Currency Rally Reversal

Front and center this morning, the euro (EUR) traded well past 1.50 yesterday afternoon, and dragged all the other non-dollar currencies higher as the day went on. But overnight, all that giddiness with seeing the euro over 1.50 for the first time since August of 2008 has been watered down.

Here’s the skinny… China printed a very strong third quarter GDP number overnight of +8.9%, and instead of basking in the glow of that report, currency traders took a different route, and decided that if: China is growing that strongly, then stimulus in China will be removed soon, and other countries will follow suit… No one in the markets believes that the US economy can withstand a removal of stimulus… Big Ben Bernanke might believe so, but the markets say, “Ain’t no way!”

So, here we are once again with this stupid trading theme of “what’s bad for the US is bad for the world, and thus a flight to the dollar and Treasuries is required”… I just love how these guys decide that “this is what’s going to happen and the rest of the trading world is going to follow them”… The non-dollar currencies got all caught up in this, and thus were sold off almost throughout the Asian and European sessions… I have seen the euro pop back up since I came in though, so maybe this will be short-lived.

There was news out of Brazil yesterday that was interesting… Yesterday I told you about the “tax” on capital inflows to slow down the stock market, and the real… Well, there were rumors yesterday that the Brazilian government would change this from “Capital inflows” to “Capital outflows”… This would apply to balances that were in the country for less than two months… So… This removes the albatross from the real’s (BRL) neck, in my opinion.

I came across some news yesterday that just kind of hit me right between the eyes… The news about the “Pay Czar” just got me thinking.

Well… Too bad the new “Pay Czar” doesn’t work for us in Congress! The new “Pay Czar” slashed compensation at 25 of the financial institutions that took government funds, lowering compensation by 50%!

But he wouldn’t – and nor would his colleagues on “the Hill” – like it very much if he started slashing their compensation! But wait! That’s a great idea! When he’s finished with the financial institutions, he can go to “the Hill” and start slashing compensation there… Freddie Krueger-style!

Because… Today, every dollar of growth comes with about four dollars of debt.

Again, the same reader sent me another email yesterday, telling me that I need to stop banging on the current administration, for deficit spending… It wasn’t their fault the annual deficit went from $450 billion in 2008, to $1.42 trillion in 2009! AGAIN! I DON’T CARE WHO SPENT IT; WE DIDN’T HAVE IT TO SPEND! And once again, let me be perfectly clear about this… When the first $150 billion of checks were sent to kick-start the economy, I ranted and kicked and screamed… When the first TARP was introduced, I screamed to the heavens! I stated then that I would NOT have bailed out anyone! I would not have spent money we didn’t have! I would have let those that could not stand on their own, fail… Think about that… The Big Ben’s and Summers’ of the world are telling you that “they saved the world”… Saved us from what? Financial ruin? We’re freakin’ broke now, what difference would it have made on that front? Job losses? Oh! And 10% (really 16%) unemployment is “saving us”? Or how about collapsing the markets? Well, I personally doubt that would have happened, folks… That’s just a scare tactic they use.

Think about this for a minute… If we had done nothing… Like Ronald Reagan did after the stock market collapse of 1987, we would have suffered some great losses… But we would be past it by now… Instead, the same firms that took billions from the government are still hurting. Did you see that Bank of America (BOA) booked a $2.2 billion loss for the third quarter! Even the Fed’s Beige Book revealed that the Fed’s regular report found that the overall economy is still plagued by weakness in banking and increasing unemployment.

OK, back to the currencies… One currency you would have thought would have gone through the roof on the news that China’s third quarter economic growth was +8.9%, is the Aussie dollar (AUD)… But NOOOOOOOOO! That didn’t happen… Once again the thought here is that economies around the world cannot withstand the removal of stimulus.. Starting right here in the US, but traveling around the world to China too… The thought process (strange as it might seem) is that if China grew this fast with stimulus, the Chinese government might see this as an opportunity to remove the stimulus, and when they do… All hell breaks loose!

While I agree that stimulus removal in the US would send our economy spiraling down the slippery slope of a double dip, I don’t agree that it would be the same in China.

So… The Aussie dollar is about 1-cent cheaper than it was yesterday afternoon. Looks like, smells like, walks like, and talks like a cheaper buying level opportunity!

Remember when I thought that Sweden’s central bank, the Riksbank, was prudent? Well, that all changed a few months ago, when the Riksbank joined the Bank of Canada in saying that they would not raise rates until the second half of 2010. Well, the Riksbank repeated that line this morning after they left rates unchanged… I just don’t get it… What the heck are these central banks thinking? I guess they just don’t have a brain… The need to go visit the Wizard of Oz; I heard he’s giving out brains!

Oil is back to $80 this morning… Gold is $1,055… And that means the Canadian dollar/loonie (CAD) is back on the rally tracks, heading toward parity against the dollar once more!

And for those of you who like to take a walk on the wild side… The South African rand (ZAR) has really taken a blow to the mid-section in the past couple of days. You see, there was a rumor floating around that the South African Reserve Bank (SARB) was going “freeze” the rand, to keep it from getting too strong versus the dollar. It was rumored that the Economic Development minister, Patel, was going to propose that the rand be “frozen”… Both the ministry and the central bank have denied ever discussing this proposal.

Let’s hope that they haven’t! That would be awful! Just look at the damage the rand has suffered on the rumor! So… If the leaders in South Africa can calm down the markets, we’ll see a rebound in the rand, and it will have been a case of “sell the rumor, buy the fact”.

Our office coordinator extraordinaire, Danielle Goodman, gave me one of those fake $1,000,000 bills yesterday and wanted to know if that was enough to buy a BRIC MarketSafe CD!

But that got me thinking about the hyperinflation story I told you about the other day… Let’s hope that we never have inflation that bad… Where $1,000,000 bills are floating around like $100 bills (i.e. C-notes, Benjamins, etc.).

The new Japanese PM is beginning to take some direction for his new Japan… For instance, this caught my eye… Prime Minister Yukio Hatoyama has advocated creation of an East Asian Community, modeled after the European Union, with China at its heart and the US left outside. Hmmmm… The Big Boss, Frank Trotter and I did a report about six years ago for The Daily Reckoning, where we outlined this Asian Union, and called the new currency there the “Pan”… That would be truly amazing if that Asian Union came to reality!

But like we said then… The wounds run pretty deep between China and Japan, and it will take quite a lot of love and tenderness to get past that! Which country has the love and which one has the tenderness? HA!

Well… The euro has continued to push back against the dollar since I came in this morning… So, maybe it can get back to 1.50, which sure looks like a nice crooked number to me!

Gold is $1,055 having lost $5 this morning. Don’t you just “love” all those commercials on TV these days with guys telling you to buy gold? Where were they when gold was $250, or $500, or $750? They were afraid that gold’s rise was not on terra firma, and they rolled up in a ball in the basement of their buildings, shaking with fear! HAHAHAHA! Nah… Just kidding… But I do find it weird that these guys are coming out of the woodwork now… Guys like Casey, Bonner, the Mogambo Guru and I have been here all along with the same message about buying gold.

The Data Cupboard finally yields some data worth looking at this morning, as the Weekly Initial Jobless Claims prints along with Leading Indicators… We’re still seeing +500K new jobless claims every week, folks… When will this stop? I contend that the US economy cannot sufficiently recover until the unemployment situation is addressed. Why is our government trying to shove this, that and the other thing down our throats these days, and not addressing the unemployment situation? I mean, a tax cut for businesses would be a great move there don’t you think? The other thing the government is ignoring is the deficit… Instead they’re thinking of new expenditures! I’ve written my congress people until my fingers won’t write any longer about this… What have you done? Come on people! This is immoral what they’re doing to our grandkids, and we just let them?

OK, I’ve got to get off that subject!

Let’s go to the recap now, as I feel myself getting all lathered up to scream at the walls about this stuff!

So to recap… The euro traded past 1.50 yesterday for the first time since August 2008. The non-dollar currencies have given back yesterday’s gains after China announced a +8.9% GDP for the third quarter, thus making the traders think that stimulus worldwide will be removed, which would be bad for the US and thus, we return to the stupid trading theme of rewarding the dollar when things are bad! UGH!

The Daily Reckoning