Risk Aversion Fuels Yesterday's Dollar Rally

The risk aversion that was creeping into the currency markets yesterday really took hold in the US trading session, which meant the dollar was being bought once more, along with Japanese yen (JPY).

It just makes me laugh out loud, when I write that the “safe haven currencies” during risk aversion trading are the dollar and yen… These two countries have debt up to their eyeballs, pay no interest on their deposits, and have a leadership deficiency.

There was good news out of the Eurozone this morning… Both Germany and France followed their previous quarter’s growth, with stronger growth in the third quarter… The Eurozone’s two largest economies continued to recover from recession in the third quarter, as exports boosted both German and French gross domestic products. I say that, and I want to spit out a raspberry to all those that claim the European Union will collapse because of the strong euro (EUR)! The largest economies of the Eurozone can grow with strong exports and even with a strong euro!

Germany’s GDP rose 0.7% in the three months to September 30. In France, GDP also grew for the second consecutive quarter, rising 0.3%.

So… Of course this data from the Eurozone put a floor under the euro’s decline from yesterday. It will be interesting to see how the US guys look at these growth numbers. The European guys liked them… But the US traders can be very fickle.

And more than that, I think this might be the thing to put the risk aversion to bed… Recent history tells me that whenever risk aversion has crept into the markets, any sign that global growth is back on track and will lead investors to higher yielding assets, the risk aversion ends abruptly… Let’s hope that’s the case today with these two growth reports from the Eurozone!

Yesterday’s data in the US showed that the Weekly Initial Jobless Claims remain above 500,000 per week, and that the budget deficit was even worse than the forecasted $160 billion! The budget deficit for October totaled $176.4 billion, which annualized puts us over $2.1 TRILLION! That awful, folks! And you should be writing, calling, or making your way to your representative’s next meeting and demanding that they STOP SPENDING MONEY THEY DON’T HAVE!

You know that letter that I said I was going to write to my darling granddaughter, Delaney Grace, apologizing for the lack of freedom and tax burdens that were left to her generation to deal with? Well, I started writing it the other night… What this and the previous administration is doing is immoral, when it comes to leaving the debt to be dealt with by future generations.

OK, it’s a Friday, I need to try to remain calm here, and be upbeat! Hmmm… Usually that means that I pull out a story on gold… But yesterday was not a good day for the shiny metal. After reaching a new all-time record level of $1,118, it fell more than $10 in the aftermath of the risk aversion… See how stupid the risk aversion people are? I mean, if you wanted to avert risk, wouldn’t you buy gold?

Anyway, colleague Don Ries, sent me a story that he came across regarding gold that I thought was quite interesting… The Daily Telegraph in the UK printed a story about how Barrick Gold believes we may have reached “peak” gold already… And by “peak” I’m talking about the mining of the shiny metal!

“Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10% as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run. There is a strong case to be made that we are already at ‘peak gold’,” he told The Daily Telegraph at the RBC’s annual gold conference in London.”

WOW! Did you get the line about how this lack of mining implies that the roaring bull market of the last eight years may have further to run? I think that’s putting it conservatively for sure! “May have further to run?” I would say it stronger…

OK… That put me back on track to be more upbeat for this Fantastico Friday! Today’s data cupboard will yield the monthly trade deficit data, and the U. of Michigan Consumer Confidence index… The trade deficit overhang continues to be a problem for the US, obviously not as bad a problem as it was during the go-go days for the consumer…

Traders have become “comfortably numb” with the deficit figures in the US, which is a bad thing, folks… Traders need to make a stand, and not allow this stuff to just slip under the door, thus allowing larger and larger deficits in the future!

I see the President is in China… I bet he thinks his presence will be the thing that will move the Chinese to allow greater currency flexibility. I just don’t see the Chinese getting caught up in the “show” to give in and allow flexibility in their currency, just because the President of the US showed up.

The currencies are rallying this morning versus the dollar. Since I began writing, the euro has climbed higher – albeit a small move higher – and thus has stopped the bleeding that began yesterday morning.

I’m surprised the Aussie dollar (AUD) isn’t really hitting on all cylinders this morning, considering the growth numbers in the Eurozone… But I think we might have to wait for the US traders to see the rally in the Aussie dollar, this morning… It is Saturday in Australia!

The Swiss franc (CHF) got caught up in the risk aversion trading yesterday, and has backed off its ascent to parity. The franc is trading around 0.9855 this morning, which is more than 1-cent lower than yesterday morning… Wink, wink…

And a country/currency that I drop the ball on all the time when it comes to talking about it in the Pfennig is the Norwegian krone (NOK)… Long time readers know that I truly like Norway for their fiscal and monetary surplus prowess… And most recently, for their absence from the rolls of those countries that got involved in subprime and bad lending practices. Earlier this month, Norway’s central bank, the Norges Bank, hiked rates 25 BPS, and is expected to raise them again in a month or two. So, now we have a country that has a strong fiscal and monetary position, no bad banks or loans, and a strong positive interest rate differential to the US… Hmmm…

And then there was this… Neil Barofsky, the special inspector general for the $700 billion TARP bailout said the program will “almost certainly result in a loss to taxpayers.” “We need to temper or be realistic about our expectations, a dollar-for-dollar return is just highly unrealistic.” Barofsky also said that he’s conducting 65 investigations of possible fraud.

OH MY! You’re telling me that with the $700 billion TARP funds that there could have been some fraud involved? I wouldn’t have believed it! NOT! The whole TARP was fraud to begin with! So, with all the corruption and scandals that have gone in before, the thought that there could be some fraud, should have been a belief that there “would be fraud for sure” when the TARP was issued!