A Rout on the Dollar

Well… Last night I was checking the markets to see what was going on, since I had walked away from the desk on Friday afternoon… And much to my surprise, the currencies, led by the euro (EUR), seemed to be breaking out of their recent trading ranges. The euro was trading at 1.4335, when I checked then… And when I turned on the currency screens here at the office this morning, the euro has stretched that move to the 1.4480 level! WOW! Looks to me as though the deficits that the dollar drags around are not looking too sharp to investors… But then, what took them so long to dump that fashion faux pas? Ahhh, grasshopper… As I’ve said many times before… The markets will do what they are supposed to do… Just not when… Which means, sometimes you have to wait… And wait… And think that the guy ranting each day in the Pfennig is barking up the wrong tree!

Chinese stocks were up 2% overnight, so that has led to even more risk taking this morning in Europe… Wait till the “Big Boys” get back from the Hamptons this morning and see what’s gone on since they left for their 3-day Holiday weekend!

You know the dollar is not faring well, when not only the usual suspects of euro, Aussie (AUD), kiwi (NZD), loonies (CAD) and francs (CHF) are taking liberties with the dollar, but also the Japanese yen (JPY)… And THAT, folks, is an indication to me that maybe, just maybe, cause you never know, fundamentals could be coming back to the head of the class. Oh! And one other thing that puts a nail in the dollar’s coffin is, last night I checked the price of gold, too… Then it was $999. This morning… It’s $1,005!!!!!!

So… We’ve got euros kicking tail and taking names, and gold kicking the dollar when it’s down. We’ve seen this type of rout on the dollar before… They used to take place at least once a week before the financial meltdown in August of 2008… And before the collapse of Lehman Bros. That’s when the markets, traders, and investors, all had their eye on the fundamentals ball, and whacking the dollar out of the park whenever another piece of bad data came the dollar’s way.

If this is the beginning of another period like we saw pre-August 2008, then get ready to strap yourself in, and make certain to keep your arms and legs inside at all times during the ride! If it’s a false dawn, it sure is a strong false dawn!

One of the best writers that I’ve come across is Ambrose Evans-Pritchard, and I came across an article he did this weekend… This news could also be one of the reasons the dollar is getting sold across the board this morning. Here’s a snippet of the story…

“Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”… He went on to say, “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.”

So… According to a top member of the Communist hierarchy… The US Federal Reserve’s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy. Shouldn’t that be enough to compel other owners of dollars to do the same? I would certainly think so, folks… I would certainly think so!

And in a not-so-wide-spread story… The United Nations (UN) is talking about creating a new global reserve bank to issue a new currency to protect emerging markets from the “confidence game of financial speculation… HEY! The UN said this… Not me! So… Those of us who have read the book The Creature from Jekyll Island, have the conspiracy chills going down our collective spines right now…

Isn’t this the second time this year that we’ve heard about a “global reserve bank”? The first time we heard about it, the IMF was to assume that role and issue special drawing rights (SDR’s) as a global currency… Now, we hear something a bit different, but it’s the same, folks… I’ll tell you right now what they are doing… The “powers that be” are “getting us used to hearing about this” by releasing stories here and there… That way, when the time comes for them to unveil their plan to have a global currency, they’ll be able to say, “We’ve been talking about this for a long time, and no on had a problem with it then!”

OK… Enough of the conspiracy stuff… Let’s see what’s going on with the other currencies beside euros and yen! Well, first off we’ll get central bank meetings from the Bank of England (BOE), Bank of Canada (BOC), and the Reserve Bank of New Zealand (RBNZ), all on Thursday… I think that for the most part, the data that will print this week will be important, but all will print as expected, which doesn’t really move a market.

For instance… We’ll see the latest trade deficit data, and monthly budget statement… Those numbers will be not so great, but as long as they print as expected, they won’t cause major earth movements. And as far as today and tomorrow are concerned the data cupboard is pretty bare, with only the Fed’s Beige Book printing tomorrow afternoon… So… This rout on the dollar could get extended and push the envelope on dollar weakness…

In Australia, The August NAB Business Confidence and Conditions printed a very strong increase to put the report at a six-year high… This report only leads me to believe that the Reserve Bank of Australia (RBA) will probably hike rates as soon as October. Just thinking of the RBA raising rates lights a fire under the Aussie dollar, and it’s trading this morning at 86-cents and change.

The Canadian dollar/loonie is trading with some fire this morning… Canada’s jobs report showed that 27,100 new jobs were created in August, when a decline of 15,000 was expected! Add this news to the news from last week where Canada’s output increased in the second quarter, and one would have to begin to believe that Canada has exited their recession… However, the Bank of Canada (BOC) – as they will prove this Thursday when they meet – has already stated that they will keep rates low until an economic recovery is firmly in place and the downside risks have been put in the rear view mirror. So, the loonie won’t get help from the BOC… But with gold at $1,005, and oil on the rise again… Well, I talked about this last week, and it’s playing out… I love it when a plan comes together!

Speaking of jobs… The US Jobs Jamboree on Friday held a couple of surprises… 1. The number of jobs lost in August was smaller than expected at -216,000… And 2. The unemployment rate rose to 9.7%… Oh! And the previous month’s number was revised up from -247,000 to -276,000… Sneaky how that do that, eh? The media is all over the better-than-expected -216,000, and forgot to mention the upward revision to the previous month’s number, which wasn’t small potatoes either!

For many years, I’ve tried to get people to look at the revisions – the weekly hours worked and the average hourly earnings – to get the “real” beef from the Jobs Jamboree report… We just talked about the revision… The Weekly Hours Worked and Hourly Earnings were a non-event, with nothing to tell us that the economy is growing stronger, or that it’s getting weaker… So, to me… The Jobs Jamboree was a washout except for the revision!

The Brazilian real (BRL) got a boost yesterday, as it was announced over the weekend that a new offshore oil reserve had been discovered. And I really liked what President Luiz Inacio Lula da Silva is proposing… The President is proposing that Brazil begin to form an oil fund, that would be similar to the one that I’ve talked glowingly about for years, in Norway…

Speaking of Norway… The Norwegian krone (NOK) has taken a queue from the euro, and really made a strong move overnight versus the dollar.

And in yet another step toward gaining a wider acceptance for their currency… The Chinese announced the issuance of renminbi (CNY) denominated bonds in Hong Kong… This would be the first renminbi denominated bonds to trade in the capital markets, and a large step for the Chinese and their currency.

Speaking of the renminbi… The Chinese allowed the currency to gain versus the dollar by a wide margin overnight. This is the first significant move versus the dollar in some time…

And with all these strong currency moves… The dollar index has fallen to a low for the year at 77.24… This is a significant move, folks… Because… In the first quarter of this year, the dollar index got down to 77.40, and bounced higher from there… And here we are again… It was thought that the 77.40 figure would prove to be a resistance figure… But the dollar slid right past that figure. I would think that having the index remain below 77.40 for the day and overnight would be HUGE!

So… Before I finish for the day… Let’s recap… The dollar has fallen big overnight… The Chinese are not happy with the Fed printing dollars… The UN is talking about replacing the dollar with a global currency that is issued by a “new global reserve bank”… And all the currencies along with gold and silver are rallying on these things.

The Daily Reckoning