Currencies Take Their Turn Beating on the US Dollar

Front and center today, gold and silver are seeing some profit taking, after gold climbed as high as $1,897!!! ($1,910 in futures!) I told the boys and girls on the desk yesterday that I truly believed that once gold moved past $1,900, that it wouldn’t take long for it to get to $2,000, because of all the momentum behind it, and the idea that so many analysts have called for $2,000 gold… Of course, I don’t know anything “inside” that would make me think that… It’s simply my opinion, and I could be wrong!

So… With gold and silver backing off their lofty levels of yesterday afternoon, the currencies have decided to take over… It’s like a tag-team wrestling match, folks… Gold beat on the dollar, until it got tired, then it tagged the currencies, and now it’s their turn to beat on the dollar. So, as I look at the currency screens this morning, I see that all the currencies that are supposed to show “green numbers” are green, and all the currencies that are supposed to show “red numbers” are red, which means it’s an all-out rout on the dollar. For, you see, even the currencies of Japan and Switzerland, which rallied alongside the dollar when it was “risk aversion” and “flight to safety” time, have turned on the dollar, and are rallying beside the other currencies this morning!

The beaten and beleaguered euro (EUR) is up to $1.25 this morning… So, in my conspiracy world, I would think that it’s about time that the US media begins to dig up more dirt on the Eurozone, so as to take the focus away from the US’s problems, that are probably deeper than most realize, and I do believe that this Friday’s speech by Fed Chairman, Big Ben Bernanke, will highlight the need for more stimulus… And that thought is shared by the bond guys, who are selling Treasuries ahead of the speech, because they don’t want to be caught with Treasuries when everyone is heading for the exit door at the same time!

Now, don’t get me wrong… Things are seriously wrong in the Eurozone… This morning, German Economic Sentiment as measured by the think tank ZEW, showed some real rot on the vine, folks… The reading of the index number shows us that Economic Sentiment is at its lowest level in 2 1/2 years! The Composite Manufacturing Index (PMI) remained stable above the line-in-the-sand figure of 50 (at 51.1)… But when the Services piece is taken out, the actual Manufacturing Index fell to 49.7… That’s not good, folks… However… The number was better than the forecasts, so that takes some of the sting out of report.

Speaking of Manufacturing… China printed their manufacturing index (PMI) last night, and improved from July’s number of 49.3 to 49.8… Yes, it’s below “50”… But, it’s hanging on, folks… And that’s a bright spot for global growth. Hey, you didn’t expect China to continue to have guns a-blazin’ while the US and Europe continued to meltdown, did you? Yes, China has done a good job of driving domestic demand to offset the loss of exports while the US and Europe meltdown, but, exports are still “king”…

I think this report represents the “moderation” that I kept talking about, while the rest of the analysts in the world said China’s economy would collapse…

Since the report was somewhat better than forecast, and improved on July’s number, the currencies of Australia (AUD) and New Zealand (NZD) are booking gains this morning. The Aussie dollar is back to $1.05, and kiwi has pushed back above 83-cents!

I saw a story on the Bloomie this morning titled “PIMCO favors currencies of China, Mexico, India Australia, and Singapore”… Well… Three of those are in my “circle of currencies to own”. I’m not a fan of Mexican pesos (MXN), never have been… I was there on the trading desk at Mark Twain Bank in the mid-’90s when Mexico decided to move the decimal in their currency price… The losses were tremendous for holders of pesos, and Mexican T-Bills… Oooh, that just brought back a bad memory…

So… It looks like my thought that this week’s Jackson Hole meeting was going to be the Big Kahuna for the markets, is really taking shape. There are more stories about what the writer believes will happen at Jackson Hole this week, than any other story on the news wires…

The Swiss franc (CHF) continues to breathe the thin air above the atmosphere of most currencies, and like I said above, it’s getting the best of both worlds right now, as it rallies versus the dollar… The strength of the franc has played heck with exports, but, at the same time it’s helping to build a trade surplus that is now the second largest on record of 2.8 billion francs (that’s $3.549 billion when you do the math back to dollars!) Pretty impressive, eh?

Did you see what the S&P Chairman got for downgrading the US credit rating? He got shown the door! OK… He will step down next month… But don’t you find that just a little interesting? My conspiracy blood is boiling right now… I’m thinking the US government decided to show the rest of the rating agencies what would happen to their leaders should they follow S&P’s downgrade with a downgrade of their own! (It’s my conspiracy, folks)…

I’m waiting for Canadian retail sales for June, this morning, which will fill out the second quarter economic reports for Canada. The recent data from Canada hasn’t been as strong as previous data, so I’m going to say that the trend remains, and June retail sales will not reach expectations of +0.7%… I’ll say, +0.5%, which won’t be “bad”, but it won’t meet expectations… And the markets don’t like it when you don’t meet expectations… And so, the second quarter will end and the data prints will have more on the side of the ledger for a rate hike than the other side, but… The side that says no rate cut has been building in recent times… I’m now on the fence with the rate hike I thought we would see in September… UGH!

Then there was this…

Fears of a double-dip recession have been eased in Germany after this year’s estimated budget deficit was slashed from 2.5 to 1.5 percent. The German Finance ministry claimed its public finances will be balanced by 2014. Germany appeared to be back on top as Europe’s powerhouse economy on Monday after it announced that it cut this year’s estimated budget deficit from 2.5 percent to 1.5 percent.

Monday’s reduction more than halved the 2010 deficit which stood at 3.3 percent.

According to a report published by Germany’s Finance Ministry public finances will now be balanced sooner than expected.

Way to go Germany! See… It can be done civilly and without all the drama, and political theater…

To recap… It’s tag team time, as gold and silver became tired of beating on the dollar, and tagged the currencies to take over… Gold is seeing some profit taking this morning, after getting very close to $1,900 ($1,910 in futures)… The risk appetite for the markets is healthier this morning. Europe and China printed PMI’s (manufacturing), and while both printed below the “50” level, both were stronger than forecast. And so with China, the global growth traders were happy.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning