A Return to Debit Crisis Trading

The rain was coming down hard on the dollar yesterday… But, this morning, when I turn on the screens, it looks like the dollar selling that went on all day yesterday, has had the brakes applied. I would say slammed on, but it all happened while I was sleeping, so I don’t really know for sure!

Yesterday… The currency rally was led by the euro (EUR), which climbed all the way past 1.23 to 1.2360 on the day. This was the first “real rally” and not “mini-rally” that we’ve seen in the single unit in what feels like a month of Sundays! There was not “real” news… In fact, I told you yesterday that German Investor Confidence plummeted, which should have sent the euro reeling… But, instead, in out world of “opposites” bad data equals currency strength… Hey! We’ve seen it for months with the dollar, so why not the euro?

There was a story that passed by on the screens yesterday about how the “fear of owning euros” was ebbing… This morning, that “ebbing” must be reversing, for the euro just fell back below 1.23! And then back above… So, it’s going to be one of “those days.” UGH!

The Bloomie is reporting this morning that Russia is “discussing” the possibility of adding Aussie (AUD) and Canadian dollars (CAD) to their reserves… Frankly, I’m surprised they haven’t already done so! It doesn’t take a rocket scientist to see the potential that these two currencies have! Right now, the US dollar accounts for 47% of Russia’s currency reserves, euros are 41%, British pounds (GBP) are 10%, and yen (JPY) is 2%…

Russia has reduced their dollar holdings from 50% in 2006, and for those of you at home keeping score, we’re not talking about peanuts here… Russia has the third largest currency reserves in the world at $458.2 billion! With my amazing ability to work a calculator, the move from 50% to 47% since 2006, was worth almost $14 billion dollars less in their treasure chest of reserves.

So… One has to wonder… What currency are they going to sell to get them the funds to buy Aussie and Canadian dollars? Will it be dollars? Or euros? And how much? These and many more questions will be answered if Russia does what is being discussed… So stay tuned… Same bat time… Same bat channel!

OK… There was news yesterday that the Fed had their first auction of term deposits (CDs)… One reader sent me a note and asked me to explain what this was all about… So, here you go!

This is just a way for the Fed to drain the billions of dollars that are sitting in the banks right now, as reserves… The Fed is scared to death that the banks will eventually get back to loaning money, and if they do it with the cadre of cash that they currently have, the velocity of money would go through the roof, and right behind it would be inflation.

These CDs are attractive to the banks because they know it will get paid back, as opposed to loaning anyone money right now, and, they get paid interest on the money! Of course, I have to chuckle, because, unless there’s a new law that requires banks to buy these term deposits from the Fed, it will become a useless tool to drain reserves, once banks feel that it’s OK to dip their toes back into the lending waters, for they will make more lending the money than they will with the interest paid on the term deposits!

So… That’s the lesson for today, HA!

So… We’ve had this back and forth with the US and China over the Chinese currency policy… Now it looks like the IMF is siding with the US. (And of course they would! The IMF’s funding is heavily weighted with US funds.) The IMF’s Chief Economist commented on the issue of renminbi (CNY) revaluation stating, “I don’t know when and by how much the renminbi will be revalued, but I believe it is in [China’s] interests. For the rest of the world it is important that it happens as soon as possible.”

I now wait for the Chinese response to the IMF… This ought to be good!

In Australia overnight… Australian Housing Starts increased 4.3% in the first quarter from the previous quarter and brought the total to a six-year high! There are reports there that the increase was fueled by government stimulus… So I’m not too impressed with the figure knowing that! It’s still data that will require the central bank to address, which means raise rates… Again, I’m calling for the next rate hike in Australia to come in August, during the dog days of summer…

And in Canada… The “separation” with the US dollar/economy/Fed rate policy, continues to be the “story”… And with the oil price continuing to rise, the loonie continues to be well bid. Oil this morning is up again trading over $76… And gold was up yesterday too, so it was all good for the loonie!

Oh… I see the thing that slammed the brakes on the euro’s rise overnight now… We all know that the debt crisis in the Eurozone wasn’t over… But the markets seem to act as if they did think it was over, and now they’re surprised to see the problem come back to haunt them, as it was reported overnight that the US Treasury and the IMF are putting together a credit line of as much as $307 billion (250 billion euros) for Spain…

I would expect now to see the euro head back down South, for the debt crisis news is back on the front page…

And India is tearing a page out of Australia’s book on how to stop a currency rally in its tracks… India is proposing a capital gains tax on all stock transactions by Indians and overseas funds.

Yes, this would help close the gap in the budget, but come on! Isn’t there something else that can be done? Taxes… On investors… That’s just wrong in my book! The currency rally the rupee (INR) had enjoyed in recent days will be wiped out in a heartbeat, on this news… So… Maybe, that’s what the Indian government wanted in the first place?

Today, the data cupboard here in the US will yield, PPI (wholesale inflation), which is expected to show an increase of nearly 5% in May… But, something happens to that number when it is converted to consumer inflation (CPI)… And that “something” is the hedonic adjustments the government makes to CPI… UGH!

We’ll also see my fave, Capacity Utilization… And Industrial Production for May.

To recap… The strong currency rally led by the euro yesterday had the brakes slammed on it by a return to focusing on the debt crisis in the Eurozone, when a report said the US and IMF are preparing a line of credit for Spain. Russia is reportedly discussing buying Aussie and Canadian dollars and adding them to their currency reserves. And India proposes a capital gains tax on investors…

Chuck Butler
for The Daily Reckoning