Currencies Rally on Tariff News

Well, just as I predicted in yesterday’s Pfennig, when the US traders came in and got word of the new Chinese tariffs on tires, the dollar got sold like re-mastered box sets of Beatles albums! So, we’ve got that to talk about, and some other items I’d like to discuss… So, here we go…

OK… Well, just as I stated above, the US traders didn’t care for the new tariff, feeling that it would project a trade war, and therefore sold the dollar. The Big Dog, euro (EUR), traded to 1.4635 by mid-day… There was some profit taking late in the day, which brought the euro back to below 1.46, but then this morning, the euro got another boost from a report on German Investor Confidence, to bring it back to 1.46, as I write.

German Investor Confidence, as measured by the think tank ZEW, rose to the highest level in nearly three years, this month. ZEW believes that their index predicts developments six months ahead… So… If that’s true, then the German economy will be well on its way to a strong recovery!

So… Traders backed up the truck and bought euros this morning. I look at 1.46 like the deal we went through when the euro was 1.43… It went back and forth from 1.4150 to 1.43 for a couple of weeks, before finally breaking out to 1.45, and then 1.46… With the single unit going back and forth over and under the 1.46 figure, it’s quite similar. And these are good things for buyers!

It allows buyers to buy on dips, before the assets finally break out. I sure hope you all are paying attention, here. Sorry, don’t mean to lecture… But that was an important point!

At one point yesterday all the little dogs (non-euro currencies) were off the porch, and chasing the dollar down the street. But overnight, we’ve seen some news in parts of the world that haven’t been of the “pro-currency” nature!

One piece of which I am talking about, is in Australia, where the Reserve Bank of Australia (RBA) issued a communiqué’ stressing that it (the RBA) was seeking to avoid “premature tightening” monetary policy. Hmmm… You can look at this two ways… You can say that the RBA is just trying to get everyone to calm down, and prepare them to wait longer for rate hikes… OR… You can say that the RBA is trying to throw the dogs off the scent of a rate hike, so things don’t get too heated before they actually do the deed.

I’m going to pin my colors to the mast of the second thought. I think the first rate hike is still in the cards for the fourth quarter of this year, and not first quarter of next year.

Unfortunately, the market participants in Aussie dollars (AUD) didn’t take it that way, and decided that they had run up the Aussie dollar too far, too fast… But just like we saw with Brazil and Canada, when the “fickle traders” sold when they got scared, the Aussie dollar should come back from this, and I would look to use this as a “buying the currency cheaper” opportunity…

The President was out to drum up enthusiasm for the economy yesterday… He said that job losses were ending. I guess he didn’t get the memo from Eli Lilly, saying that they would be laying off 5,500 jobs in the next two years. So… They’re not ending… There’s just not the same number of people working these days to lay off! So, I guess if you start out with, let’s say, five million people working, and four million of them get laid off, then you’ve only got one million more to lay off… That’s less than four million, and therefore the layoffs end.

OK, let’s not go down that road…

I’ve got something that is quite interesting to discuss this morning… OK, did you hear about Germany issuing “dollar denominated bonds”? What’s up with that? I hear you asking… Well… There are a number of schools of thought here, but I think what we have here is a green light from Big Ben Bernanke to other countries to carry the flag of dollar destruction, which the Fed has carried since 1913.

Now, those that pay attention in class might be saying, “But Chuck… If Germany per se is issuing dollar denominated bonds, wouldn’t that be good for the dollar, as dollars have to be bought by the Germans?” Ahhh… But maybe dollars don’t have to be bought… Maybe dollars are already in reserves? Lots of dollars in the reserves of central banks all over the world!

OK, here’s what I think is scary about this… 1. Further dissolution of the dollar’s value, 2. Alternative bonds to buy, other than Treasuries, 3. The dollar becomes the new de facto funding currency for the carry trade.

When I think of all the reasons NOT to own the dollar, I’m reminded of a great song… All in all it’s just another brick in the wall! With the “it’s” being the reasons to NOT own the dollar!

I received an email from a reader that explained how auto tires are made, and how the US has had to import rubber for these tires from Brazil, China and Europe anyway! So, tire makers won’t be home free with the tariff that the President slapped on the Chinese.

I did see an article that hangs with my thought yesterday that these tariffs are “no good” for the global recovery. Nice to see that others see things like I do… I don’t like being out on the limb, albeit a nice strong fat one, by myself all the time!

The Norwegian krone (NOK) is trading about in at the same level as yesterday morning, which is a good thing, considering that Norway had an election that totally slipped by my radar, yesterday… There was no real change to the center-left government, but there were some thoughts yesterday that a change could take place. You have to like the krone going forward based on the fact that government is basically remaining the same, with the same monetary policies, etc. that have guided Norway’s economy and banks through the stormy waters that have existed the last two years!

British pound sterling (GBP) is weaker this morning as Bank of England Governor King brought to light three areas of concern in the UK economy… I’ve never bought into the sterling strength, so maybe this corrects some of this overbought currency.

And the Japanese yen (JPY) gave up some of its recently gained ground versus the dollar overnight. The new government in Japan issued a report that calls for an increased participation in the intervention market to keep yen from getting too strong. Great! That’s just what we need… NOT! The Bank of Japan already had their hands in the intervention cookie jar enough! Now the new government is calling for more participation?

I think the Canadian dollar/loonie (CAD) might see some weakness in the near term, due to a development in the Parliament… The coalition government that exists in Canada is being threatened. The Liberal party has withdrawn its support for the Conservative party, vowing to bring them down… Whenever you have questions like this in government or leadership, the currency will suffer.

Did you see that the judge residing over the Bank of America (BOA) settlement with the SEC rejected the fine of $33 million, which BOA and the SEC had agreed on? The Wall Street Journal reported yesterday that Federal district Judge Jed S. Rakoff rejected a proposed $33 million settlement of allegations by the Securities and Exchange Commission that Bank of America “materially lied” in shareholder communications about bonuses to employees of Merrill Lynch.

The data cupboard gets restocked today with retail sales for August. I talked about this yesterday, and nothing has changed, so expect retail sales to have been strong in August on the Cash for Clunkers program, and back to school purchasing… And we’ll see the stupid PPI for August… PPI is wholesale inflation, and is at least a bit better than the manipulated CPI version, which we’ll be so lucky to see tomorrow!

Today marks the 1-year anniversary of the Lehman Bros. collapse… What have we learned from that meltdown? Not a darn thing! We’re still spending like there’s no tomorrow, and we’re still willing to bail out some and not others… In the past year, though, gold is up 30%… That says it all to me!

So… To recap today, ZEW says German Investor Confidence is strong, and that has helped to underpin the euro. Aussie dollars got sold after the RBA tried to calm the markets down regarding the timing of a rate hike, and retail sales headlines the data releases today.

The Daily Reckoning