want the dollar to be on the selling blocks every day…

And I would have to think that any sustained dollar rally would have to get some support from yields… And I don’t think that’s happening! The 10-year yield is 2.37%… The 5-year is 1.15%, and once again, we’re back to T-Bills with yields so small that after the broker takes his commission or mark-up, the yield the T-Bill holder receives is negative! The holder actually is paying the government while holding the government’s debt… Now, that’s just mental genius right there, folks… And that’s all I’ll say about that today.

OK… Speaking of China and the renminbi… These threats from US lawmakers to force China to allow a faster appreciation of the renminbi have recently become more strident.  However, as I’ve said over and over again, all this saber rattling is counter productive. I’ve tried to make certain that Pfennig readers clearly understand what’s going on here, with the blame finger waving, because, the simple truth is that a stronger renminbi exchange rate will do little to reduce our trade deficit and our unemployment when other low cost nations are more than willing to take China’s place.

If it makes sense for the Chinese to allow the renminbi to appreciate versus the dollar, then it will… It’s that simple… No saber rattling or blame finger waving by the US is going to change that… The fact that the renminbi has gained almost 2% since the Chinese removed the governor from the currency, is simply a co-inky-dink! You can see the Chinese in the back room laughing their you know what’s off, because the US lawmakers and officials are slapping themselves on the back thinking “they pushed the Chinese to allow the appreciation!”

OK… You’ve all waited patiently…

Well, thanks to a reader, I was given the text of Fed Chairman Ben Bernanke’s speech on Wednesday. The text below is Big Ben’s own words… I have not changed anything. But when you’re finished reading his truthful thoughts, stop and think for a minute that he’s finally singing from my song sheet!

It is remarkable that mainstream media has given this speech no coverage. I repeat, the central banker of the United States says in his own words:

Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit. Herbert Stein, a wise economist, once said, “If something cannot go on forever, it will stop.” One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.

So… Now you’re wondering why the mass media has not even shown a clip of Big Ben speaking… Haven’t they gone overboard when he has muttered words about the recession being over and other such nonsense? I think Big Ben deserves to be heard on this subject… He’s doing an Aaron Neville and “telling it like it is”!

Alrighty then… Today’s a Jobs Jamboree, and I think a lot hangs in the balance here… For I see the Jobs Jamboree being a key to the direction of the dollar today, and… Help with the questions about whether the FOMC does QE or not. A stronger-than-expected jobs report would be supportive of no QE and a stronger dollar… A weaker-than-expected jobs report would be supportive of QE and a weak dollar… It’s that simple… Except of course if the report is neither stronger nor weaker than expected… If it’s just a “muddle through” report, then I’ll throw my hands up in the air and wave the white flag, grab my bat and ball, and head home!

Of course in “Chuck’s World” the markets only focus on the Average Hourly Earnings and the Average Weekly Hours because it’s here that we find clues to inflation… Not the “number of jobs created”… For who knows what kind of jobs they were, what they paid, and if they had benefits, or if they will be long standing jobs!

Then there was this… Moody’s Investors Service on Friday placed the Chinese government’s bond ratings on review for possible upgrade. The rating agency plans to conclude its review within a three-month period. And possible upgrades could be in the plans for other emerging markets… In a story on RTT News and Bloomberg, “China and a long list of emerging economies are expected to face strong domestic and foreign pressure to allow their currencies to appreciate soon, when their debt ratings are upgraded, currency experts said. The likelihood of such currencies appreciating against major currencies is one force driving a torrent of capital into emerging markets.”

The emerging markets get a gold star from Moody’s!

To recap… The lofty levels of currencies and precious metals sold off quickly yesterday, and even a brief overnight rally in Asia, was not held by Europe, and the dollar is still stronger today than yesterday morning! Today’s a Jobs Jamboree Friday, and the Jobs Jamboree will be watched closely today, looking for clues to whether or not the FOMC implements QE.

Chuck Butler
for The Daily Reckoning