A New Carry Trade Currency?

Well… Here we go with the last three days of September… A month that saw gold return to $1,000 and the non-dollar currencies all return to levels they held a year ago, having withstood the onslaught of flight-to-safety trades that benefitted the dollar after the Lehman Bros. collapse.

We’ve seen the Fed Chairman sound the “all clear horn” and me question why anyone would still be listening to this guy! And our country is becoming quite divided over the health care issue… So… There we have it… September all rolled up in a nice package, to take out the trash!

OK, we’re all caught up now… On Friday, the currencies gravitated toward weaker levels, as the dollar buying continued, with stocks leading the risk assets lower… But it hasn’t been a “taken to the woodshed event” for the currencies yet… So, the question remains if this is the correction we’ve been waiting for or not.

Last week I gave you some quotes by Nassim Taleb, but forgot to tell you that he was the author of the book The Black Swan… Nassim Taleb was talking to a group of business people in Hong Kong this weekend, and asked the same question I’ve been asking, as he wanted to know why Big Ben Bernanke, and Treasury Secretary Tim Geithner kept their posts after failing to foresee the collapse in global credit markets. Taleb said, “Bernanke, Geithner, and Summers didn’t see the crisis coming so why are they still there? Bernanke is like a pilot who didn’t see a hurricane.”

Good stuff, eh? Especially, when you read The Washington Post and see that the Fed was ignoring pleas from consumer groups, as far back as 1999, that subprime lending was expanding… Turning a deaf ear on the consumer groups, the Fed left rates low, and accommodating… What the heck do we have these guys for anyway! The Fed has been the root cause of every financial problem we’ve had in this country since they were created in 1913.

OK… Last week, The Financial Times ran a story regarding the dollar laying claims to being the top carry trade currency. Let’s read a bit from the FT… “For years, the yen was the currency of choice to fund international Carry Trades. Analysts say negligible US interest rates, [and] its quantitative easing measures…sing that the country is set to withdraw from its ultra-lose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.”

Well… I had already told you all that, but when you see it in the FT, it obviously gives it more credence, eh?

But let’s talk about that for a minute… If the dollar begins to become the new funding currency of the carry trade, that means that people will be selling the dollar short, and using the proceeds to buy a higher yielding asset. Well, in today’s markets, there aren’t what we would traditionally consider to be “high yielding assets”… For the carry trade is quite risky, therefore you need to have some cushion from the “buy side” asset… The only “real interest differential” in the world resides with Brazil… But the real (BRL) is traded on a non-deliverable forward, which means it’s just as liquid as say Aussie (AUD) or kiwi (NZD), which were the main beneficiaries when the yen (JPY) was the funding currency.

So… This new carry trade, might have to wait a bit before getting into fourth gear. When the Reserve Bank of Australia (RBA) begins their rate hike cycle, probably by year-end, then it might begin to make sense… Which is just another thing in the gauntlet the dollar has to run through every day!

Speaking of the Japanese yen… The yen reached an 8-month high of 89.30 overnight. I told you last week that yen is getting a lot of love from Japanese exporters that are repatriating their profits in yen, ahead of the end of the month/quarter.

I had to laugh out loud when I read a story about the Japanese Finance Minister, Fujii, who apparently hadn’t gotten the memo about how Finance Ministers are supposed to jawbone the yen lower… Recall, I had told you that he said over and over again that he supported a strong yen… Well… That all changed once he got the “memo”… Fujii said last night that, “people were mistakenly saying he supported a strong yen.”

Hey Fujii, got the memo now? Is it clear? Crystal… OK, now go out there and jawbone the yen weaker, or you’ll be falling on a sword!

This week is chock-full-o-data all over the globe… In the US, we’ll end the week with the Jobs Jamboree, while Japan will print their latest Tankan report (which checks the pulse of the economy), Canada will print their latest GDP, China will print their latest Manufacturing Index, and Australia will report on retail sales.

In the Eurozone, Germany re-elected Angela Merkel as chancellor… Now, she just needs to figure out how to deliver those tax-cuts she promised during the campaign!

The euro (EUR) had climbed back to 1.4720, but the election results were not taken as “euro friendly”. Remember, I told you that there could be tax-cuts coming in Germany, which is the Eurozone’s largest economy. Tax-cuts are great, if you are in a fiscal position to do so… Germany has a nascent recovery at best going on right now, so the timing is not what traders are happy with… Therefore the euro dropped like a stone to 1.4570, but has bounced off that as I write, back to 1.4635.

And the Reserve Bank of Australia, (RBA) was in the news overnight, as the RBA Governor Stevens gave a speech that was hawkish… Stevens mentioned that the interest rates needed to move off their “unusually low levels”. He also pointed out something that should be quite recognizable by all central bankers now, but apparently not here in the US… And that is that “imbalances build up when rates are left too low for too long.”

Well… The highly touted G-20 meeting last week ended not with a bang, but with some newfound strength as a group. Recall on Friday I told you that they would replace the G-8 as the watchdog for the economies of the world. That news was announced later on Friday… The meeting ended with leaders from the G-20 nations saying that they plan to cooperate on an overhaul of financial regulations to prevent arbitrage in the global system. By the end of next year, banks will be required to hold more capital, and compensation policies will need to be linked to longer-term performance.

You know… When the media reports “bankers compensation” they’re not talking about real bankers, per se… They’re referring to the Merrills and Goldmans of the world that pay out billions in bonuses… Or at least “did”… Just thought I would clarify that point…

And then there was the British pound sterling (GBP), which I kept saying over and over again was a house of cards… Well, that house of cards is collapsing. Even the speculators that were buying it because it was a part of the mix of currencies that made up the IMF’s SDRs (Special Drawing Rights), are backing out now.

Data in the US besides the Jobs Jamboree at the end of the week, include the S&P/Case Shiller Home Price Index for July which will print tomorrow, along with consumer confidence, which is expected to be stronger… I guess the people they surveyed haven’t seen the Bernanke video collection of his statements that couldn’t be more wrong, and still believe him when he says it’s all OK! Wednesday brings us the final print of second quarter GDP. Thursday has two of my faves, personal income and spending, and then Friday’s Jobs Jamboree.

So, if the data continues to show some strength, but nothing to speak about, I would think that the risk takers will remain confused, and it could lead to further selling in stocks, and other risk assets. Don’t really know… Just an opinion on what might happen…

OK, to recap… The dollar has rebounded, but nothing too strong to speak of as of this morning; G-20 is the new world economic watchdog, there’s a ton o’ data to print this week all over the globe, and Japanese yen continues to outperform the other currencies versus the dollar.

The Daily Reckoning