An Aussie Rate Cut

Good day… And a Wonderful Wednesday to you! I’m shaking my head this morning and wondering what its going to take to get this dollar rally stopped before it gets out of hand, and the exports get killed once again. And if the exports get killed, the current account deficit begins to swell again, and so on and so on. This dollar strength is not good for our economy at this stage, but that’s what we have, and I’m wondering who wrote the book of love!

I recall the last time we saw the dollar smokin’ hot like this was 2005. I sure hope the nasty emails to me don’t start again. You should have seen some of these emails; they would embarrass a sailor! OK, that’s just a saying; I’m not picking on sailors! You have to say these disclaimers or else there will be someone that gets upset and fires off a nasty email.

What’s happened in society? Email has allowed people to say things they would never say to someone’s face. It’s brought out the Mr. Hyde in people, for sure!

OK… Enough of that! The dollar has taken more steps to push higher this morning against the euro (EUR), sterling (GBP), Swiss (CHF), Aussie (AUD), kiwi (NZD), Canada (CAD), Norway (NOK) and Sweden (SEK)… All the currencies that had taken liberties with the dollar for the past six years. As I said yesterday, there’s one lone wolf… Japanese yen (JPY) that is holding its own versus the dollar…

The euro was taken to the woodshed this morning after the Eurozone July retail sales data printed an unexpected drop of -0.4% (-0.2% was expected)… Then in a double whammy for the euro, it was announced that second quarter GDP shrunk by 0.2%, bringing the Eurozone economy, as a whole, to the brink of recession. Household spending also dropped in the second quarter by -0.2%… So… Not exactly the end of the world as we know it, but… After the U.S. “inflated” second quarter GDP last week of 3.3%, you can see that the euro is losing at the game of: “your economy is worse than mine”.

When I turned on the screens this morning, the euro had fallen below the 1.44 handle. Of course, it bounced off that figure… But for how long, and how high can it go? Not long, and not far would be my answers to those questions. The euro just doesn’t have anyone on its side any longer. Big Boys like Goldman and Morgan Stanley have flipped their dollar bear stances, and issued “sell orders” on the euro. This is so similar to 2005, which had the props of the repatriation of dollar earnings in foreign countries brought back to the United States at a reduced tax rate… And Fed Reserve rate hikes. What would happen should the Fed begin to raise rates at this point in time? It wouldn’t be pretty.

It wouldn’t be pretty on two fronts… First: The dollar would be splashing in the cool waters having a ball, but then… Second: The economy would get hit smack dab in the gut. So, let’s leave that one alone and move on. Go ahead; move on, there’s nothing to see here…

The U.S. data yesterday, gave the euro a reason to rise, albeit briefly, as the ISM (manufacturing index) came in right about where it was expected at 49.9. The bad side of the report that briefly boosted the euro, was a fall in coincident production, from 52.9 to 52.1… And the employment piece fell from 51.9 to 49.7. These point to economic weakness… But that was quickly forgotten about when the “good side” of the report showed a rise in forward-looking new orders to 48.3 from 45. This piece reflects a stronger growth ahead, albeit very small.

The news came down from Australia yesterday morning that the Reserve Bank of Australia (RBA) had gone ahead and cut rates 25 BPS. The Aussie dollar got taken to the woodshed on the news… What’s up with the RBA? Well… Here’s my thoughts on this rate cut… First of all, the Australian economy had slowed, and isn’t that the reason the RBA raised rates to begin with? So, they removed 25 BPS of that governor that had been placed on the economy. They will probably come back in a month or two and cut rates another 25 BPS… But, that’s all I see from them.

You may say, Why do you say that, Chuck? Well… I just don’t see the Aussie economy slowing that much… Not unless, CHINA IS FALLING ASLEEP! China is the key here… And from all reports, China is still growing, and in need of the raw materials that Australia supplies.

There was a great article in The Daily Telegraph (Australia) by Terry McCrann… Here’s some of the article:

“YESTERDAY’S Reserve Bank rate cut may seem just like the others starting a ‘rate-cutting cycle’.

“To think that would be to make a very dangerous mistake. It is like no other. Certainly, not like 2001, the last time rates were being cut. Even less like mid-1996, at the start of the Howard-Costello era. In blunt terms, this could prove to be the shortest cutting cycle we have seen. In size and number of cuts, and also their time-span.

“Further, this rate cut is not just different from our own previous cuts, but the rate cuts that have been delivered by other nations’ central banks over the past year or so. The most obvious is the US, where the Federal Reserve, their RBA, has been slashing rates, certainly in fear and also with a bit of loathing. Fear of their banking system imploding. Fear of their economy sliding into recession, their homes market swamped as surely as New Orleans was by Hurricane Katrina.

“With central bank loathing of the inflation risked and the moral hazard promoted, by bailing out promiscuous financiers and institutions.

“In contrast, for us, uniquely in the world, this rate cut is the first in the, our ‘Chinese century’. Our banks certainly don’t need bailing out. Obviously some, even many, homeowners are hurting but the threat of a property meltdown exists only in the fevered minds of over-excited real estate people.”

Here’s the link to the full story if you want to read it

And… In my bit to point out the stupidity of the mass media… As the media spent the weekend digging up the dirt on VP Candidate Sarah Palin’s 17-year old daughter… The U.S. handed over the order keeping responsibilities for the Anbar Province to the Iraqis. But none of that was reported! Come ON! Serenity NOW! This should have been great news for our country! This region that once was responsible for 1 U.S. soldier’s death a day, had seen a 90% drop of attacks, and we were handing it over! This IS a GREAT STORY!

OK… Back to the task at hand… The dollar rally… Which is living the old song by Jerry Reed (who died yesterday) that “When you’re hot you’re hot, and when you’re not, you’re not! Today, we’ll see Factory Orders for July, which are expected to fall to 1% from 1.7% in June, and later today we’ll see the Fed’s Beige Book, which will probably be more cow pies to step through.

Commodities continue to get pounded… With oil prices leading the way. Oil price has fallen to $107 overnight, but has rebounded to $108.60 right now. That was a huge drop yesterday from $115, as Hurricane Gustav, didn’t pack the punch to the oil production region as had been feared. (Thank goodness for that!) Apparently, traders and market participants believe that China is falling asleep. Hey China, WAKE UP!

With commodities dropping like my beloved Cardinals’ chances to make the playoff this year… Precious metals are caught in the undertow. Gold has fallen back below $800, and silver below $13. Dollar strength is the culprit here.

I have to think back to the beginning of June when Big Ben Bernanke announced that he was an inflation fighter, and that the dollar’s weakness had pushed the envelope with inflation. I said at the time that Big Ben was merely trying to deflect the blame away from him for inflation’s rise… But… I think there was something else to this statement, as we later found out, given the story that I wrote about last week that appeared in the NIKKEI paper… Recall, that the story said that the Fed, ECB and Bank of Japan, all decided the dollar had gotten weak enough, and schemed to support the dollar by selling yen and buying dollars, with the Bank of Japan ready and willing to supply the yen that was needed to sell.

Big Ben knew when he made those statements that this coordinated intervention plan had been hatched… That’s pretty sneaky if you ask me… He could have just come straight out and said that he had devised a plan to stop the dollar’s decline. Instead he worked a smoky back room deal that was stealth-like! Hmmm… Now we know what kind of central banker he is.

That’s enough for today… Get to the Big Finish before you say something about Big Ben that will get your wrists slapped again, Chuck!

Currencies today 9/3/08: A$ .8295, kiwi .6790, C$ .9285, euro 1.4420, sterling 1.7725, Swiss .8980, ISK 85.15, rand 7.8885, krone 5.5530, SEK 6.5685, forint 165.75, zloty 2.3390, koruna 17.19, yen 108.70, baht 34.35, sing 1.4390, HKD 7.8080, INR 44, China 6.8438, pesos 10.40, BRL 1.6590, dollar index 78.53, Oil $108.60, Silver $12.80, and Gold… $799.15

That’s it for today… Thanks to all who have sent along “fingers crossed” type notes to me regarding my scheduled scans on September 12th… This is a BIG DEAL, and one that I hope I can pass with flying colors! There was a Big Boss, Frank Trotter, sighting yesterday! He’s Here! He’s Here! Could be heard in the halls of the office! I’ll try to nail him down to talk today, as I want to get his take on this dollar rally. I noticed my ankle was all swollen again this morning as I tried slip on my shoes. The swelling comes and goes, but I think I was standing and walking too much this past weekend, and then a long day at the office yesterday… So… Shorter days here I come again! We return to a full desk today, the first time in some time! We’re getting closer September 19th, when two of our colleagues on the trading desk, Ty Keough, and Don Ries, are inducted into the St. Louis Soccer Hall of Fame! WOW! St. Louis was once known as the capital of soccer in the U.S. and these two had something to do with that! Congratulations! Time to go! I hope you have a Wonderful Wednesday!

Chuck Butler
September 3, 2008