Dollar Continues to Fall Against Currencies and Commodities

Yesterday morning I said that we were watching a currency and commodity rally for the ages… Well, guess what? Last night, and this morning, the “ages” returned to make it two days straight! The dollar looks beaten and ready to “give in”, say “uncle” and all those other sayings about that… I can think of another one that’s associated with “giving up”, but I’ll be nice today…

So… Yesterday, I told you that Apple would report their first quarter earnings Wednesday night, and well, let’s just go to the tape and pull that comment from yesterday’s Pfennig, shall we? I said, “After the market closes, Apple will announce first quarter earnings… If the ‘risk sentiment’ is to remain, and continue to put pressure on the dollar, Apple’s earnings will need to be strong.” Well, Apple reported earnings that doubled the previous quarter’s numbers, and far exceeded what the expectations were…

S here’s a quick rundown of what the currencies are doing… The euro (EUR) is 1.4640, the Aussie dollar (AUD) is $1.0760, gold is $1,507.50 and silver is within spitting distance of $46, at $45.98… I just can’t believe that we haven’t gone too far, too fast, BUT… If what Laurence Kotlikoff was talking about yesterday comes to fruition, we could be saying we hadn’t seen anything yet! Did you hear Kotlikoff yesterday? First, Laurence Kotlikoff is a Professor of Economics at Boston University, and when asked about the bond market, he told Bloomberg that a “bond market crash would occur in the next few days”… Whoa! Really? Look, folks, I don’t know what he knows that the rest of us don’t… For I have long called for a bond bubble burst, but I’ve never put a timetable on it! Now, this Professor of Economics at Boston University has… Are you ready, if in fact this is the tipping point? You’ve got to believe that another “circuit breaker” is going to appear, they always have when we’ve gotten to this point with the dollar…

Yesterday, a chartist friend of mine sent me this note… “Dollar index off about 1% overnight. The current level (74.36) is just a few pips above the lows from 2009 of 74.17. Below there, the charts look pretty open down to the all-time low of 70.70 from 2008.” Well, I guess we’re on our way to 70.70, because the dollar index this morning is 73.75!

So… I’ve explained this before, but in case you missed class that day… The dollar index is a basket of currencies from countries that are trading partners with the US. The dollar index is used by many a trader… The problem I see with it, is that it is so heavily weighted with euros… You see, all the legacy currencies of Europe were once in the index, and when they became euros, well… The euro became 57.6% of the index… Then add in Japan, and you’ve got 70% of the index… So, I don’t follow the dollar index, nor trade it, as it is… But, as I said, lots of traders do, so it behooves us to keep an eye on it (that’s all I can do!)…

I would think that as we draw closer to Friday, which is Good Friday, where the stock market is closed, and the bond market closes at noon, that there will be plenty of profit taking, and with the markets being somewhat illiquid with most of Europe gone on Friday and Monday, we could see wild swings… So, watch for that!

Well… The price of oil shot up another $2 yesterday, and now sits at $111.94, so the “dollar alternatives” of oil, gold, silver and currencies, just keep taking turns beating on the dollar. I really do believe that people are beginning to “get it” regarding the deficit. The need to fund the deficit and the interest payments on the debt that was issued are going to be too much for this country to deal with in the future… And now, with the risk appetite at what seems to be an all-time high, “investors” are “getting it”… Of course, I would say that Pfennig Readers have “gotten the message” years ago, and that it’s about time for everyone to get on board my wagon… Better late than never!

OK… Let’s look at some of the currencies… The Canadian dollar/loonie (CAD) continues to surge higher versus the green/peachback… Tuesday it was that soaring inflation rate of 3.3%, and today, we’ll see the color of the latest retail sales from Canada. Given the strong reading of inflation, I would have to say that I’d be looking for a yet another piece of strong data from Canada… I still believe that the Bank of Canada is on schedule to hike rates again in July… But given the inflation data from Tuesday, we could see them move that schedule forward by a month should the economic data continue to have strong prints… And that would all be good for the loonie, folks… Putting that 100 miles of desert between the loonie and dollar with regards to rate differentials would be manna from heaven for the loonie…and loonie holders!

It was weird the other day watching the markets react negatively to the rate hike in Sweden by the Riksbank… The negative reaction was quickly turned around, but still strange at first… But since that turn around, the krona (SEK) has not looked back, and has now traded to July 2008 levels… The record level for the krona came in April of 2008 at 5.8218… So, again, the krona has some ways to go if it is going to revisit its previous high…

Brazil’s central bank is signaling to the markets that more rate hikes are on the way, after they hiked an internal rate to 12%, (1/4% hike)… This 1/4% hike was the smallest rate hike we’ve seen from Brazil, and I think that’s what’s left for us to see going forward… Yes, previously we would see 1/2 or 3/4 % rate hikes from Brazil, but now that a 12% internal rate has been reached, it no longer calls for such drastic moves… The key here is whether or not inflation returns to the Brazilian 4.5% target… Inflation right now is 6.44%… The central bank here does allow a 2% variance from the target… But still, with inflation at 6.44%, I don’t see how interest rates can stand pat… And with the price of oil shooting higher and higher, inflation in Brazil is ready to surge again…

The Brazilian real (BRL) continues to surge stronger versus the dollar, and the central bank has to be wondering just what they need to do to stop this appreciation… You and I know what they could do, but let’s hope that the thought of placing currency controls on the real never enters their collective minds! And remember, the real is an emerging market currency, and one should only use the “speculative” part of their investment portfolio to purchase it!

The Russian ruble (RUB) continues to push higher, as the price of oil surges again… I said two years ago, when we put together our BRIC MarketSafe CD, that Russia was an “oil play”… Well, that certainly has turned out to be bang on, eh?

Speaking of Russia…and gold… The central bank of the Russian Federation reported their March gold purchases yesterday…and they bought 600,000 ounces…which brings their ‘official’ holdings up to 26.1 million ounces. Better to be buying gold than holding dollars, is what the Russians are telling the world, and I think they aren’t alone in that feeling!

And then speaking of gold… The Gold Rush of 2011 is happening… But while gold is getting all the headlines…silver continues to outperform gold. Back in November, when I did an interview with NewsMax that appeared in their January magazine, I talked about the ratio of gold and silver, and how that ratio was narrowing… Let’s go to the tape from NewsMax… “The ratio between gold and silver now stands at 55 or 56, but I expect it to fall below 20”… OK… So, the ratio is now well below 20, and in danger of reaching parity… And that scares me a bit… For if this current scenario in the currencies isn’t the next big leg down for the dollar, then silver is overbought… Nobody knows for sure which way this is going to go, but, as I said above, I fully expect a “circuit breaker” to appear, and bring these lofty levels of currencies and metals back to reasonable levels…

The euro continues to be resilient, folks… Very resilient. This morning, the latest Business Sentiment in Germany (as measured by the think tank IFO) printed, and saw some slippage in the index number… The current assessment was stronger, while the outlook was weaker… Strange, I would have thought those two to be reversed. But getting back to the euro… I think this proves that interest rate expectations are strong medicine for a currency torn apart from peripheral country problems. Speaking of peripheral countries… Spain auctioned bonds yesterday, and while they did have to ratchet up the yield a bit, the auction went off without a hitch, thus giving the markets the indication that Spain will not need to be rescued…

I’ve long said that Spain was not to be included with the Portugals, Irelands, and Italys of the Eurozone!

Then there was this… This is a snippet of a note that a reader (thanks Dave!) sent me that comes from Ted Butler (no relation)…

The facts still suggest higher silver prices, although sharp sell-offs must be expected (whether they are realized or not). The facts still point to silver to greatly outperform gold. Therefore, it still looks like the switch from gold to silver is a go. The facts still strongly suggest that silver should be held until the three critical factors are played out or clearly in force. The three critical factors are widespread silver investment, the dissipation of the concentrated silver short position and the coming silver industrial user inventory buying panic.

While there has been a notable pick up in investment interest in silver, it still appears to be in its early stage. I have yet to see a big hedge fund name revealed as a silver investor. The commentary about silver has exploded, to be sure, but most of that commentary still appears to be warning of a top and not to drop everything and rush to buy silver now. I see absolutely no signs of any type of widespread leveraged buying of silver. That tells me we have much further to go in silver investment.

So there you go… Warnings that silver may be at a top, and then “Mr. Silver” Ted Butler, says no… Interesting times we live in, eh?

To recap… The currencies and metals took the dollar to the woodshed again last night, after holding on to their gains yesterday. Apple announced strong earnings, thus keeping the risk sentiment afloat and sea ready. Oil jumped another $2 overnight, thus propelling the Canadian dollar, Norwegian krone (NOK), UK pound (GBP), Mexican peso (MXN), and Russian ruble higher versus the dollar. The 2011 Gold Rush is on, with gold reaching record levels on what seems to be a nightly occasion. And Ted Butler gives us his thoughts on silver…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning