Another Asian Ambush

Good day… And a Terrific Tuesday to you! How are those Thanksgiving plans going for you? We’re so busy here on the trading desk, I might have to sneak away from the Turkey on Thursday and come in to deal with all of this! I sure do have a great group of people here making sure all is taken care of before going home. I did 13 hours yesterday, and my beautiful bride was not happy about that, reminding me twice that I was supposed to be taking it easy!

Yesterday’s trading range was tight like a Tupperware seal, with a bias to sell dollars all day… But overnight? Watch out! Overnight, however, was a different story! Once again the Asian markets have ambushed the dollar. Yesterday’s Tupperware ranges have been thrown to the roadside and here we go again! The euro (EUR) has pushed up close to 1.48… That’s right folks… 1.48… And Swiss francs (CHF) have crossed the 90-cent mark! The dollar got sold like funnel cakes at a State Fair in the Asian session, and the only reason I can see for this run through the gauntlet for the dollar is the speculation on the housing report later this morning.

The Asian traders figure that the housing starts report this morning will be so bad, (this is where you say, how bad is it?) that it will lead the Fed back to the rate cut table, thus deepening the interest rate differentials in favor of many currencies… And the ones that don’t enjoy a positive rate differential to the dollar will see the spread to the dollar narrow. So… If you’re an investor, and one currency has RISK written all over it, and only sports a small interest rate differential to another currency that doesn’t have the same fundamental problems, you don’t normally go out on the limb and buy the bad fundamentals currency.

So… That’s what’s going on, at least from my view in the cheap seats! Of course, all that bad stuff for the dollar that I talked about yesterday didn’t help the dollar out either! Just to recap… The dollar is being talked about by OPEC and the Gulf States organizations regarding switching the peg to a basket of currencies… And… For the second consecutive month, the United States had trouble attracting enough investment to cover the current account deficit funding requirements of $80-85 billion per month.

It’s quite a scene on the currency screens this morning… I would have to say that I’m surprised a bit due to the fact that this is Thanksgiving week, and we’re going to see volume slow down given the people off trading desks, and all that… However, this happened in Asia.

Getting back to yesterday before I go on… At one point in the day, I was trading and said… “Hey! Yen (JPY) is really strong this morning, stocks must be selling” and Chris Gaffney replied… “Yes, they are way off!”

That’s it… More risk aversion in the markets, and the carry trades get unwound… I really think that this will be “the trade” as we end 2007 and go into 2008… But it doesn’t mean it will be a ONE-WAY street… Remember, that carry trade has more lives than a cat!

One thing to keep in mind as we go on regarding the carry trade is that we’ve seen some real volatile trading days recently, and last night is a prime example. Volatility increases hedging costs. If hedging the carry trade becomes too expensive then we could really see an unwinding of the trade. So… Watch at volatility in the currencies, because that could be a real indicator toward the eventual unwinding of the carry trade.

Yesterday, Goldman Sachs downgraded large banks like Citigroup, who Goldman’s research people believe will have to write down $15 billion in loans over the next two quarters. Folks, this is the stuff I keep talking about that scares the bejeebers out of me… And when will all of this housing meltdown finally deliver the knockout punch to the U.S. consumer? Soon… I believe… Soon.

Chris mentioned last night that the Canadian dollar/loonie (CAD) had really swooned since reaching $1.10 a couple of weeks ago. I think the Canadian government has started a whispering campaign to bring the loonie down. Yesterday, a Bank of Canada official was talking about possible rate cuts in Canada… Nothing like throwing those two words out to the markets and let them eat up a currency… Say rate cuts, and a currency is thrown to the sharks!

Again though… I don’t see this as the end of the loonie’s charge… Merely an interruption. My little buddy’s football coach had a great saying last week when he said… “It’s not the off-season for football, there’s just more time in between games.” HA!

I mentioned the rise in Swiss francs above, and the move has been quite impressive, leaving the high yielders eating the franc’s dust! To top off the move overnight, the Swiss government announced a huge rise in exports in October, as exports topped 18 billion francs for the first time ever! Yes… The franc was a bit weaker and helped support those exports… But really, the franc has been gaining ground inch-by-inch, step-by-step, for some time now. Seems like everybody wants to know what time it is… Does anybody even care? If so I can’t imagine why, we only have time enough to cry… Now, isn’t that just like me? Right in the middle of an important thought, a song pops into my head, and my fat fingers just begin typing it!

Anyway… Everybody must want to know what time it is, because watch shipments to Hong Kong led way with a 15% rise in October… You see, the way I understand this is that wealthy Chinese go to Hong Kong to buy their expensive Swiss watches, to take advantage of lower taxes… So… There you have it!

The dollar ambush overnight has helped gold apply a tourniquet to stop the bleeding it had suffered for four consecutive days. Now that gold has seen a technical correction, I think it will form a strong base here to launch another assault on its previous record high and beyond!

The Chinese renminbi (CNY) has been in the news a lot lately… And this time it’s not because of Schumer, Graham, Paulson, Bernanke or anyone else bashing them. This time the spotlight has been placed on them by investment gurus like Jim Rogers, and Steve Sjuggerud. These two – and others I might add – are calling people to buy Chinese renminbi. Of course investors do live by owning one currency… So, to repeat… Jim Rogers has also said he was buying Swiss francs and Japanese yen… Both, by the way, have rallied since his statement.

I’ll finish up here with a story I read last night… It looks like the bond market is calling out for more rate cuts from the Fed. The financial futures market is pricing in more rate cuts, and telling us that they believe Big Ben Bernanke is withholding some vital information, and that the economy is so bad the Fed will have to cut rates 75 Basis Points to avoid a recession. One head bond trader was quoted as saying to Big Ben… “You’re wrong and we’re going to lead you to the next ease.”

Recall a couple of weeks ago I told you the Fed Fund Futures had priced in a 62% chance of a rate cut in December? Well, that number is now up to 86%! Of course if everyone had just listened to me before the Fed made their fist cut the deepest on September 18th, they would already know that the Fed was going to make three cuts before year-end! That’s right… Way back in August I said that Fed would cut in September, October, and December… So far I’m two for three, which puts me in the Hall of Fame!

Currencies today: A$ .8895, kiwi .7625, C$ 1.0255, euro 1.4785, sterling 2.0650, Swiss .9025, ISK 61.70, rand 6.7050, krone 5.41, SEK 6.28, forint 172.48, zloty 2.4925, koruna 18, yen 110.15, baht 31.40, sing 1.4460, HKD 7.78, INR 39.36, China 7.4250, pesos 10.98, BRL 1.76, dollar index 75.33, Oil $95.50, Silver $14.40, and Gold… $789.80

That’s it for today… So… The big housing starts today… How low will it go? Only the Shadow knows! We’ve had a Jr. Salesperson requisition on the streets for a month now, and just can’t seem to get the right kind of person for the job… Someone that wants to start at the bottom, learn the business, and work their way up… That’s how I started in this investment business… I worked in the mailroom for goodness sake! Oh well, we’ll keep looking… One day closer to Thanksgiving… Hope your Tuesday is Terrific!

Chuck Butler
November 20, 2007

The Daily Reckoning