A Ride on the Currency Roller Coaster

The Ohio Players were singing their song “Roller Coaster” as I begin today’s letter. I thought the song played well with the action we’ve seen in the currencies lately… The Roller Coaster of Love, has turned into The Roller Coaster of Currencies…

What am I talking about? In each of the last four or five mornings, I’ve come in, turned on the currency screens and seen the euro (EUR) trading stronger versus the dollar; the last three days, it’s been above 1.31, only to see the single unit fall throughout the day in US trading…but then rally again overnight… Up, down, up, down, we need some new directions, eh?

Well, today is the day that the markets have been waiting for, with the FOMC meeting here in the US. It’s pretty confusing right now, as to which way the markets see the FOMC moving from here… Will they or won’t they, implement more quantitative easing?

I see one headline story on the Bloomie that says: “Franc advances on Speculation Federal Reserve May Hint At Asset Purchases”… And then there’s this one: “N.Z. Dollar declines on Speculation Fed to Refrain From Further Stimulus.”

What’s it gonna be, boy? And, oh… By the way… I love it when someone refers to the Cartel as the Federal Reserve… For there’s nothing “Federal” about them; nor are there any reserves…

So… You can see that the markets are a mixed can of nuts over what the FOMC will do this afternoon… Me? One day I think they’ll go the QE route, and then not… Like yesterday… The NBER, the unit that decides when we “officially go into and out of recessions” made a strange call, saying that the US recession officially ended in June of 2009… WHAT? Where the heck did that come from? You don’t think it has anything to do with the upcoming mid-term elections do you? I mean if it ended in June 2009, why did it take them 1 1/4 years to tell us? This is all very fishy to me…

Here’s what I think we’ll see… I don’t think the Cartel has it in them to come right out and say they will implement quantitative easing (QE)… They saw what happened the last time they did that in March of 2009, the dollar went into a 9-month slide that almost reversed the previous nine months of dollar strength that came from the financial meltdown and the flight to safety.

Instead… I think the FOMC will beat around the bush… They’ll hem and haw and talk about older, calmer days… They’ll hint about QE, which means they’ll do it, but in a stealth manner, in hopes that the markets don’t catch on… Hey! That’s your central bank at work there! It’s not my central bank; I disowned them years ago!

So… Here’s the skinny… If the FOMC announces QE, a selling of the dollar will take place… If they don’t, a rally in the dollar will take place, and if they do like I said… There will be a bit of a dollar rally in relief, but nothing to get all up in arms about.

OK… Enough of that! Back to what’s happening this morning… Well… Ireland and Spain have both completed successful auctions this morning, and the Eurozone’s rescue package has received two AAA ratings… Just shows to go you that the ratings agencies are NUTS! There’s no way the Eurozone rescue package, which created more debt, should be AAA-rated!

So the euro roller coaster is going up this morning… The Aussie dollar (AUD) roller coaster is on its way up too… The Aussie dollar seems to be very comfortable in the 0.9450 shoes it’s been wearing recently… We’ve seen the Aussie dollar climb to 0.9490, and then come back down to 0.9450… So the trading range has been tight, and that’s a good sign that there’s not going to be a pullback right now… It’s important that the Aussie dollar eventually moves to 95-cents and higher, or else traders will give up and move on to another currency.

I was reading a story last night that if the Aussie dollar can move past 95-cents and onto 96-cents then it has a very good shot of returning to its all-time high of 98.50… But that’s just one guy’s opinion… Me? I don’t see why not… But then, you never know what kind of a spanner can be thrown into the works… I mean, think back to July 2008… The Aussie dollar was 0.9850 and looking as if it would go to parity with the US dollar, when the rug was pulled out from under it. And it has been a long strenuous climb back that has taken two years…

Yesterday, I told you how the Reserve Bank of Australia (RBA) Governr Stevens was very upbeat about the Aussie economy. I also told you that the RBA would be on hold for another rate hike until 2011… But I’ve thought about this more, and with the RBA minutes laying out further groundwork for higher rates, there is a chance of an RBA rate hike before year-end. I don’t think the RBA is feeling any urgency to raise rates right now, for they have done the groundwork of rate hikes previously… But should we continue to see strong data, the RBA could wet their powder before year-end… And, that could be the harbinger to the Aussie dollar returning to July 2008 glory!

OK… We’ve had some time pass since the Bank of Japan received word from the Ministry of Finance (MOF) to intervene and weaken the yen… Their intervention worked, for now, but I believe the markets are just waiting to see if the MOF gives any more instructions to intervene, before they rush back to buy yen (JPY) and move it higher versus the dollar…

Recall last week, I talked about how the US continues to bang on China for their currency manipulation but allows Japan to go Ollie, Ollie, Oxen free? Well, former Japanese MOF, aka “Mr. Yen”, Sakakibara said last night that “intervention is ineffective unless it’s a joint effort, and it is ineffective in the medium and long term.” He also mentioned that he “believes that the US will begin to criticize Japan if they pursue more intervention.”

Smart man… But he gives the US Treasury too much credit, for they have their focus on China right now…

Well… The price of gold reached another new all-time record high yesterday of $1,283.70… Hmmm… The gold roller coaster has been more of one of those kiddie roller coasters with the gentle ups and downs. Gold was unable to maintain the $6 gain it had yesterday morning, falling $3, but gaining back those $3 of price this morning.

Brazil’s $1 billion dollars a day habit continues to push the real (BRL) weaker… For now, that is… As Mr. Yen said above… “Intervention is ineffective in the medium and long term”… So, unless the Brazilian Central Bank has $1 billion to spend every day until the markets give up, then OK… If not, I suggest they stop now, for in the end, they’ll have spent tens of billions and end up with a strong real any way… Maybe the Swiss National Bank Governor Roth should give Brazilian Central Bank Governor Meirelles a call, eh?

Intervention sure didn’t work for the Swiss, now did it?

Speaking of the Swiss franc (CHF)… It’s nearing parity to the dollar once again this morning, having traded above parity on two different days last week.

Then there was this… From Bloomberg… The US has fallen behind emerging markets in Brazil, China and India as the preferred place to invest, with the US having to accept their new position as highest rank among developed countries.

Here’s the part of the story that just got my feathers ruffled to no end, folks… The story says that “overall, investors give the central bank favorable marks, and that Fed Chairman Ben Bernanke is viewed favorably by 71% of respondents.”

Excuse me while I go to the bathroom; I think I’m going to be violently ill!

Before I go to the Big Finish… I said on the desk yesterday that it had been a long time since I’ve seen Swedish krona (SEK) trade below 7… And a quick look at the history shows that it was the height of the March to December 2009 rally in the currencies that held the krona below 7…

Oh, and one more thing… Apparently, I left a few zeroes off my deficit numbers yesterday… We were talking trillions in deficit just for those of your keeping score at home!

To recap… The currencies are riding the roller coaster for the past week, going up overnight, and coming back down in US trading. Last night was no different with the euro rising to trade over 1.31 again. The NBER said we came out of our recession in June of 2009!!! Amazing, simply amazing, folks… The RBA minutes were upbeat, following RBA Governor Stevens’ upbeat speech the other night, boosting the Aussie dollar higher this morning. And Brazil continues to spend $1 billion per day to keep the real from getting stronger. When will they run out of money?

Chuck Butler
for The Daily Reckoning