Another Day for the Currencies

Good day… And a Terrific Tuesday to you. Another Monday morning has come and gone but not before confirming that the U.S. economy is still heading down the wrong side of the slippery slope. The uneventful trading day from Friday certainly didn’t carry over as we saw a sizeable run up in currencies along with equities during the morning session. As the day progressed, the equity markets shed their gains; but most of the currencies remained resilient and held on. I guess I’ll stop beating around the bush and get right to it…

It seems that Bernanke’s calming approach during his interview with 60 Minutes gave investors the feeling that we are not as bad off, saying the risk of a depression has been averted. He went on to say if the government succeeds in calming financial markets, the recession will probably end this year and that the economy will expand in 2010.

It might be a bit early to make that call, especially amid economic data that hasn’t found a bottom yet. I understand the need for some type of positive news in order to boost fragile confidence, but I don’t see much in the way of a foundation to provide longer-term support.

The TIC flows, or foreign demand of U.S. assets, were absolutely terrible, as foreign investors ran for the hills, taking their money with them in January. Net sales of long-term equities, notes and bonds totaled $43 billion in January compared with a positive $34.8 billion in December. If you bring short-term securities into the picture, foreigners sold a net $148.9 billion. All of this combined with China’s concern about safety of their capital does not paint a rosy picture for funding the stimulus measures here in the United States. The two largest holders of U.S. Treasuries – China and Japan – did increase holdings, but nowhere near previous figures.

Industrial production fell for the fourth consecutive month with its 11% year-over-year contraction marking the most since 1975. We saw a more-than-expected fall of 1.4% from January. And capacity utilization, which measures the amount of factory capacity in use, fell to the lowest level on record. We have PPI, some housing numbers, and a measure of consumer confidence out today, so maybe these figures will give us something to be hopeful about, as yesterday’s numbers were making me want to pull a Rip Van Winkle and wake up when it’s all over.

The euro (EUR) had a nice little day as it shot up to 1.3072 on the back of the equity markets’ morning rally and G-20 policy makers saying they would double the IMF’s resources. Monday marked the fifth day of gains against the dollar and is the longest such run we have seen in the past three months. One of the biggest concerns about the euro recently has been its exposure to Eastern Europe, but if the IMF has the ammo to step in, those worries should begin to subside.

The euro broke through a key resistance level of 1.2990 yesterday and has some technical traders looking to 1.31 and 1.3325 as possible destinations for the currency down the road. If investor risk tolerances continue to inch upward, or if inflation shows any signs of going higher, the incentive to hold dollars at virtually zero yields, will begin to fade. Risk aversion, at this point, continues to be the overall market mover. As we continue to say, the euro is the offset currency to the U.S. dollar, so any movement one way or the other will appear directly in the euro.

The Australian dollar (AUD) and New Zealand dollar (NZD) were both trading a little higher on the day as commodities held their own, providing some support for the resource rich countries. The minutes of the RBA are due out today and could provide some insight into their decision to keep rates on hold earlier in the month. The odds of a 0.50% cut resulting from their April meeting have gone down a bit but still remain very high. An increased degree of apprehension still exists because of the poor GDP and employment numbers that came out after the last rate decision.

The Japanese yen (JPY) has remained under pressure as it sold off and was contained within the 98-handle by the end of the day. As Chuck has pointed out several times in the past, the prospects of higher appreciation to the low 90s or high 80s are wearing off and has found a home near 100 for the time being. On the flip side of the risk barometer coin, the Brazilian real (BRL) rose to a one-month high of 2.2565 and has become the second best performing currency so far this year. Even though we like their commodity-rich attributes, the fact that it remains an emerging market commands a higher tolerance for risk.

As I came in this morning, the euro was back up to 1.30 as German investor confidence unexpectedly rose, but we are starting to see some signs of profit taking from U.S. traders first thing here today. We’ll see if that trend continues as the day wears on and how the dollar reacts to the results of today’s numbers right out of the gate. It’s on to the Big Finish…

Currencies today 3/17/09: A$ .6598, kiwi .5288, C$ .7885, euro 1.3017, sterling 1.4078, Swiss .8463, rand 9.8865, krone 6.7922, SEK 8.4556, forint 228.54, zloty 3.4267, koruna 20.3095, yen 98.63, sing 1.5328, HKD 7.7521, INR 51.3950, China 6.8370, pesos 14.0730, BRL 2.2842, dollar index 86.85, Oil $46.92, Silver $12.91, and Gold… 919.05

That’s it for today… I almost forgot that it was St. Patrick’s Day so needless to say I forgot to wear my green today. It’s supposed to be a picture perfect day, pushing 80 degrees here in St. Louis, so that is welcomed news for those who are going to enjoy our parade and other St. Paddy’s Day activities. Anyway, I’m running a little behind schedule today, so top o’ the morning to you on this fine day and have a Terrific Tuesday!

The Daily Reckoning