China Continues to Plant its Currency Seeds

I had someone last week in Bermuda ask me why I have my little sayings like Wonderful Wednesdays, and Fantastico Fridays. I told him that it had to do with my life scare of almost two years ago, and that I now celebrate each and every day! (Well, maybe when I had pneumonia two weeks back I wasn’t celebrating.)

OK… I hope your Cinco De Mayo fun was… Well… Fun! We went out with some good friends, but we were back home before bedtime for yours truly… Still fun though!

The currencies, led by the euro (EUR) have run into a dollar roadblock. It’s all about the stress tests this morning, folks… It now appears that Bank of America (BOA) will need approximately $35 billion, rather than the measly $10 billion rumored yesterday. That’s quite a boatload of money, folks… So… All eyes are on the stress tests results, which are expected to be released tomorrow. But this kind of rumor regarding BOA is weighing heavily on the risk assets this morning, with a bias toward risk aversion.

The euro didn’t get any help from the latest print of retail sales this morning either. Eurozone retail sales in March fell by the largest amount on record. The Eurozone recession has really deepened, no doubt about it! But remember this… In 2002-03 the euro ignored the recession that had a tight grip on Germany – the Eurozone’s largest economy – and rallied strongly versus the dollar. It was simply a case of “your car is uglier than mine” regarding the problems that were cropping up for the dollar at that time. And since the euro is the offset currency to the dollar… Voila! The dollar’s car was uglier than the euro’s car.

One thing I also want to mention is that we briefly saw the euro climb back above 1.34 again yesterday morning. It sure seems to me that the euro is performing according to many currency moves that I’ve seen since 1992. What I’m talking about here is the fact that the euro keeps probing higher into the 1.34 handle, only to be knocked back down. This can be good or bad, depending how on patient the traders are. Usually, a currency goes above a level that sees a ton of resistance (sells/profit taking), and it falls back. The currency will do this a few times, at which time traders can see this as a challenge, and push the currency higher… Or can grow tired and impatient and give up the rally, thus allowing the currency to drift lower. We’ll have to keep an eye on this in the next week.

One currency that has pushed past a road block and not given it up is the Aussie dollar (AUD), which passed 74-cents the other day. Yes, the Aussie dollar has given back some ground following the Big Dog (euro)… But not below 74-cents, not yet any way! The Aussie dollar got a boost overnight as retail sales for March reversed the 2% fall in Feb, with a 2.2% rise! Of course, the government has sent out a round of checks about this time… So, one would expect this to happen. It will be important to see if this is a one-and-done, or if it has legs.

OK… Yesterday, I opened Pandora’s Box of inquiry regarding the Chinese/Argentina currency swap line story I brought to you. Inquiring minds want to know more! Well… I researched this more yesterday, and this is beginning to scare the bejeebers out of me, folks. First of all, the currency swap line that China and Argentina agreed to was actually the sixth currency swap line that China has done in the past sixth months… They have in the books, South Korea, Hong Kong, Malaysia, Indonesia, Belarus, and now Argentina. Now, when these other swap lines were announced I didn’t think too much about them. But now… stop for a minute and think back to last month, when we told you that China was calling for an end of the dollar’s reserve currency status.

Now… Don’t these all take on a different meaning now that China has made their intentions known? To me… All of these swap lines are like pieces of a puzzle, and are fitting together very nicely for China. 1. I think China is trying to gain wider use of the renminbi (CNY) in Southeast Asia… And 2. I think China will continue to add pieces of the puzzle, and when all the pieces are in place… China goes back to the G-20 ministers and says, “I want the dollar removed as the world’s reserve currency.”

What does this do to the dollar? Well… If we look back at the last reserve currency of the world, the pound sterling (GBP), we can see that it had a long slow decline that took years to see any recovery, and then only briefly. And to each and every consumer in the United States, a weaker dollar will mean a loss of purchasing power, as witnessed last year before the financial meltdown. Remember back around this time last year, I came up with some data that really illustrated the loss of purchasing power of the dollar? Well… It went something like this… In the past six years, the price of oil has risen in dollar terms by 319%, while the rise in euro terms was only 94%, and against gold it was only 50%. So, that’s what the U.S. consumer can expect… A loss of purchasing power.

That is… Unless they have a “hedge” against this scenario… I can hear you asking right away, “What’s this ‘hedge’ Chuck?” Ahhh grasshopper, the “hedge” is to diversify a portion of your dollar-denominated investment portfolio out of the dollar!

I’m still waiting for the news from Norway’s Norges Bank regarding the size of the rate cut that has been forecast… Most observers believe it will be 50 BPS. I think they will opt for a smaller cut of 25 BPS… But given the strange things that are valuing currencies these days, a 50 BPS cut would probably help the krone (NOK) more than a lesser cut of 25 BPS. Not exactly the “fundamental” way of valuing a currency, but in these strange days, it seems to be the norm.

News from Switzerland this morning has the Swiss National Bank (SNB) watching the advances by the franc (CHF) very closely. Hmmm… Recall that I explained to you that the SNB was NOT going to allow the franc to get too strong versus the dollar, as the SNB wanted a weaker currency to bring inflation into their economy. The SNB is scared to death about the prospects of deflation getting a grip on their economy… But debasing the currency to achieve this? I don’t think this should be their route. I’m not a fan of the SNB right now.

And tomorrow is meeting day for the European Central Bank (ECB)… ECB President, Trichet, is between a rock and hard place… He wants to continue to provide price stability, but his economy is diving deep into a recession. What’s a prudent central banker to do? The markets believe he will cut rates at this meeting, which is also a weight on the euro this morning. I’m on the fence with this one, folks… I know in Trichet’s heart of hearts he wants to keeps rates unchanged… But I don’t think he’ll be able to follow his heart.

My friend, Ashish Advani, made a call to buy Indian rupee (INR) last month, in my “paid subscriber” newsletter, The Currency Capitalist… And this morning, Standard Chartered Plc said, “India will be a growth outperformer this year because it is relatively insulated to the global recession and the trade deficit has been narrowing quite rapidly. The Indian rupee will rally as India’s Trade Deficit narrows and the economy expands faster than most Asian nations.”

The data cupboard will produce the ADP Challenger employment report this morning. Recall, that this is the report that tried to emulate the Bureau of Labor Statistics’ (BLS) methodology, but has failed in past months to be a solid indicator of what the Jobs Jamboree will hold in store for us. Nevertheless, the ADP report will give us an “idea” of what to expect, so, it is worth the couple of minutes it takes to review it when it prints this morning.

OK… Before I go to the Big Finish, I wanted to share something with you… In these times when Banks all over are having a rough go of it, EverBank continues to steer the ship in the right direction. Our first quarter 2009 results saw a press release yesterday, and I believe I can now share them with you…

– Net income of $14.4 million, a 65% increase from the first quarter of 2008
– Asset growth of 28% over the same period last year, to over $7.6 billion
– Deposit growth of 42%, or $558 million, to over $5.6 billion

In addition to producing solid earnings and growth in our core businesses, we further strengthened our capital and liquidity positions and significantly increased our loan reserves. EverBank’s total equity rose to over $541 million, a 49% increase over the first quarter of 2008 and more than $170 million above the amount required by the FDIC to be deemed “well capitalized.”


Currencies today 5/6/09: A$ .7422, kiwi .5822, C$ .8480, euro 1.3320, sterling 1.5090, Swiss .8830, rand 8.5240, krone 6.5740, SEK 7.98, forint 214.20, zloty 3.30, koruna 20.08, yen 98.30, sing 1.4750, HKD 7.75, INR 49.49, China 6.8215, pesos 13.27, BRL 2.1350, dollar index 84.05, Oil $54.17, Silver $13.47, and Gold… $905

That’s it for today… Great results for the bank, eh? Our center fielder, Rick Ankiel, who had a nasty crash into the outfield wall on Monday night, is OK… No fractures, or bad stuff… Thank goodness! This guy has been through some bad stuff… Recall, he melted down as a young stud pitcher, then came back years later as a position player! You don’t see that happen every day! We have a new face on our trading desk… Aaron Stevenson. Aaron comes to us from our Jacksonville banks. I had a reader send along a note yesterday that was quite amusing… He claimed that his wife thinks that he and I resemble each other, but claims him to be the better looking of the two! No Duh! That should be a lay-up! Well, it’s a rainy day, which is fine with me; get it out of the way for tomorrow’s day game!