Currencies Mount a Mini-Rally

The chill that has settled down on us here in the Midwest, has tried to settle in on the currencies going into the end of the year… But… Here we are, it’s 2010, a new year, and new ideas for the currencies… We’ll have to wait-n-see what comes out this week and next, for there will be plenty of pundits, analysts, writers, and so on, that come out with their forecasts for 2010… Me? The song remains the same, folks… Fundamentally speaking, there’s only one direction the dollar should go… But, then, we need to get to fundamentals again, eh?

So… When I left you, the non-dollar currencies were in mini-rally mode on thoughts that the dollar’s run had gone too far, too fast. But, remember… I warned you about taking that too seriously, given the thin volumes in the markets… And by mid-morning, the mini-rally had been reversed, and the dollar bulls once again were pounding their chests.

This morning, we have yet another mini-rally going on with the non-dollar currencies, which makes sense, given the fact that risk-type trades were taken off the books as we headed into Christmas, and it’s time to get those puppies back on the books! The high-yielders like Aussie (AUD), Brazil (BRL), South Africa (ZAR), and even New Zealand (NZD) are the currencies that look the best this morning…

Speaking of looking the best this morning, that claim goes to gold, which is up $21 as I write! WOW! One has to wonder if last week’s dip below $1,100 was the last opportunity to buy gold below $1,100. I’m not saying it was… I’m just saying that given this $21 move on the first day in the new year, one has to wonder if it was the last chance.

OK… I was reading the business section of our local paper yesterday morning, and a couple of things caught my eye… There on the front page, was a story by David Nicklaus… Let’s listen in…

“If Rip Van Winkle were to check his stock portfolio today after a 10-year snooze, he might wish he had stayed asleep. The US stock market just completed a decade that was, by some measures, its worst ever. If Rip had bought a S&P 500 Index fund on Jan. 1, 2000, he’d now be worth about 11% less, even after reinvesting 10 years’ worth of dividends. Adjusting for inflation makes things worse: The purchasing power of that buy-and-hold index portfolio fell by roughly 3.5% a year during the dismal decade.”

So, that’s a prime reason right there, that diversification is needed!

But wait, in the same paper, we had another investment author writing this… “I think a well-diversified stock portfolio is what you ought to have.” Hmmm… You mean like the S&P 500 Index fund?

Let me lay this out for you… The writer was asked if gold should be a part of an investment portfolio… And he said that about a “well diversified stock portfolio”.

See why I get so darn ticked off about these guys who only think about stocks? I mean, while his well-diversified stock portfolio wallowed in the mud for a decade, gold was up over $870 per ounce, or 358%! And the currencies? Well… I told you about their moves last week during the same period of time… Now, wouldn’t it have been better to have a “well diversified portfolio, that included non-dollar denominated asset classes during this time?”

I don’t see that changing going forward either!

I also came across this story last night, when checking the Asian markets open… I’m shaking my head in disgust just thinking about typing what I’m about to type… But here goes…

“Federal Reserve Chairman Ben S. Bernanke said the central bank’s low interest rates didn’t cause the past decade’s housing bubble and that better regulation would have been more effective in limiting the boom.

“‘The best response to the housing bubble would have been regulatory, rather than monetary,’ Bernanke said today in remarks to the American Economic Association’s annual meeting in Atlanta. The Fed’s efforts to constrain the bubble were ‘too late or were insufficient,’ which means that regulatory actions ‘must be better and smarter,’ he said.”

Hmmm… Just like today’s youth… Point the finger and blame someone/something else! Why, it’s never their fault! Someone else must be to blame!

No, Big Ben… Low interest rates were the fuel that this bubble needed to get growing… All the other stuff came later… If the low interest rates were never in place, we would have never seen the housing bubble like we did… And guess what, Big Ben? You’re doing the same stupid thing again, by keeping interest rates at near zero! But don’t let that get in the way of you blaming someone else.

And… With regards to regulation… You might want to check with your buddy over at the US Treasury, Tim Geithner, for he was the President of the NY Fed at the time, maybe he can shed some light on why there wasn’t regulation…

OK… I’ll get down from the soapbox now…

There’s a story out this morning about Brazil’s Sovereign Wealth Fund (SWF) and the decision to allow them to buy dollars. This authorization came from the Brazilian President, whom we chronicled here in the Pfennig previously as someone that feels the need to get the Brazilian real weaker…

So… Is this his plan to get the real weaker? To allow the SWF to buy dollars? I think so… The question here would be whether or not the markets believe the plan will be successful.

Personally, I don’t think so… But it could have some initial strength, just like all new plans, before the markets can punch holes in them! The SWF has 16.3 billion reals, as a reserve to make payments in the event that the government’s revenue falls short… Hmmm… Sounds like the SWF had better keep as many reals ready in their fund, and not worry about holding dollars… In the end, I think the Brazilian authorities are crossing their fingers and wishing and hoping and thinking and praying that the simple announcement of being able to buy dollars will be enough to scare the markets into halting the ascent of the real!

And the 10-year Treasury yield is still inching higher, trading at 3.85% this morning… And for those of you new to class… When pricing bonds, yield and price have an inverse relationship… So, as yield rises, the price goes down and vice versa…

This cold snap across the country has the price of oil above $80 again…

In the Eurozone this morning, their Manufacturing Index (PMI) came in as expected at 51.6, ticking higher than the previous month’s figure of 51.2… Eurozone manufacturing has been inching higher for 10 months now, which is a good sign for the recovering economy there.

The euro (EUR) took the news and ran with it back to 1.44 this morning…

In Canada, the Canadian dollar/loonie (CAD), registered its best performance for a year in 2009 in a month of Sundays… And, it didn’t take long this morning for the loonie to get rolling again versus the green/peachback, with oil trading higher once again.

And in Australia… The Aussie dollar is back above 90-cents this morning… I noticed last week that the Aussie dollars had fallen to 0.8940, which according to my chartist friend, was 40 pips above the resistance… Since then the Aussie dollar has shot up over 1-cent!

We’ll see some data from Australia this week, that we need to keep track of (to “tally up” so to speak) because the Reserve Bank of Australia (RBA) doesn’t meet until February, and we’ll want to see if the data adds up to another rate hike at that meeting. This week, we’ll see retail sales and the Aussie trade balance…

And in China this morning… China’s manufacturing posted its biggest growth since 2004, last month! WOW! Their Manufacturing Index rose to 56.1…

As a refresher… These Manufacturing indexes report an index number, which uses a level of 50 as the line in the sand between expansion and contraction… So, any number above 50 means manufacturing is expanding.

Speaking of which, we’ll se the US version of a manufacturing index we call the ISM this morning… And the ISM is expected to have inched up too to 54.1 in December… I’m still not sure where this “manufacturing” is happening, with the unemployment rate at 17%, and so on… But, that’s what the government says it is, and we can’t question the government…

OK… You all know that I was kidding there, right? It’s our duty to question the government!

Then there was this… Well, I know that these mini-rallies can be snuffed out in a NY minute, but… It sure didn’t take long for the dollar to get back on the selling blocks this morning, as we start the New Year! It usually takes a week or two to see the direction for the currencies when we start a new year, but if this year is different, and we continue with the initial move downward for the dollar, for now.

To recap… The dollar bulls finished the year pounding their chests, but it didn’t take long for the reversal to take place in the New Year! Eurozone manufacturing is stronger, and China’s is off the charts! Canadian dollars/loonies, recorded one of their best year’s, performance wise, and Bernanke is pointing the blame-finger at someone else… It couldn’t have been the low interest rates that caused the housing bubble… Yeah right!

The Daily Reckoning