Diversifying to Aussie Dollars and Scandinavian Currencies

Good day… And a Marvelous Monday to you! 2of 3 from the 1st place Reds, wasn’t too shabby, sure would have loved to see a sweep… The long winning streak still hasn’t materialized for my beloved Cardinals, but winning 2 of 3, is better than losing 2 of 3! The tropical storm / hurricane in the Gulf is causing some havoc… Please be safe there…

Speaking of winning streaks… it seems the currencies and metals are taking a page from the Cardinals book on winning… The Currencies and metals have been in this “win the day for two days, and then lose the 3rd day”… trading pattern. But like I said above, winning 2 of 3 is better than losing 2 of 3! Try as they might, the currencies & metals failed in their attempt to rally on Friday… So, that must mean they’ll bounce back today… Hmmm, not so fast! That’s the last thing anyone ever wants to do, is to trade on they feel is a set in stone trading pattern! Usually, these things come back to bite you in the you know what!

But that doesn’t stop me from watching them or tracking them… I really just want to see the markets trade on fundamentals once again, and leave the Risk On and Risk Off by the side of the road, and peel out leaving swaying tire tracks on the road, and waving good bye to the Risk On, Risk Off trading days in the rear view mirror! Now, wouldn’t it be nice to live together, no wait! It would be nice to see that happen, not the Beach Boys version!

The Isaac storm in the Gulf is playing havoc with the price of Oil… There was a little reported story too from Venezuela, where an oil refinery exploded, killing 39 people. The price of Oil, which had dropped on Friday morning, shot back up by $2 overnight. Sure, the supply risk going on right now, my be short-term, but that doesn’t stop the rise in the price of Oil… and in turn gasoline at the pump, and this is where consumers complain about the price they have to pay.

The Big news from the weekend (other than Isaac) was the long awaited meeting of Eurozone leaders with the Greek Prime Minister, Samaras. There was a real breakdown in the “company line” this past weekend, when an official in the German Chancellor’s (Merkel) coalition, called for Greece to exit the euro… Merkel was quick to react, telling her party that “Everybody should weigh their words very carefully. The Greek Gov’t under Prime Minister, Samaras, is undertaking serious efforts to reduce its debt.”

I would say that by listening to that “talk” from Merkel, that there’s no question that she wants Greece to remain in the euro-club… So, apparently, Samaras either showed real progress with debt cutting, or he pulled the wool over Merkel, Hollande, and anyone else that was able to see what he had accomplished… Remember, Hollande, is the President of France… And has basically been sent to the back of the class… Remember how Merkel and former French President, Sarkozy, were always together on this crisis? But now it seems it’s just Merkel that’s carrying the euro-flag…

Here’s a statement from Greek Prime Minister, Samaras, that he made right after Merkel had taken here stance… “Such toxic statements, from wherever they come, can only do damage. Is there any businessman who will make an investment in euros to get it back in drachmas? The recovery of the economy is of critical importance if we are to achieve our goals.”

So… Merkel and Samaras are singing from the same song sheet… German Business Confidence as measured by the think tank IFO, slid more this month, marking 4 consecutive months of sliding, thus indicating that German Business leaders are feeling the weight of the debt crisis too… the measure of executive’s expectations component, fell to 94.2, the lowest level since June of 2009… (the previous month’s figure was 95.5)

But… having said all that, which would lead one to believe the euro would be getting sold, the euro is actually well underpinned above 1.25… the single unit reached 1.25 last week, and has made a couple of probes into the 1.25 handle, reaching 1.2530 overnight, but currency trades around 1.2525… With Eurozone officials making statements that should damage the euro, and with economic data from the largest economy in the Eurozone (Germany) really showing cracks, the euro has been quite resilient… And whenever I talk about the euro when I’m on the road, I always make a point to say… With all these bad things in the Eurozone, but yet the euro remains above the dollar… What does that say about the dollar?

In the “old days” of just a few years ago… When the euro rallied it gave the rest of the currencies the opportunity to rally VS the dollar too. The last 3 weeks I’ve given you the data from the futures contracts on the number of long dollar positions, falling…

And I’m seeing some data that shows the net bets that the dollar will DROP against eight major peers Increased to 131,512 contracts last week… Compare that to the 311,000 contracts on June 5th that bet on an Advance for the dollar… That’s the biggest reversal on record, folks… So, I can’t wait to see the rest of the data tonight!

The best performer overnight has been the Swedish krona! The krona reached the strongest level against the dollar, since April… Ulrich Leuchtmann, head currency strategist at Commerzbank AG, said, “People will try to diversify away from the dollar into currencies that have strong fundamentals like the Australian dollar and the Scandinavian currencies.”

I agree with what this guy had to say… The Aussie dollar (A$) really tripped and stumbled around last week, losing not only the $1.05 and $1.04 handles. This morning, I’ve watched the A$ rebound from $1.0370 back to $1.04, so maybe that sell off last week was a lot of profit taking… Unfortunately, for the A$, the selling was so strong that it pushed the A$ below its 200 – day moving average. There’s not much in the way of economic data or speeches by Australian leaders this week, So the A$ will be left to trade on its own merits…

I love the stories that hit the newswires… Take for instance this morning, there’s a headline that says that “Dollar loses Hedge Fund Bulls as Risk Drops Among G-10 Nations”… And then there’s one a few lines down that says, “Australian dollar touches month-low on Global Growth Concerns” So, which one is it? Are there Global Growth Concerns? If so, then why has “Risk dropped”? Look… You have to be careful when reading stuff on the markets, because there’s always two sides to a market… That’s why you should just read the Pfennig! HA!

This week the Fed Heads and Economists, and Analysts from all over will meet for their annual boondoggle at Jackson Hole, Wyoming… ( I grew up on Wyoming street, in South St. Louis, so I like typing: Wyoming) … I’ve told you about how a couple of years ago, Big Ben Bernanke used his speech at Jackson Hole, Wyoming, to announce the 2nd round of Quantitative Easing… And the markets would sure love to see history repeat itself this week… But, given the disappointment that the Fed Heads have laid at the feet of the markets for months now, I would say that more disappointment is on the way…

So… Friday, I was in my office reading, and researching things I was needing for an article, when I came across a story on MarkeWatch.com about why the stock market isn’t pricing in the “fiscal cliff”… Interesting take… Basically it said, what I’ve already told you… That Congress is already working on delaying the 2nd part of the components of the “fiscal cliff”… Remember the $1.2 Trillion in discretionary spending cuts (over 20 years, whoopee!) that were supposed to be “automatic” on Jan 1, 2013, as part of the debt ceiling negotiations last summer? Well… lawmakers are NOT going to let those go through, in my opinion…

And, regarding the 1st part of the “fiscal cliff” which is the end of the Bush tax cuts, I would almost think that the lawmakers will attempt to extend them for at least 6 months to a year…

But, if the lawmakers can’t get either of these two things delayed/ postponed, then we are destined to hit the “fiscal cliff”… And it won’t be pretty folks… But that’s the thing, we have to all realize and accept… The deficit spending, and debt accumulation in this country has been out of control for years now. To begin to correct it, there will be pain… To really correct it, there will be lots of pain… So, let’s stop kicking the can down the road. If the ending is all the same, then why don’t we start, right here, right now?

My friends over at the 5-Minute Forecast, quoted me on Friday, which always puts a smile on my face… But it reminded me of something I talked about when it first came out, but not since… and that is the Little Book of the Shrinking Dollar… Here’s the 5… “Chuck consulted closely with Addison on The Little Book of the Shrinking Dollar — packed with 47 ways to protect your purchasing power as the politicians keep their distance from Door 2.”

I saw some analysis on the Emerging Markets the other day, which is very timely given our new MarketSafe Emerging Markets CD… The overall gist of the analysis was the Net Emerging Markets Exposure was Picking Up… Here’s a snippet, “Over the last three months, the countries showing the most significant increase in cash exposure were Brazil and Turkey.” Another note from the analysis was that Emerging Markets Net exposure remains slightly “underweight”, which means that it’s still very early here…

Then There Was This… I read this over at King World… Citi Analyst, Tom Fitzpatrick had this to say about Gold, Silver and Oil… ““We remain bullish on the gold price. Most importantly, this is a bullish gold view, not a gold/dollar view. So while the gold/dollar chart now looks strong, and momentum is picking up, we believe gold will outperform all paper currencies in the developed world. This is because there is so much money printing taking place, particularly in the West.

In fact, gold may perform 20% to 25% better against the euro VS the dollar. It is also worth noting that gold is only 3% off the all-time highs in euro terms. Silver has also held nicely above the $27 level, and very recently we have seen silver begin to outperform gold. The silver chart looks very bullish. We believe that silver will continue to outperform gold in this breakout move. The entire backdrop from 1973 to 1975 is very interesting. At that time we saw the downturn in the equity market, the economy, and housing, along with the surge in the oil price and corresponding move higher in soft commodities. We saw a settling down until 1978/1979, then we got that second surge, which ultimately yielded the stagflationary dynamic in the U.S.

We replicated a lot of that in the 2007 and 2008 time period. Now we are seeing a surge in soft commodities once again, and that’s exactly what happened back in 1978/1979 time period. So we’re convinced there is more upside to come. We expect new all-time highs in Brent Crude. We believe we will see a surge to the $160 level on Brent, and if we replicate the move in 2007/2008, that would target $190 for Brent. “

Chuck again… it’s important to always remember that it’s just one person’s opinion… But, I have a picture on my desk of my friend, the Mogambo Guru, and the words on the picture say: “What would the Mogambo buy?” Gold, Silver and Oil, moron… OK… I did NOT call anyone a moron, it’s just the way the Mogambo gets his point across!

To recap… the currencies & metals could not complete the sweep winning 2 of 3 days last week VS the dollar. But they appear to be ready to win again today… But, don’t bet on trading patterns remaining in place too long! Germany’s IFO slid further this month, showing that Germany is feeling the weight of the debt crisis too. German Chancellor, Merkel, stood by Greek Prime Minister, Samaras this past weekend… Either Greece has done a good job of cutting debt, or they have pulled the wool over the Eurozone leaders’ eyes…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning