Currencies Rally

Good day… And a Tub Thumpin’ Thursday to you! Yes, it’s a Tub Thumpin’ Thursday because it’s finally supposed to be warm here today, and… The Cards and Mets in a day game at Busch today… Wink, wink… It’s also a Tub Thumpin’ Thursday because… I said so! HA-HA!

Well… We had a rally in the currencies yesterday and this time the rally wasn’t reversed overnight by profit taking! WOW! It’s been some time since we could say that! Maybe it was the good karma the overnight markets received by my little buddy Alex’s base hit last night to drive in two runs! Or, the good karma from a Cardinals pitcher going into the 9th inning of a game! WOW! Or… Maybe, just maybe, cause you never know, fundamentals are creeping back into the currency markets?

A one-day rally does not make a trend… Nor does a bear market rally that lasts nine months! Fundamentals dictate trends… Charts do not… And neither do bear market rallies! For they are built on short covering, deleveraging, safe haven flows, and profit taking… Not Fundamentals!

I’ve been wanting to get that off my chest for some time now… I know, I’ve explained this before, but it’s been awhile, and thought it needed to be said once again for a refresher or for the new readers! On that note… Did you know that the Pfennig is now read by a very large number of people each day? It’s something to behold for your humble Pfennig writer, who began this endeavor with hand written notes about the overnight markets on the desks of the bond salesmen so they didn’t have to spend their mornings trying to catch up!

OK… Back to the task at hand… Well… I see that Commerzbank is telling their clients that these rallies in the euro (EUR) are opportunities to sell their positions… Hmmm… Of course they must be talking about “trading positions” clients… Not investment portfolio diversification clients!

The euro, which tried for a week to get back to 1.30, finally climbed above the figure yesterday morning, and has remained there. The single unit received an additional boost this morning when the good ZEW Business Confidence report that printed earlier this week was followed up by the European Manufacturing Index rising… Does this mean the Eurozone’s recession is easing? Hmmm… I don’t think so… I just think it shows what I’ve been talking about for some time, and that is the fact that in the Eurozone, 80% of their trade is among themselves… But! You have to like the resiliency, eh?

The Big Dog (euro) was off the porch yesterday chasing the dollar down the street, which means the rest of the smaller dogs get to stretch their legs too! And so, currencies like Aussie (AUD), Swiss (CHF), kiwi (NZD), rand (ZAR), and real (BRL) all enjoyed their exercise! One of these things is not like the other; can you guess which one it is? Right! It’s Swiss francs! All the other currencies mentioned are high yielders.

So, what’s with Swiss getting mixed in with the high yielders? Ahhh grasshopper, Credit Suisse posted a return to the black… A profit… And that’s a good thing for Switzerland, as Credit Suisse, and UBS had really pulled the franc down in the past quarter… But don’t look for any sustained gains here, as The Swiss National Bank’s (SNB) vice-chairman, Hildebrand, said that the bank would continue to limit gains in the franc… That’s central bank parlance for they will intervene, and sell francs to keep it weak.

Now… I find that statement by Hildebrand very interesting… Because just last week, the SNB issued a statement that said they didn’t think it was a competition by countries to weaken their currencies… Hmmm… When a central bank makes two different statements within a month talking about how they will extend currency purchases as long as necessary to prevent appreciation of the franc to ward off deflation… You’ve got to wonder how many other central banks will follow?

Just to explain further for those of you new to class… A strong currency goes a long way toward fighting inflation… Well, if inflation isn’t your concern, and you would like to actually see some inflation in your economy (not deflation) then a weak currency would go a long way toward achieving that goal.

I think the U.S. Fed and Treasury would love to follow, but they just can’t right now, with all of the safe haven flows into the United States.

Gold pushed higher yesterday and then again this morning at the London fixing… There’s a great story on the U.K. Telegraph by Ambrose Evans-Pritchard regarding gold, and how it could rise to $1,500… Here are a couple of snippets…

“In normal times, gold mining companies sell – or ‘hedge’ – a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 Tonnes each year until the start of this decade.

“Low real interest rates have caused the process to reverse, creating a shortfall of about 500 Tonnes. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.”

I’ll follow that up with a story I read the other day that claims that the NYSE-Liffe futures exchange has, it seems, run out of 1 kg bars of gold. WOW! This physical demand for gold is really beginning to get very serious… We did some research on our Metals Select product, and found that comparing March 2008 to March 2009, our trades for physical gold increased by over 200%! I just finished an outline to a presentation that I’ll be making at the Las Vegas Money Show that will be web-cast on gold… And in the presentation, I talk about these uncertain times. The fear that everyone walks around with, from the crackpots shooting missiles, to those gearing up nuclear capabilities, to those throwing good money at bad situations… Gold, is the answer…

Well… Speaking of throwing good money at a bad situation… I received a couple of emails from people that weren’t happy that I made fun of the $100 million that the Obama camp was told to cut from the budget… They claimed that I was being unfair to Obama. Well… I said, very quickly… That apparently they hadn’t been readers very long, or else they would recall me lambasting the previous administration for their deficit spending, too! Shoot Rudy, I don’t care who’s making the decisions… As long as it involves adding over $3 trillion to the National Debt in one year, I’m going to point out how bad that is for us, for our kids, and for our grandkids…

Think the call for an alternative reserve currency by China is a thing of the past? I think the Chinese are just getting warmed up! Memememe… Testing, testing, 1,2,3… Ahem, there my voice is clear! Seriously though… The research folks over at ING said that they believe with China’s trade surplus swelling to $325 billion this year, thus boosting their currency reserves (read dollars), it will add pressure on the Chinese to push for an alternative reserve currency, other than the dollar. Recall, that the Chinese earlier this month threw a cat among the pigeons by saying they wanted to create SDR’s (special drawing rights) that would include a number of currencies, and that would be the global currency.

That was met with a cold shoulder at the G-20… But for how long? With that kind of a war chest of dollars, the Chinese could really start throwing their weight around. Recall that Chinese PM Wen Jiabao said earlier this month that he feared that the dollar was going to weaken given the spending, and thus their need to borrow in the United States.

The Bank of Canada will give the details of their announcement the other day to cut their target rate and place a hold on it, but not the discount rate. They’ll also give details on what they will do with regards to quantitative easing…

And… The Bank of England didn’t back off reports that they would issue a budget deficit larger than any since World War II yesterday… That’s exactly what they did… Not, good stuff for the U.K. economy or the pound sterling (GBP), folks.

Time to head to the Big Finish, and eat my apple…

Currencies today 4/23/09: A$ .7115, kiwi .56, C$ .8090, euro 1.3050, sterling 1.4525, Swiss .8640, rand 8.9475, krone 6.6750, SEK 8.4125, forint 227.80, zloty 3.3840, koruna 20.60, yen 98.20, sing 1.5010, HKD 7.75, INR 50.07, China 6.8299, pesos 13.22, BRL 2.21, dollar index 86.03, Oil $48.57, Silver $12.47, and Gold… $894

That’s it for today… Do you Twitter? I keep getting asked to join people’s twitter conversations. I have to say that I understand what it is… But don’t understand the need. And, think about it, the base word to Twitter is Twit… That cracks me up! Of course there’s more to that discussion, but not here! Late game for my little buddy Alex last night… And on a school night! Good thing I got a 3-hour nap in when I got home! OK… This is really serious stuff… My friend, Addison Wiggin at Agora Publishing made an announcement the other day that I asked if I could relay to my readers. Remember the late, great Kurt Richebächer? Well, his newsletter is being continued in the framework of the great Austrian economics guru. Click here for more information…

OK… Time to get going if I’m going to sneak out of here and head to downtown… Ooops! Guess I let the cat out of the bag! Oh well, I’m sure you figured that out when I first told you there was a day game today! I sure hope our Thursday is Tub Thumpin’!

The Daily Reckoning