Dollar Bulls Bushwhack Foreign Currencies

The non-dollar currencies got bushwhacked yesterday by the dollar bulls around mid-day, and there’s been no recovery since. The Treasury is back at the auction table, with $32 billion in 7-year Treasuries for you to buy at the fantabulous yield of…. Drum roll please…. 2.60%! All that and more, so buckle yourself in, and make certain to keep your arms and legs inside the Pfennig at all times during the ride!

Front and center this morning, we have the bushwhacking that the non-dollar currencies took from the dollar bulls yesterday… As I signed off yesterday, the high yielders were rallying, and the euro (EUR) had gained 3/8 of a cent versus the dollar… But around mid-morning, heading into the lunch-time session, the switch was thrown, and the dollar bulls came out of the woodwork. At first just the low yielding currencies like euros, francs (CHF), and loonie (CAD) got sold, and the high-yielders held “steady Eddie” versus the dollar… But as the day wore on the high-yielders gave their gains back, and here we were once again, looking at dollar strength going into the year-end.

I would like to say it was the economic data that flipped the switch and allowed the dollar bulls to come out of the woodwork… But, if I said that, it would mean that a return to the fundamentals has taken place… Here’s the skinny… The S&P/CaseShiller Home Price Index was not as strong as forecast, but still showed improvement in home prices for the month of October. In addition, consumer confidence posted a rise to 52.9 from 49.5 this month. So… As you might recall, for the past nine months we’ve been trading under a trading theme that punished the dollar any time there was good economic news. You might recall me saying (a couple hundred times probably) that fundamentals were not in play with this trading theme, and that I would welcome a return to fundamentals.

Well… I have to say that it sure looks like this has been set up all so well, so carefully… And maybe, just maybe, fundamentals will take over the driving from here on out… Which would mean we have to endure some dollar strength for a while… But when the US economy does its double dipping, then the non-dollar currencies should be good to go!

OK… I know that many of you think I belong on the loony farm for saying that the next bubble to pop will be the US Treasuries… But, before you send me away, you might want to know that 2009 has been the worst year for Treasuries (performance wise) since 1978! And why, you might ask, is this happening? Ahhh grasshopper… Supply and demand… We have the supply, and the foreigners who are required to continue to step up and buy more Treasuries to finance our deficit spending… Are demanding that they get higher yields!

And if you think we auctioned off some crazy, unbelievable, steroid-induced, Treasury amounts in 2009, you haven’t seen nothin’ yet! Just wait till our lovable (NOT!) lawmakers see the results of this latest auction – which saw $44 billion of 2-year notes, and $42 billion of 5-year notes get bought up… And they believe that no matter how much they spend, foreigners will buy our debt! OH NO! Because I know, that you know, that I know, that you know, that once lawmakers in this country see that they can spend more without ramifications, the spending spigot will get turned on BIG TIME!

So… Treasuries will have to deal with this in 2010… And beyond… It’s not like the deficit spending is going to stop in 2010! 2011? Now that’s a different story, if… That is, voters throw all the deficit spending dolts out on their ears, when it comes time for elections!

I was reading this story last night at home… Barton Biggs and Marc Faber, are in agreement that the dollar is set to rebound 5-10% in 2010… Hmmm… I want to make certain that you understand that their reasoning is that the US economy, in their eyes, will make a HUGE rebound in 2010… So, apparently they are not in agreement with my opinion that we’ll see a double dip in 2010…

Well… With the dollar in such demand right now, gold is getting sold to buy those dollars. Some pretty strange thinking… Let’s see… I’m going to sell my gold, with the threat of inflation down the road, with nut-cakes shooting off missiles, and ramping up nuclear capabilities, and a continuation of deficit spending and doing nothing about the current deficit, and buy dollars?

But that’s just what’s happening, folks… Strange days indeed…

So… It looks like the Christmas shopping season will turn out to be OK, according to the reports I’m reading… Most of the stories contain a thought that it is believed that US consumers are spending again… Hmmm… How can that be? With unemployment around 17%, how can this be? Well, it’s happening… So I guess we need to deal with it! We have a debt crisis in the US, so what do we do? Well, the government goes out and spends more, which leads to consumers going out and spending more… Makes sense to me… Spend your way out of a spending/debt crisis… NOT!

Speaking of debt crisis… I was reading a story last night that once again was ripping the Eurozone countries saying that they will enter 2010 with a debt crisis… The story had a map of the Eurozone countries, and showed that Ireland, Spain, Italy and Greece, all have major debt problems, while the rest of the Eurozone have minor debt problems… OK… Haven’t we all been down this road before? I mean what’s new writing about the debt problems of the Club Med countries? Yes, they’ve thrown Ireland in there now… But, we’ve identified these as problem countries in the past… And when I say the “past” I mean going all the way back to the mid-’90s! Yes, these Club Med countries have had problems for that long! So, today’s problems don’t seem to be such a big deal to me! Been there, done that, bought the T-shirt!

I want to know why The Wall Street Journal printed that story, without a story side-by-side of the debt problems in California, New York, Illinois, and others? Because that won’t sell papers! People in the US don’t want to hear about our own problems, they would prefer to point fingers at other countries and mock them for their problems.

The Brazilian real (BRL) and South African rand (ZAR), were the only currencies to hold on to “some” of their gains yesterday… And are back at it this morning, posting small gains… So, investors still have an itch that needs to be scratched for higher yielding assets. Just not as strong as it was back in November.

The rose has faded for the Japanese yen (JPY)… A few months ago, yen was getting bought when the currencies rallied, and bought when the dollar rallied… But that’s all in the rear view mirror now, folks… Like I said yesterday, it certainly looks as though the carry trade has come back to haunt yen. But Shoot Rudy, what did the Japanese expect? Their interest rates are zero, have been zero, and will remain zero for some time to come!

While we’re in Asia… The Chinese renminbi (CNY) really went on a sugar induced rush overnight, pushing higher versus the dollar in one of the largest one-day moves versus the dollar that I’ve seen… Somebody must have been asleep at the wheel there, and will be falling on a sword later, when the authorities see how strong the renminbi got overnight!

The price of oil traded to $79 yesterday, but it has dropped back below that figure overnight… Oil is a good proxy for future inflation, folks… So keep an eye on it!

Then there was this… GMAC, Inc., of which the government is its largest stakeholder, is back in Washington DC once again, on bended knees, begging for an additional $3 to $4 billion in bailout funds. This would be the third time the administration has given bailout funds to GMAC… I find this to be utterly ridiculous… The government is not responsible for GMAC… But since they’ve already invested $13.5 billion in the struggling carmaker, I guess they feel the need to investment more… Don’t ask me! I said to let them fail the first time they asked for bailout money!

To recap… The dollar rebounded from early morning losses on Tuesday, after economic data was good… (Not super; just good)… Could this be a return to fundamentals? The US Treasury is auctioning $118 billion-worth of Treasuries this week… $86 billion has already been put away… Debt is everywhere, so why do people point fingers at other people’s problems when they have their own problems to deal with? It looks like the carry trade is back, which is not good for the yen… And GM is looking for more bailout money… Do you think they should get it?

The Daily Reckoning