Currencies Rally as US Dollar Weakness Continues

I sure would like to confirm that the euro (EUR) is out of the woods, but the single unit is still lost in the middle of the forest! Every time the euro gets close to the edge of the woods, it gets pulled back in by a different periphery Eurozone country’s debt problems. Pretty soon, they’ll be out of periphery countries to bang on, and the Eurozone will do much like they do here… Kick the can down the road, with regards to dealing with the debt, not just finding people to finance it… But, when you compare the two most liquid currencies of the world, the dollar and the euro, it’s like going to a junkyard to find a cheap car… They all look like hell, but one of them is going to start and keep running to get you to work… And to me, that car is the euro… But, then that’s just me…

Europe may have a mountain of problems, but they are molehills compared to the Mount Everest problems in the US and for the dollar… The reason the Eurozone problems seem to get all the media air time, is to provide a circuit breaker for the dollar’s decline… In my heart of hearts, I truly believe that, folks…

OK… Yesterday, we were talking about the dollar index bouncing off the 78.25 figure three times since November, and it was approaching that figure yesterday… I said the dollar was at the crossroads, and I think it’s sinking down… But, the question was… Would the dollar index bounce again, or take a dive down this time? Well… We haven’t gotten any real answer to that question, but… The euro is stronger this morning, which will push the dollar index down, as the dollar index is heavily weighted with euros.

So… Here we are on January 19th, and the dollar is weaker again, with the euro trading over 1.3455, and the Aussie dollar (AUD) trading back above parity. The loonie is also trading back above parity again, and gold and silver are charting stronger prices this morning. The euro actually popped over the 1.35 level overnight… Portugal had a successful Treasury bill auction this morning with a 3:1 cover, which drove yields lower once again. Ever since China made the announcement about 10 days ago, that they would buy Eurozone debt, the debt auctions by the periphery countries have gone smoothly, and yields have dropped… That’s all good for the euro, folks… But like I said above, they didn’t reduce the debt, they simply found someone to buy it… Kicking the can down the road…

The Canadian dollar/loonie (CAD), like I said above, is back to parity with the dollar, after slipping through it briefly. This move to parity comes in the face of some damaging words from the Bank of Canada yesterday… The Bank of Canada (BOC) said that future interest rate increases are on hold because the nation’s economic recovery is threatened by a strong currency and Europe’s fiscal crisis. On the other side of the loonie coin is Queen Elizabeth II… And she knows all too well, that the loonie can withstand the BOC’s damaging words, as long as the price of oil continues to move higher… Which, by the way, it is!

The Aussie dollar recovered yesterday, in spite of a falling consumer confidence report. The consumer confidence is severely damaged by the floods in Queensland, and I think the markets are looking past that for now… What has moved the Aussie dollar stronger is the expectation that China will print their latest GDP/economic growth, tomorrow (tonight for us), and right now, most observers believe that China’s GDP will remain above 9%…

The Aussie dollar’s kissin’ cousin across the Tasman, the New Zealand dollar/kiwi (NZD), is also moving up the currency price charts. It’s been quite “stealth-like” eh? Yes, it has been! The most recent move in kiwi has been a reaction to the news that their largest dairy exporter is seeing prices rise to a 7-month high. Rising prices of milk plays well with my constant harping about food price inflation… It also plays well with pushing the Reserve Bank of New Zealand (RBNZ) to come back to the rate hike table. New Zealand still has a deficit problem that bothers me, folks… But for all of you who have been watching kiwi a long time know all too well, when interest rates move higher here, investors forget about the deficit problem.

The Brazilian real (BRL) has had quite a week of turbulence… After reaching its strongest level in a couple of years, last week, the real weakened on not only the verbal assault on the currency, but also the $1 billion of real sales that the government did to stem the real’s strength. Well, a quick look at the real this morning, and I see that it is back on the rally tracks… There’s another $1 billion that did nothing but line the pockets of the currency dealers that did the swap to dollars…

The real is stronger this morning on the news that the economy is strong, and creating jobs at a record pace. The Latin American Herald Tribune reports this morning…

Brazil created a record 2.52 million new formal jobs last year, the most since the statistic was first registered in 1992, the Labor Ministry said Tuesday.

The number surpassed the 1.61 million formal jobs the nation generated in 2007, which was the previous high until now, and contrasts with the 990,000 formal jobs created in 2009 when the country was still suffering the effects of the global economic crisis.

The vigorous expansion of employment is attributed to the solid growth of the Brazilian economy in 2010, estimated at 7.3%, following the contraction of 0.6 percent in 2009.

Don’t you wish that the Brazilian government, along with the knuckleheads in the central bank, would tear a page out of the Monetary Authority of Singapore’s book on taming inflation? In Singapore, they use a strong currency to fight inflation… They don’t get their panties all in a bunch like they do in Brazil, because the currency is strong!

Another currency that could be used to fight inflation is the Chinese renminbi (CNY), which continues to gain versus the dollar, and get stronger along the way. But, if the Chinese had allowed moves like this in the renminbi, say, two years ago, their rising inflation would be muted by now. China’s President, Hu, will attend a state dinner tonight, and listen to the whiners all day… Remember that SNL skit Todd and Wendy Whiner? The Whiners, that’s what reminds me of the lawmakers that continue to blame all our problems on China…

Speaking of China… Last week I told you that the Bank of China Ltd. had announced that they would now accept accounts from US customers, and hold deposits of renminbi… I told you that it was another step for the Chinese in gaining a wider acceptance of their currency. Well, I tried to open an account to see what would happen… And I was told that I could open an account in person, and invest up to $4,000 per day – and a total of $20,000 per year – in Chinese yuan… And no interest is paid on the balance. So… It’s not the “end all” of diversifications, but for someone that only has small amounts to invest/allocate to currencies, and renminbi is their choice, this is an alternative…

However, I don’t see where even a Chinese Bank can beat the offering that my bank (EverBank) makes available for investors who want to allocate a portion of their investment portfolio to currencies and choose renminbi… At EverBank, the minimum is $10,000 but there is no maximum, like in the Bank of China Ltd. So, there you go… But of course, as I’ve said over and over again, I prefer Singapore dollars (SGD) at this point to renminbi…

The data cupboard here in the US will yield housing data this morning… And the rot on that vine is most likely the culprit regarding the dollar weakness.

Then there was this… Dallas Fed Head, Fischer, was talking the other day and addressing the calls by Ron Paul to end the Fed… I think he was getting a little defensive… But he did speak the truth about the lawmakers creating the debt… Here’s a snippet from a story in The Wall Street Journal

Fisher noted that the Fed’s large bond buying program, which private analysts note is buying up the equivalent of nearly all new Treasury debt issuance, means the central bank has “run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance.”

But he hit back at the widespread criticism the Fed has gotten in Congress. “Those lawmakers who advocate ‘Ending the Fed’ might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.” Fisher said “the Fed could not monetize the debt if the debt were not being created by Congress in the first place.”

That’s right… But, what the Fed has done with it, is our concern, Mr. Fischer… Don’t tell me that you too have fallen into the hands of the current generation’s mantra to always blame someone else.

To recap… The dollar is weaker again this morning, with housing data hanging over the dollar like the Sword of Damocles… Portugal had another successful debt auction this morning, with yields falling again. The price of oil, gold and silver are all higher this morning, thus underpinning the commodity currencies like Aussie, kiwi, Canada, Brazil, and Norway…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning