Some Healing

Good day… And a Terrific Tuesday to you! I heard from my two sisters who live in the Houston area, yesterday. The two of them rode out the Hurricane together. Unfortunately there is some damage to the house, and they are still without electricity; but they are both safe, and that’s what’s most important. I simply can’t imagine what all that is like.

Well… The euro (EUR) had it’s largest one-day move upward versus the dollar since its inception in 1999, yesterday. We’ve seen some profit taking in the overnight markets, but just for good measure… I think it appropriate to show that the euro reached 1.48 yesterday. That was a 3.5-euro move, and after falling to a low of 1.3869 on September 12th (before bouncing big that day), the euro has now recovered about 7%. I would call that “some healing”.

I don’t believe this will be all for the euro or the other currencies that followed the Big Dog euro off the porch to chase the dollar down the street yesterday. Our old Corp FX Trader, Ashish, sent me a note from Citi yesterday regarding the dollar’s move, and they don’t see the events of last week as anything “positive for the dollar”. These are things I’ve tried to tell everyone since they began last August, and I don’t mean August 2008! I mean August 2007! But, I guess no one sits up to listen until the “Big Boys” with their million dollar research centers say it’s so!

That’s OK… At least someone is agreeing with me… For a while there, it didn’t seem like anyone was going to go out on a limb with me regarding how weak the dollar should be. The folks at Citi also sent out a note to their customers regarding the move in the dollar index. The note involves understanding chart movements… But in the end, the researchers at Citi show that the dollar index move higher has reached what’s called “an evening star pattern”. The conclusion is simply that the dollar index is poised to fall.

Another thing moving the euro a bit lower this morning, from yesterday’s high, is the fact that stability has returned, somewhat, to oil. Yesterday, oil shot up $24 at one point! The largest one-day movement in Black Gold/Texas Tea! Oil futures have calmed down overnight.

The other asset that had a moon-shot day was gold. The shiny metal reached $900 and change in yesterday’s trading, and sits just below that figure at $897 this morning.

So… We saw it all going on versus the dollar yesterday. Gold, oil and the currencies… And rightly so, don’t you think? I mean, if the Treasury and Fed are going to add “at least” $1 trillion in new spending to the deficit side of the ledger, and flood the markets with more dollars, the dollar should be beaten about the head and shoulders!

Morgan Stanley’s Stephen Jen doesn’t believe this to be the case, though, and said that once the “shock” from the bailout is over, that the dollar would rebound. So… There you have it… Two sides to every coin!

Yesterday, I talked about how Goldman and Morgan Stanley were now Bank Holding Companies… And last night on the drive home I was sitting in traffic, and my mind started thinking about these HUGE Bank Holding Companies probably going on a raid of regional banks to accumulate deposits. They had better be careful, as these regional banks (except EverBank of course) have a ton of toxic waste mortgage bonds on their books, and even if they sell them to King Henry’s RTC-like institution to take on this junk, they will have to sell them at HUGE LOSSES! And that won’t make their balance sheets look very good!

Did you like that “King Henry”? Of course I’m talking about Henry Paulson, the U.S. Treasury Secretary and how he has acted like a “king” here lately; so I thought I would bestow the title of King on him!

The Canadian dollar/loonie (CAD) sure took their kissin’ cousin to the south to the woodshed yesterday. A couple of weeks ago I talked about how the loonie was remaining Steady Eddie around 94-cents. Well, yesterday the loonie jumped out of that comfort zone and up to the 96-cent handle, and it doesn’t look as though it will stop there. Of course, with oil and gold doing the Super Ball Bounce higher, the loonie was bound to finally move out of the comfort zone. I still think that loonie will be capped around parity to the green/peachback; that is, unless oil and gold take off from here.

The two-day sell off/carry trade return in Japanese yen (JPY) ended yesterday. The yen shook off the previous two-days of selling and got right back to rallying versus the dollar, moving to the 105-handle. Risk is definitely back on the table folks… And that will help the yen any old day!

The Swiss franc (CHF) saw a push higher on the back of the euro’s wave, but also gained, I would think, due to some “safe haven” buying. Investors still believe that francs are backed by gold, and therefore in times of geopolitical problems, and financial meltdowns, there is usually a rush to buy Swiss francs as a “safe haven” currency. My father always told me, “You are what you are perceived to be”… And so… If the franc is perceived as a “safe haven” currency, then so be it!

The Nordic currencies were really flying high yesterday – Norway (NOK), Sweden (SEK), Denmark were all going strong versus the dollar. Norway’s krone has seen a backing-off this morning, though, as it is thought that the central bank (Norges Bank) will keep interest rates unchanged at their meeting tomorrow. That, and the fact that oil has backed off some, will cause the krone to fluctuate a bit. But, I’m still pinning my colors to the Norway, Sweden, Denmark masts.

And we finally saw some movement from the stagnant Chinese renminbi (CNY) overnight. The renminbi had been like some stagnant pond-water, collecting mosquitoes over the past month. But overnight, it finally broke free of that pond-water, posting a nice gain versus the dollar!

One currency that didn’t participate in the rally versus the dollar yesterday was the South African rand (ZAR)… First, there was news that President Mbeki has stepped down, and now the Finance Minister has left. This is nothing new to the politics of South Africa, and the rand is usually taken to the woodshed for the political goings on here.

The data cupboard is pretty bare today, with very little to look at. There’s the Richmond Fed Manufacturing Index (third tier data), the House Price Index for July, which should show more rot on the housing price vine, and the ABC Consumer Confidence report for this week. So, no real biggies here, which means the dollar will have to rely on the outcome of the bailout package

We’re still sitting around waiting for Congress to deal with King Henry’s bailout package. I sure hope these dolts in Congress realize that this package is not big enough or broad enough to efficiently deal with this mess. And in the end, it will just be a colossal screw-up of the financial system… One that former Fed Chairman Paul Volcker says is “broken”…

The Wall Street Journal called yesterday to get my take on the effects of all this dollar printing… And today I’m going to talk to the MarketWatch people about this mess… Interesting times, eh?

A trader friend of mine was telling me yesterday that the dollar movement was strictly long positions being put on in the currencies, and not all-out short positions in the dollar. (of course going long a currency VS the dollar means you’re short the dollar, but what I’m talking about here is where a trader / investor just “shorts” the dollar) Once we see the all-out “shorts” being put on… Then we’ll be back to the all-out negativity toward the dollar. And we all know what that looks like!

Currencies today 9/23/08: A$ .8425, kiwi .6890, C$ .9675, euro 1.4775, sterling 1.8585, Swiss .9275, ISK 94.45, rand 8.1780, krone 5.5550, SEK 6.50, forint 163.05, zloty 2.2440, koruna 16.35, yen 105.50, baht 33.75, sing 1.4110, HKD 7.7645, INR 45.80, China 6.8115, pesos 10.65, BRL 1.8025, dollar index 76.22, Oil $108.10, Silver $13.37, and Gold… $893.30

That’s it for today… The end of regular-season baseball can’t get here fast enough for my beloved Cardinals… They have faded quickly, just like last year… Just don’t understand how a team can play at a high level for five months and then collapse. Oh well, wait till next year! And our Rams? Oh Geez Louise, good thing my beloved Missouri Tigers know how to play football! My Tigers will be on national TV October 4th versus Nebraska on ESPN, so you can check them out too! It was good to get back in the saddle at the trading desk here yesterday. It was a crazy day on the phones. We were so backed up, I had to jump in and take some pressure off the kids on the phones! This financial system meltdown has our phones lighting up like the Rockefeller Center Christmas Tree. So, if you call, please be patient. Of course, isn’t that like everything in life… People tell you over and over again to protect your investments by diversifying into currencies and metals, and then when the “you know what” hits the fan, they panic and have to “get it done” now! OK… If that’s your bag… No worries, we’re here! And… We’re hoping for a Terrific Tuesday, and so should you!

Chuck Butler
September 23, 2008