Currency Rallies Abound

The risk investors have nothing but green lights in front of them too! Risk is ON! Funny how things have changed, eh? I mean, in the “old days” an Industrial Production report from China would have been ignored, for it was “all about the US”… But not any longer, apparently, because, the Chinese Industrial Production and Retail Sales reports over the weekend, have opened Pandora’s Box of currency rallies!

And here’s the real key to seeing that it’s an all-out assault on the dollar once more… Swiss francs (CHF) and Japanese yen (JPY) are both rallying versus the dollar! When the partners in crime, I mean flight to safety, turn on the dollar, and begin to rally versus the green/peachback, then you have a rout on the dollar.

Shoot Rudy, the Swiss franc reached parity to the dollar overnight, but has seen some profit taking since hitting that lofty figure. And… The Chinese renminbi (CNY) continues its 4-day move higher versus the dollar… No backing off here, folks!

The euro (EUR) did hit a speed bump this morning, when Investor Confidence, as measured by the think tank, ZEW, reported a slide in Investor Confidence that has reached a 19-month low!

But… The single unit remained well above 1.28, and again that’s just another sign, for when a currency gets smacked in the mouth but is able to retain its footing, you know that it’s all good for the currencies…

Another thing helping the euro to maintain strength in the face of an awful ZEW report, is that the European Commission increased its projection for growth in the Eurozone to 1.7% for 2010, nearly doubling its May forecast of 0.9%. The strength of Germany’s economic recovery is a major factor for the change. The commission upgraded its forecast for Germany’s growth from 1.2% to 3.4%.

And gold? Recall, yesterday, I told you how in the initial reversal of risk aversion, that gold gets sold, but then turns around? Well, the turn-around has already occurred! Gold is up $7, and is now just 1.6% away from its all-time high! I read a story on the Bloomie this morning that had a title that was quite catchy, it read: “Gold’s soothing balm trumps slower inflation.” HA! That’s a good one! But it’s true, it’s true, I did see a putty tat! As I told the reporter from The Street two weeks ago… These are uncertain times, and gold is the “uncertainty hedge”…

One currency that did get caught up the cross winds of a bad economic report was kiwi (NZD)… New Zealand Retail Sales fell 0.4% in July and some now fear that the earthquake that recently hit New Zealand, has sent consumers to the sidelines in fear… I don’t think that this is something that will carry on too long, and if the rest of the currencies continue to rally against the dollar, kiwi will look at this dip in its rear view mirror.

And the poor pound sterling (GBP)… It can’t get any traction, in either direction… It’s stuck in the mud… Inflation in the UK continues to be a bug-a-boo, as it printed at 3.1% in August… The UK, you might recall, has a 2% ceiling, but what are they going to do about it? Stuck between the rock and a hard place, I would say, for if the Bank of England (BOE) would hike rates to cool this inflation, the economy – which is nothing more than a house of cards – would come crashing down… The BOE is resigned to living with 3.1% inflation for now… But what happens when it begins to inch up again?

Now… I’ve said this many times in the past but it needs to be repeated right here, right now… Since the financial meltdown began, the UK experiences things before we do here… So… Is that what’s in our future? Rising inflation that the Fed can’t do a thing about? I believe so, dear readers… I do believe so…

An even more reason to buy and hold gold, eh?

And don’t forget silver! Yesterday, while gold was fluctuating up and down, the steady rise was in silver!

Japan’s PM, Kan, survived a vote last night, and that helped the yen to reach its 15-year high versus the dollar once again. What are Kan and his partners in crime going to do about this yen strength? The markets are convinced that they will do nothing, and that there is a green light to continue to mark up the yen versus the dollar… Hmmm… I’m still pinning my colors to the mast of Japanese intervention… I believe it will come, and when it does it will be with both guns a-blazin’! And those in short-term positions will get whacked! Long-term positions, will simply be able to either batten-down the hatches or sell with a profit…

The US data cupboard has August retail sales for us this morning… As I said yesterday, the BHI indicates that the report will be just “OK” nothing to get the recovery campers all lathered up about, nor will it be bad to get the “double dip” campers lathered either! Yesterday, the Monthly Budget Deficit came in better than expected, at “only” $90.5 billion! UGH!

Then there was this… Where do you stand on the tax cuts? Every US taxpayer will be affected by the outcome of the debate in Congress regarding whether to extend Bush-era tax cuts and credits scheduled to expire this year. Congress has a few options available, including extending all of the measures, letting them expire or continuing them with change, such as limiting their benefit to middle-income families.

I’ll say this, and be done with it… Tax cuts are great for you and me, AS LONG AS THEY ARE ACCOMPANIED BY SPENDING CUTS IN THE GOVERNMENT! The loss of revenue has to be offset by a reduction of spending… This is NOT what happened eight years ago, and one of the reasons we have such a mess on our hands! And can we really depend on this administration to cut spending? I doubt it seriously, folks…

To recap… The currencies, for the most part, added to their gains yesterday, overnight. Even Swiss francs and yen took a swing at the dollar, with francs hitting parity to the dollar overnight! Gold is back in the swing versus the dollar, and is now only 1.6% away from its all-time high. New Zealand saw a weak retail sales report, and kiwi suffered. Pound sterling is stuck in the mud, with rising inflation… Is that what we can expect here?

Chuck Butler
for The Daily Reckoning