Aussie Dollars Lead a Currency Rally

All I can say about yesterday’s price action in the currencies and precious metals versus the dollar is… WOW! OK… You knew that wasn’t all I was going to say about the moves yesterday! So, let’s get going!

The currencies are on an all-out assault on the dollar, folks… But the BIG winner from yesterday was gold… When I left the office, gold was up $25 on the day! And the “offset to the dollar” euro (EUR)? Well, the single unit gained over 1 1/4-cents versus the dollar yesterday, and has added 1/3-cent this morning… Oh, and gold? It has added another $5 to yesterday’s $25 gain! WOW!

So… What gives here? Suddenly, the TV financial news shows are 24/7 on the weakness of the dollar… They are stepping on my toes! But, I guess even those knuckleheads can’t miss an all-out assault on the dollar like this! This is the stuff I’ve been talking about folks, day-in and day-out, week-in and week-out, month-in and month-out, and I can even go as far as saying year-in and year-out!

So… What I’ve been warning about is in place once again… Yes, it’s not on terra firma just yet, as I’m still waiting for the media to get the wink and nod from the government to change their stripes and focus on the Eurozone GIIPS problems once again, to stem the depreciation of the dollar. As I’ve told you many, many times in the past… The government wants a weaker dollar; they just can’t have it fall off a cliff… A slow depreciation over a period of years is what they would prefer…

Yesterday, the gas that was thrown on the fire burning up the dollar, was a statement by Chicago Cartel President, Charles Evans who said… “In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should. This is a far grimmer forecast than we ought to have.” As result, he said, he favors “much more [monetary] accommodation than we’ve put in place.”

He even went so far as to say that he wants “a declaration that it (the Cartel) wants inflation to rise for a time beyond its informal 2% target.”

Great! Now we’ve got Cartel members not only moaning about inflation being too low, but we’ve got them wanting inflation over our “informal 2% target”…

And… We’ve Cartel and government people that apparently don’t understand how CPI is calculated, what hedonic adjustments are, and that food prices are rising! Oh! That’s right, the Cartel removes food and energy from their inflation calculations! But you, me, and the guy down the street that has his car up on blocks in the driveway, can’t remove food and energy! Yes, I know, there are people, including my doctor that would like to see me remove food from my daily routine, but that’s not the point!

As I told you yesterday, the S&P Agriculture Index is at a two-year high! That’s food prices, folks… And that’s inflation! So, if food prices are at a two-year high, just how high does the Cartel want them to get? I shake my head in disgust here… And I have to be careful with what I say about the Cartel members, because Big Brother is watching over me… But, to say it nicely… These guys are … You can fill in the blanks…

OK… I’ve got to go on to other things here, as the more I talk about the Cartel and its members, the more I develop a rash!

Did you see the news where Brazil announced an increased tax of Foreign Fixed Income Investments to 4.0%? Long time readers will recall that Brazil introduced a tax on Foreign Fixed Income Investments about a year ago, in their first attempt to stem the real’s rise… Well, here we are a year later, and the original tax didn’t work, so what do they do? They increase the tax! UGH! Well… Once again, the markets didn’t flinch when it was announced, and the real (BRL) rose to its highest level versus the dollar in over two years! That’s right! The last time the real was this strong was in September of 2008, and then, it was on its way to the slippery slope, losing value versus the dollar like most currencies after the financial meltdown in the US in 2008.

Just another example of central banks and governments that make wrong decisions… A central bank is supposed to provide price stability, and to do that, they need a strong – or at least not a weakening – currency! When will they ever learn? When, will, they, ever, learn?

Well, that 1/3-cent the euro had gained this morning, and I talked about a 1/2 hour ago (for me, 1 minute for you) has been wiped out… But gold is still up $5…

The 1-day disappointment trading that took place in the Aussie dollar (AUD) because the Reserve Bank of Australia (RBA) didn’t hike rates, is over! The Aussie dollar has recovered nicely overnight, and now sits within 1-cent of its all-time high of 0.9850 that it reached in July of 2008.

I was on a conference call yesterday, and made this point about current interest rates… The historical interest rate differentials that were in place before the financial meltdown are returning… However, rates around the world aren’t as high as before… For instance, the Aussie rates in July of 2008 were 7.25%, but rates here in the US were 2.75%, which, using my new math skills, equals a differential of 4.5% in favor of the Aussie dollar… Well, fast forward to today… The Aussie OCR is 4.5%, and the US rate is 0.25%, which is a rate differential of 4%… And will widen as the RBA returns to the rate hike table in November.

So… I don’t see any reason why the Aussie dollar can’t return to its all-time high, and then we’ll be to the cheese that binds… The Aussie dollar will either rise further, or retreat… Personally, and this is just my opinion, I could be wrong… But unless there’s another financial meltdown to stop the Aussie dollar like in 2008, I don’t see any reason for it to stop here…

OK… I’m sure I beat that one to death… (No one was hurt!)

I see where Goldman Sachs Group, Inc. sent out an email to clients, talking about the US economy… “We see two main scenarios. A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10%… And a very bad one in which the economy returns to an outright recession.”

Hey! At least they’re being honest with their clients… Doing an Aaron Neville, and telling it like it is, isn’t always high on a company’s management’s hit parade… I know about that!

So… I was sitting on a veranda in Scottsdale Arizona in February of this year, and I told the analysts sitting around me that the dollar strength would last anywhere from 3 to 6 months… I had to remind them of that yesterday in a conference call! Oh! And… The dollar index can be used here… The dollar index is in relentless decline down 12% from its June high… So, June was the end of the dollar strength, although we’ve had bouts of it back and forth, the overall trend since June is of dollar weakness.

I love it when a plan comes together!

I was up late last night reading stuff like: US Treasury Secretary Geithner is going to give a talk this afternoon titled: “A Conversation with Secretary of the Treasury Tim Geithner”… I have to believe that Old Tommy Boy, I mean Timmy Boy, is going to be talking about how he was responsible for saving the world… HA!

This Friday is a Jobs Jamboree Friday, and it is also a G-7 meeting Friday! Now, if these guys have any brains, they should be taking Japan to the woodshed for all their currency manipulation… But, I would bet a dollar to a Krispy Kreme that all the currency talk will be directed at China… UGH!

Speaking of the Jobs Jamboree… There’s been no change by the “experts” to their forecast for zero jobs to have been created In September, and 75,000 in the private sector… (That means more census workers have been cut) And the unemployment rate is expected to rise to 9.7% from 9.6%… So… The ADP Employment Change report will print today, and that’s a wild card report. But it’s expected to show just 20,000 jobs created in September… So, none of this is good folks… None of it, at all!

But that’s Friday… Let’s not think any more about it until Black Friday comes…

Did you know that China is out all week for “Golden Week”… Well, it’s been “Golden decade” for gold holders! And don’t forget silver! But I heard an old song last night, by the late Dan Fogelberg… “The Power of Gold”… The story is told of the power of gold and its lure on the unsuspecting. It glitters and shines… Someone asked me the other day about whether or not it made sense to buy gold now at $1,300… I said… Did it make sense at the “time” to buy gold at $800? $900? or $1,000, or $1,100, or even $1,200? Now it does… Now that gold is $1,345… But were those leaps of faith or were the investors just under the power of gold?

OK… The data cupboard has the aforementioned ADP Employment Change report this morning, and not much else… So, unless something changes, the markets will shrug off the ADP report. And we’ll be left with nothing to give the markets direction today, except… Later today when we get to have a conversation with the US Treasury Secretary… Ooooh, the goose bumps! NOT!

Then there was this from The Washington Post

In a letter to US Attorney General Eric H. Holder Jr., Pelosi and dozens of other Democrats accused the nation’s biggest banks of making it difficult for struggling borrowers to get foreclosure relief while the firms routinely evicted them with flawed court papers.

The group said that recent reports of lenders initiating hundreds of thousands of questionable foreclosures “amplify our concerns that systemic problems exist.”

Hmmm… I’m all for helping, but does this smell like a mid-term elections ploy to you?

To recap… Gold gained $25 yesterday, and the currencies rallied with the Aussie dollar leading the way. Chicago Cartel President Evans let the cat out of the bag, with comments about needing more stimulus and inflation to rise past targets. The TV talking heads are talking about dollar weakness again… Where the heck have they been? The dollar strength began to fade back in June!

Chuck Butler
for The Daily Reckoning