Bad News For GM and Chrysler

Good day… And good Monday morning to all of you.  I can’t believe March is nearly over, it seems as though it just started.  March will end up being a pretty good month for the currency markets, as investors exited the safety of US treasuries and started moving funds back into higher yielding assets.  But the markets continue to be volatile, and news released on Friday and over the weekend has sent these investors rushing back to the safe haven of the US dollar.

The Japanese Yen and US dollar benefited after a US Government official said Friday that bankruptcy may be the best option for GM and Chrysler.  The dollar continued to gain strength this morning after US Treasury Secretary Geithner warned yesterday that some financial institutions will need “large amounts” of aid.  When the Treasury Secretary says large amounts, you know it is going to be billions or trillions!  Geithner was making the rounds of Sunday morning talk shows to try and justify the money already spent and prepare the taxpayers for another request of funds.

Bad economic data released on Friday here in the US helped drive investors back into the US$.  Consumer confidence in the US remained near a three decade low this month as the jobless rate continues to climb.  The number of US states with a double digit jobless rate almost doubled in February; with Nevada, North Carolina, and Oregon joining Michigan, South Carolina, California, and Rhode Island with unemployment rates above 10%.

The Japanese yen benefited from the safe haven buying, with the yen turning in the only positive performance vs. the US$.  A report in Japan which indicated a cut in inventories added to the yen’s good day.  Inventories fell 4.2% last month, and companies said they would increase production in coming months, indicating the worst of the manufacturing slump may be over.  But with exports falling, and retail sales tumbling, I don’t expect manufacturing to pick up anytime soon.  Deflation continues to be a problem in Japan, as consumer prices remain stalled.  With benchmark rates as close to zero as possible, the Bank of Japan has little ammunition left to combat the falling prices.  If you still own the Japanese yen, take advantage of these small rallies to exit your position, as the yen will probably not be able to maintain this strength.

Another currency you may want to consider exiting is the Singapore dollar.  According to a story I read on Bloomberg this morning, the Monetary Authority of Singapore may devalue their currency and allow it to drop 4 percent against the US dollar in the next few months.  The central bank reviews the currency’s position twice a year, and some are now predicting it will shift the value of the Singapore dollar in April.  Singapore’s exports continue to fall and some are blaming the strength of the Singapore dollar vs. its regional competitors.  While I believe the Asian economies will lead the world out of the global recession, the Singapore dollar will likely come under some selling pressure going into April.

With a general move back toward safety, the higher yielding currencies of Australia and New Zealand suffered.  The Australian dollar dropped below .68 but will still end March with over an impressive gain vs. the US$.  The New Zealand dollar also gave back some of its recent gains, moving down to the .55 handle.  But like the Australian dollar, the kiwi will still end march with nice gains vs. the US$, likely to be in the double digits.

Other commodity based currencies also suffered, with the US dollar moving higher vs. the Brazilian real and Canadian dollar.  But many investors still feel these commodity currencies will be some of the first to recover, as countries invest stimulus money into infrastructure projects.

News from Europe fed into the dollar’s strength as a report showed industrial orders plunged 34% in January, the most on record.   Another report showed France’s economy shrank by 1.1% in the fourth quarter, the steepest decline since 1974.  With all of this negative data, it isn’t hard to see why European confidence fell to the lowest on record in March.  An index of executive and consumer sentiment in the euro region released this morning fell to a record low.  All of this negative data is boosting calls for further rate cuts by the ECB.  After the 50 basis point cut at the beginning of March, most currency traders expected the ECB to pause and hold rates steady for a couple of meetings.  But now the calls for further cuts are becoming louder.

The Euro had the worst day vs. the US$ in nearly three months on Friday, and is not holding just above 1.32.  Some are now even suggesting the ECB follow the US and UK down the path of “quantitative easing”, buying bonds to pump more money directly into their economy.  As I have written recently, this is one of the most inflationary moves a central bank can take, and would be a dramatic step by the typically hawkish ECB.

But not everyone in Europe is wanting the ECB to follow the paths of the US, UK, and Japanese central banks.  Germany’s leader,  Chancellor Angela Merkel warned against inflating the global economy to revive growth.  Frank Trotter sent me an article from this weekend’s Financial Times in which Merkel rejected calls to spend more public money in Germany to speed the recovery.  “This crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable growth,” Merkel said, according to the FT. “If we want to learn from that, the answer is not to repeat the mistakes of the past.”

Merkel’s position is in stark contrast to our own administration, who have taken a somewhat short sighted ‘grow now, worry about inflation later’ stance.  In fact, the US administration is excited about how they have been able to manufacture a new ‘refinance’ boom by forcing mortgage rates back down.  But the concern I share with Merkel is how will policy makers unwind all of this ‘easy money’ once the recovery begins?

Does anyone think the Fed will have the courage to end their emergency-lending programs while the unemployment rate remains near double digits?  You know the administration is going to push the Fed to wait until there are clear signs the US is in recovery before moving rates back up.  But any slight hesitation on the Fed’s part will probably spark inflation which could quickly grow out of control if left unchecked.

But Treasury Secretary Geithner said yesterday that the Fed’s injections of reserves into the economy are “not going to create the risk of hyperinflation in the future.”  “We have a strong independent Federal Reserve with a very strong mandate from the Congress, and they will do what’s necessary to keep inflation low and stable over time,” Geithner said on ABC’s Meet the Press.  At the same time, he warned policy makers shouldn’t “put the brakes on too quickly.”

I hate to disagree with the Treasury Secretary (ok, you caught me, I actually kind of like disagreeing with the Treasury Secretary) but I just don’t think they have the ability to keep inflation at bay.  The Fed has injected record amounts of liquidity into the system, using some untested ‘quantitative easing’ procedures which will need to be reversed.  With the Fed pledging to purchase another $1.25 trillion of mortgage debt and $300 billion of Treasuries, inflation is inevitable.

Finally, I read where Wednesday has been dubbed ‘Financial Fools Day’ in London.  Protestors attracted by the G20 summit plan to target London bankers for their role in the financial meltdown.  This should make things interesting on Wednesday, as protestors plant to try and block roads and prevent people from getting to work at the heart of the global currency trading.

Currencies today 3/30/2009: A$ .6808, kiwi .5625, C$ .8001, euro 1.3192, sterling 1.4183, Swiss .8706, rand 9.7274, krone 6.7765, SEK 8.2889, forint 234.97, zloty 3.595, koruna 20.89, yen 96.63, sing 1.5213, HKD 7.7502, INR 51.2825, China 6.8364, pesos 14.539, BRL 2.2911, dollar index 85.66, Oil $50.57, Silver $13.03, and Gold… 912.14

That’s it for today… Mizzou just couldn’t get it done vs. UCONN on Saturday, and a terrific Tiger season came to an end.  But the Blues had better luck vs. Columbus, winning back to back games and moving into a tie for the final playoff spot.  They still have their work cut out though, as they play 6 of their last 7 games on the road.  We did end up getting a quick shot of snow which had been predicted, but nothing more than a dusting which melted in a few hours on Sunday.  I guess we got lucky, as areas just to our west got dumped on with up to a foot.  Mike and Chachi are here now, so better get this out and get the week started.  Hope everyone has a Marvelous Monday!!