Commodity Currencies Rebound Versus the Dollar

Well… Instead of a “turn around Tuesday”, we’re seeing a whiplash Wednesday! And for once the Big Dog (euro) (EUR) didn’t lead the other little dogs (currencies) off the porch to chase the dollar down the street!

No… This time it was the currencies of Australia (AUD) and New Zealand (NZD) that led the charge versus the dollar. The euro has taken up the charge since opening the doors to a new day of trading in Europe, so… It looks like it’s a “take the dollar to the woodshed” day.

OK… Let’s start first with the goings on yesterday and then build to a big crescendo! Yeah, right, like I can do that! HA! Anyway.

As a reminder, yesterday we had the Russian rate cut, and the Japanese Finance Minister giving the dollar a boost… We then saw some data that at first glance seemed to be good, but a quick look under the hood told the markets otherwise… Home Prices fell in July versus June, but are still down 13.3% versus last year… And consumer confidence surprised everyone by falling this month. It was expected to gain. So… As the day went on, it just didn’t look like the US data would be strong enough to cause dollar selling.

But then, overnight, we had a strong retail sales report in Australia, and a strong Business Confidence report in New Zealand, and the “global recovery thoughts” were back on! Yesterday morning, the Russian rate cut said “step back on the thoughts for a global recovery”… And then overnight, the reports from Australia and New Zealand said, “step forward on the thoughts for a global recovery”!

And so it is… We end the month – and quarter – with the dollar on the losing end versus many currencies. This marks the second consecutive quarter of dollar losses… Does that sound like a trend to anyone? To me, I do not consider this to be a “new trend”, but instead, simply a return to the underlying weak dollar trend that went dormant for six months while the world sorted out the financial meltdown.

This is where, when I go out on the road and speak to people, I say that trends are not One Way Streets… There can be volatility within the trend. And thus this explains the six months from August of 2008 trough February of 2009… For most people that got into diversification using currencies and precious metals, they saw it for what it was, and simply battened down the hatches, and looked for deep discounts to add to their diversification… For some people – who got in for all the wrong reasons, and never thought about diversification – they panicked and sold out at losses… For those that battened down the hatches, they were rewarded with this latest six-month move… And that’s all I’m going to say about that!

The boys and girls over at the IMF are trying really hard to keep the currencies in check and not let this become another rout on the dollar. The IMF issued a statement saying that there are still risks in the global recovery… Unfortunately for the IMF, nobody is listening to them, judging from the dollar selling I’ve seen since I came in this morning!

Hey! I don’t give the French much credit for anything… But I did see last night that they are cutting taxes on business! WOW! What a novel idea! And one that I think would behoove the current US administration to follow… This is really a great way to get real traction in the economy… Give businesses more room to breathe, and they will hire people, expand capital purchases, etc. Good show!

The Aussie retail sales report for August climbed 0.9%, erasing the -0.9% loss in July! This report plays well with the recovery story and the thoughts that the Reserve Bank of Australia (RBA) will raise rates before year-end.

New Zealand saw their Employment Confidence Index climb to 103 last quarter from 96.1 the previous three months… The report showed that 32.2% of companies surveyed expected sales and profits to rise over the next 12 months… I know that doesn’t sound like a resounding vote of confidence, but the previous number was 26%… So that’s quite a jump!

Of these two, I expect The RBA to lead with the rate hikes, while the Reserve Bank of New Zealand (RBNZ) will drag its feet… They don’t need the kiwi to start rising aggressively, as exporters in New Zealand are having a tough time right now, with kiwi as strong as it is!

Whenever the commodity currencies of Australia and New Zealand have good performances versus the dollar, the other commodity currencies get to play along… So that means the performances of Canada (CAD), South Africa (ZAR), Norway (NOK), and Brazil (BRL) have been good.

There is some risk in the currency markets today, though… First, we have some data due, and second we have Fed Vice Chairman Donald Kohn, and European Central Bank (ECB) President, Trichet, due to speak today… Could this be more central bank parlance for propping up the dollar, that is seen as being on the skids again this morning? I think it just might… Especially if Kohn doesn’t mention that the Fed is going to keep rates at near zero for some time to come. If we don’t hear that… Then I think the “con” is on to prop up the dollar.

But don’t let that bother you too much… These guys can only affect the currencies for short periods of time with their verbal jawboning… After that, they need to walk the walk with coordinated intervention, if they’re going to talk the talk!

Speaking of the data… We’ll see the color of the second quarter GDP and the wild and wacky ADP employment change reports… The Chicago PMI (manufacturing for that region) will also show its colors… All of these are expected to show improvement in the US economy… And, if the trading pattern remains in place… Any signs of improvement in the US economy normally result in more dollar weakness!

So… In the end, the data inducing dollar weakness, might be offset by the central bank jawboning… In which case, we’ll spend the day in a tight trading range for sure! But what happens if Kohn and Trichet don’t support the dollar in their speeches? Then it will all be up to the data!

This morning, Canada will print their latest GDP report… The forecasts are for a very weak report… I’m going to go out on a limb and say that I expect Canada’s GDP to surprise on the up-side… If so, the loonie would look to add to gains it already has booked this morning versus the dollar.

With the commodity currencies on the rise this morning, gold has returned to $1,000! Gold remained below $1,000 for about five days, in which there were ample opportunities to buy the dips below $1,000.

And… As we close out the month and quarter, the Russian rate cut is all but forgotten about, which is exactly how I told you it would play out… The global recovery theme is back with a vengeance!

You know… We wouldn’t be having these discussions about dollar weakness every day, if the budget deficits weren’t piling up on top of other deficits… Hey! Remember when I used to take the previous administration to the woodshed for piling up $450 billion dollar budget deficits? Well, that certainly seems to be but a drop in the bucket of the nearly $2 trillion budget deficit that will post this year, and the forecast for $9 trillion more in the next nine years.

That all leads me to this… We need to express to our representatives in Washington DC that it is very important, and that they should focus their attention on this first and foremost! I doubt that we’ll ever get there again, but wouldn’t that be nice for our grandkids? I just don’t understand why we go around spending money on this that and the other thing, and don’t ever stop to think about the immoral things we are doing to our future generations… I guess I mean to say that the “we” I’m talking about is not you and me! It’s the knuckleheads in DC… That is, other than Ron Paul, who seems to be the only person there who understands all this deficit spending.

The Daily Reckoning