Currencies Rally After Alcoa Profit Announcement

Another Big “WOW” goes to the currencies and metals yesterday! What a rally! The currencies, led by the Big Dog euro (EUR), left the porch and chased the dollar dog down the street all day! The euro returned to the 1.27 handle, moving through the 1.26 handle like a hot knife goes through butter! By the time I made it into work from the doctor’s office yesterday morning, the damage to the dollar was a done deal… Last night, before I went to bed, I checked the currencies just to see if there had been profit taking in Asia… And what to my surprise did I see? But no profit taking, what glee!

The guys and gals who write about currencies, and I must say that list has grown by leaps and bounds since I began my currency letter, all attributed the rally in the currencies to the strong rally in stocks after the Alcoa profit announcement yesterday.

I’m not silly enough (although a few would question that!) to think that the stock rally didn’t have something to do with the currency rally…but all of it? I think not! I think that Fed Head Rosengren had a bit to do with the rally… Oh! You didn’t see or hear what he had to say yesterday on your cable news station? I’m shocked… NOT!

So for how long have I been telling you all that we were following Japan down the slippery slope? I even brought out the old ’80s song by the Vapors about Turning Japanese.  Well… A Fed Head by the name of Rosengren is singing the same tune these days. Let’s listen in to his comments to The Wall Street Journal yesterday…

“We have plenty of tools to tighten up if it turns out the economy grows faster and inflation becomes more of a concern. But it is a little uncertain how effective our tools are once the economy gets into a deflationary environment. The experience of Japan is sobering. They’ve spent a decade and a half dealing with an economy that has had falling prices and despite a variety of monetary and fiscal actions taken are still facing a deflation problem.

It just highlights that it is not straightforward for policy makers to break out of a deflationary environment. And so if you were to look at the balance of risks and what we could do about those risks, the risk from a downside shock I would view as more of a problem than the risk of an upside shock of inflation or to the economy overall.”

OK… I hear a lot of you also saying that I’ve said that the US would not follow Japan through a “decade”-long funk of deflation, and that inflation would be all around us once the deflation bug was squashed…

Well… I stand by those comments, and will continue to do so.  We are following Japan, but we don’t have to go “down there” with them! We can stop the deflation thing at the border if we want to… and the more we attempt to stop it, the more the inflation waves will come crashing down on us in the future…

Ask yourself this… Would you, as a consumer, prefer to have prices remain at current levels and even fall lower… Or… Would you prefer to have them rising so fast it makes your head spin? One is deflationary, and the other is inflationary… Choose your poison because this is what the government, the Fed and Treasury has led us to…

I’ve always contended, well, I guess, not always, but since I was able to think about this stuff, that the Fed is the cause of all our problems… Think about this… If we didn’t have a Fed, the markets would set the interest rates, and they would be bang on about what’s happening in the economy. We would never see inflationary times or deflationary times! The Fed was created to even out the peaks and valleys of the economy… Yeah, that’s what I say, “nice job”… NOT! And somewhere along the way, it was given the responsibility of employment… Now, if you had done your job so miserably for almost 100 years, wouldn’t you expect to get fired? We should repeal 1913… That’s the year that we had both the Fed and income taxes forced upon us… I’ve said it before, and I’ll say it again many times… Woodrow Wilson was the worst president ever!

Ok… I really went off on a tangent there, eh? Let’s get back to the currencies and metals…

The Aussie dollar (AUD) rallied 1-cent yesterday, and held onto the gains overnight after seeing the color of its latest Consumer Confidence report, which printed at a HUGE increase of 11.1% in July! There’s a lot to be confident about in Australia these days… The labor market is cooking with gas, the mining tax is being resolved in a better way, a new Prime Minister, and even the RBA is holding steady with the rate hikes last month… And… The most important thing to me… Australian Treasurer announced that his 2012 Budget has a larger surplus in it than previously discussed!

The rally wasn’t confined to the currencies yesterday… Gold and silver got in the mix too! And for the first time in a while, gold and euros rallied versus the dollar on the same day! I find this whole ying and yang with euro and gold to be strange… For instance, yesterday gold rallied because of renewed Euro-debt problems after Moody’s downgraded Portugal’s debt rating… But the euro rallied! Strange days indeed, so peculiar momma!

Today, though, gold is pretty much flat on the day…

Remember a week or so ago I told you about the better times for the British pound sterling (GBP) in recent weeks? Well… I just saw a blurb go across the screen, catching it with my good eye, that said, “UBS ends trade recommendation to sell pound sterling.”  Again… I’m not saying we should go out and load up the truck with pound sterling, just pointing out that things are better there, and it all points to the U.K.’s willingness to cut deficit spending.

The Norwegian krone (NOK), and the South African rand (ZAR), an odd couple in every stretch of the imagination, both rallied impressively versus the dollar yesterday… Here’s the thing, folks… Rand is a high yielder, and krone is a “wanna’ be high yielder” that has raised rates at least two times, which is two times more than any other European country! When the karma is flowing and the stars align, like they did yesterday for the currencies, these are two of the smaller dogs that run past the Big Dog euro, and chase the dollar dog down the street.

And Brazilian real (BRL)… I haven’t talked much about Brazil lately… I suspect the country was in mourning after their soccer team lost in the World Cup… But have come back strong taking the real along for the ride. This real strength must have put a lot of pressure on the Central Bank Governor who, along with the President, have on more than one occasion expressed their wishes for a weaker real… The markets will have nothing to do with those wishes though!  When you have a currency that sports an interest rate differential so large you could drive a Mack truck through it, you’ve got investors getting into line to buy this market…

OK… The data cupboard comes back strong today with Retail Sales for June, and the Fed Head minutes of their last meeting. Here’s the skinny on how I see Retail Sales printing this morning: The BHI (Butler Household Index) tells me the report will be weak…. and will not reverse the -1.2% decline in May that printed last month. Remember the “cash for appliance” rebate program? Well, just like all the hair-brained ideas the government has had to stimulate growth, like Cash for Clunkers, this one has hurt future sales… Yes, you see this program ended in April, and May’s report was horrible, and most likely June’s will be very disappointing, and it can all be traced to the government program… UGH!

Then there was this… The US Senate will probably vote on the financial regulation reform bill by the end of this week… The House already passed it, and the President can’t wait to get his hands on it to sign… But let me ask you this… Will it really keep us from another meltdown?

In a recent survey, people were asked that question… And it was overwhelmingly decided that the bill will NOT help us avoid another meltdown… In fact, only 15% of those surveyed thought it would! So… If it’s not going to help us, why pass it as it is?

To recap… The currencies & metals had strong rallies yesterday, with the euro going back over 1.27, and gold back over $1,210… There was little if no profit taking overnight. Fed Head Rosengren made a comparison of the US and Japan, and Aussie confidence soared!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning