A New Trading Theme

Good day… And a Tub Thumpin’ Thursday to you! Well… How about those wily veteran central bankers? They all got together and decided to cut rates. The Reserve Bank of Australia (RBA) went first with their 100 BPS cut, and opened the rate cut sea for the rest of the central banks around the world. The European Central Bank, The Riksbank (Sweden), Swiss National Bank, Bank of Canada, Bank of England, and the Bank of China all lined up at the rate cut table. The Bank of Japan, The Norges Bank (Norway), and Reserve Bank of New Zealand did not participate.

The Bank of Japan doesn’t have any rate to cut, The Norges Bank will wait until their regularly scheduled meeting on 10/15, and the RBNZ believes that they have taken their toxic waste bond flu shot.

RBNZ Governor Bollard said last night… “New Zealand banks have high-quality assets.  Fortunately they do not have the poor quality assets that have proved so damaging overseas.” Boy… Given what happened after the European Union’s Finance Minister put his foot in his mouth, pointing a blaming finger at the U.S. and putting the EU’s fortunes above those of the U.S., only to see the walls crumble down all around him, RBNZ Gov. Bollard, might want to talk low, talk slow, and don’t talk much at all!

That’s a famous John Wayne line… Just had to use that when I saw it on the Bloomie this morning!

So… The currency traders around the world, stopped when the rate announcements were made, to check the pulse of the markets. At first, we saw calm… But then, traders and investors began to say, “Uh-oh! Maybe things are worse than we imagined if central banks around the world are cutting rates”… So, getting back to the theme I talked about yesterday – where if it looks bad for the United States, buy the dollar, and if it looks good, sell the dollar – we saw the currencies go back and forth… But overnight, calm seems to have settled in, and keeping with the “theme”, that means a weaker dollar.

The stock markets of Asia and Europe have generally been stronger, which could lead to a tourniquet being applied to the U.S. stocks… And again – keeping with the “theme” – that would spell a further weakening of the dollar.

This isn’t rocket science; it’s just what I see happening in the currencies right now. It’s like looking into the mirror, as everything is opposite; but that’s what’s happening right here, right now!

G-7 ministers meet this week, starting tomorrow, I believe. U.S. Treasury Secretary King Henry Paulson, held a press conference yesterday afternoon, and in my opinion, effectively kicked off the G-7 meeting. King Henry was particularly focusing on the coordinated policy moves. I would think we could expect more of these kinds of global policy maneuvers going forward.

I’ll tell you this… It’s my opinion that the coordinated rate cut didn’t do what the central bankers had hoped it would do. And that is, unlock the seized up credit markets… But, you can’t blame them; the central bankers are using whatever they have at their disposal to deal with this global mess.

Speaking of messes… It was reported this morning that Kaupthing Bank, the largest Bank in Iceland, has fallen, as the government seized control. The currency CAN’T EVEN TRADE AT SPOT! That means immediate cash isn’t available, folks! This is very serious stuff! Somebody expressed dissatisfaction with the price we received in the market the other day at 171. Yesterday, the last spot trades were done at 259! UGH! A foreign exchange dealer at Nordea in Copenhagen said, “Effectively the krona can’t be traded at the moment because there are no banks to clear the trade.”

Hopefully, that situation will be fixed quickly, and currency transactions can be cleared again, at least for spot… Oh… And that peg to the euro (EUR) that the Governor announced on Tuesday? It was dropped yesterday, because the peg to the euro at 131 could not be defended. Trades were going off at 340 krona per euro. It’s a bad situation. Hopefully, a white knight will step in to help here… Unfortunately, banks around the world (except the few mentioned above) have their own problems to deal with right now. Russia made a big loan the other day, and with Russia swimming in cash from oil, maybe they could be the white knight.

Aussie (AUD) and New Zealand dollars (NZD) saw some love last night for the first time in what seems to be a month of Sundays. I wouldn’t put too much into a one-night stand for these two. Yes, it’s true that they have been beaten up too much and look oversold to me, but that doesn’t mean the markets see it that way. We’ll have to see if more than a one-night stand is in the cards for these two.

One thing keeping a lid on any big time rally for these two, especially New Zealand, is the fact that the Japanese appetite for anything offshore has gone away. Recall that I told you several times over the years that the Japanese loved to sell their currency and buy kiwi (and Aussie)? Shoot Rudy, they would even issue Japanese bonds issued in kiwi!

With the Japanese appetite for anything offshore going away (at least for now) the financing of the U.S. Current Account Deficit comes back into the worry picture. Recall, that the Current Account Deficit needs about $2 billion per day in foreign investments to keep it properly financed. And if the Japanese are slowing their offshore investments, that means the United States, too – not just New Zealand and Australia!

Another country with a currency crisis going on is Mexico… For the last month, the currency has teetered, and yesterday, it fell off the cliff, on rumors that Citibank and Chase were pulling up stakes in Mexico. There was nothing to confirm those rumors, but the damage had been done. The pesos slipped to a 14 handle… Recall that two months ago, it was all seashells and balloons for pesos as they almost moved to a multi-year high. But that’s in the rear view mirror now… UGH!

The Mexican President, Calderon, has proposed a stimulus package worth 1% of GDP to help the economy… But the real problem here is that the cow has already left the barn. This is the economy that showed signs of slowing, but got caught in the mud after all the hurricanes this year… And how many times have I told you that Mexico needs high interest rates to attract foreign investment… Foreign investors use the high interest rates as sort of an insurance policy, risk policy, whatever, to pad their investments in case of problems that have existed in Mexico in the past. Well… When the economy slowed, and it looked like the central bank may have needed to cut rates, the investors began to leave. And then with the rumors yesterday, the “you know what” hit the fan in Mexico. At this point, it’s nothing more than a currency problem… This is not Iceland! Oh, and the peso has “recovered” back to a 12 handle.

One country that I was surprised to see on the list of rate cutters yesterday was Canada. I’ve written about the surprising strength of the Canadian economy the past couple of months, and even yesterday they saw Housing Starts at a pace that was stronger than forecast… But the Bank of Canada (BOC) joined the rate cut party anyway. Why you would go out and debase your currency just to keep your neighbor to the south happy is beyond me! The loonie (CAD) has taken the rate cut hard. The currency slipped 2 cents yesterday, from 90-cents to 88-cents (rounded). It was just a few weeks ago that the loonie was trending toward parity again.

OK, this morning, I turned on the screens and saw the euro trading 1.3750, and said, “OK… That’s better”. But now, I look up, after all this furious typing, and see that the single unit has slipped back below 1.37, to 1.3675. I don’t know why it has to play these games with me! Trust me, I don’t need any more stress! But… It is what it is… There’s nothing I can do about, so no reason to bang my head against the wall, and throw things… Well, maybe the throwing, it always makes me feel better! HA!

Well… Gold didn’t gain yesterday for the first time in four days. Gold continues to outperform oil, though, and that in itself is a major victory for gold! With the coordinated rate cuts yesterday, I thought to myself, “Chuck, this is going to reignite the inflation story, and that should be good for gold.”

Oh, and one other thing, and this is BIG! Who was right and who was wrong on the Fed’s next rate move? Chuck, or the big banks? I told you months and months ago that the Fed’s next move would be down before moving rates up again… Now, I didn’t foresee the coordinated rate cuts coming then, but I did see the Fed cutting rates to reignite the economy, that they kept saying was strong… And I kept saying they were wrong! Anyway… Rate cuts should get inflation roaring again. And again… That should be… Good… For… Gold!

Yesterday afternoon I got a minute to read a newsletter that brought something back to my mind that I had talked about in July and early August, and that is the huge dollar short covering we saw in July while I was in Vancouver. At that time, it appeared very suspicious, and I said it was government intervention. Well, it may have been some of that, but it now appears to be a widely known fact that the government gave the “heads up” to several large banks, and allowed them to cover their dollar shorts and sell gold. Hmmm… Don’t you think it would have been nice for them to give all us investors the “heads up” too? This just ticks me off to no end folks. You can’t believe how angry I get when I begin to think about this stuff!

Any way… Back at the ranch… Now their rate cuts will reignite inflation, and gold should look to rebound, maybe back to previous highs? Who knows… But… The Gov.’s and Fed’s moves in the end, will have caused a lot of pain, and achieved nothing but to keep the dollar from circling the bowl.

And in an attempt to bring this home with a happy story… The Japanese yen (JPY) continues to bask in the “no carry trade” sun. We saw yen trade with a 98 handle yesterday… I hadn’t seen that since around 1995 or so… I would have to go back and check, but in the mid ’90s we saw yen trade to the mid ’80s… And they were in such a mess economically. I’ve said it before many times, but this mess we’re in here in the United States has very familiar ring tones to what happened in Japan in the ’90s… And, come to think of it, had the same currency trading theme that I believe is going on in the dollar right now. The worse-off Japan’s economy got, the better the currency did… Just like the U.S. right here, right now! WOW!

Currencies today 10/9/08: A$ .7030, kiwi .6205, C$ .8895, euro 1.37, sterling 1.7330, Swiss .8850, ISK no quote, rand 9.0575, krone 6.1010, SEK 7.0475, forint 183.50, zloty 2.5130, koruna 2.5125, yen 100.70, baht 34.34, sing 1.4680, HKD 7.7650, INR 48, China 6.82, pesos 12.11, BRL 2.3325, dollar index 80.79, Oil $88.80, Silver $11.62, and Gold… $888 (this has just slipped here, as it was $912 as I was writing about Gold above)

That’s it for today… The League Championship games for baseball begin tonight. You’ve just got to love those Tampa Bay Rays don’t you? They had never won more than 70 games in a year prior to this year, and now they’re in the American League Championship! I love underdog stories like that! Sort of like my beloved Cardinals in 2006! Man! That seems like so long ago now! The Dodgers are in the National League Championship, and every time I see or hear about the Dodgers, I think about Rick Monday, and how he made the greatest play ever in baseball… You should Google it if you don’t know what I’m talking about. Forever ingrained in my mind, and brings chills to my spine every time I watch it… OK… Things haven’t calmed down here on the trading desk, and I’m leaving for almost two weeks! I sure hope things do calm down while I’m gone… Until then, I going to try to have a Tub Thumpin’ Thursday and hope you do too!

Chuck Butler
October 9, 2008