Dollar Negativity Soars on Pending QE2

The negativity toward the FOMC’s pending quantitative easing (QE) and the dollar just continues to mount… I’ll tell you this now, so you can listen to me later… This negativity is stronger right now than at any time in the past 8 years of this weak dollar trend… The euro (EUR) traded over 1.41 overnight, the Canadian dollar/loonie (CAD) traded parity to the US dollar, the Chinese renminbi (CNY) posted another 5-year high fixing level, and the Monetary Authority of Singapore gave the green light to traders to continue to move the Sing dollar (SGD) stronger!

It’s all about the QE folks… QE 24/7, all day, all night… So, here’s the problem as I see it with these strong moves all at once… It’s probably going to be a “buy the rumor, sell the fact” with all the run-up in currencies and precious metals coming before the FOMC implements QE, and then comes the profit taking once the QE gets implemented.

I could be wrong there, but that’s how I see it… But, it doesn’t mean that the dollar weakness will be over… It will just mean that it was time to take a pause for the cause… The dollar weakness will continue on and on, like the Energizer Bunny, because… The dollar has no yield to back it up… It has deficit financing problems out the wazoo… And it’s the only way the government can pay back the debts they’ve built up!

OK… So… I was doing some reading last night, and saw that the Monetary Authority of Singapore (MAS) issued their bi-annual report on the currency last night. This from Bloomberg:

Singapore will seek a faster appreciation of its currency to curb inflation even as the local economy grows at a slower and more sustainable pace, its central bank said.

The island will steepen and widen the band on the local dollar as the pace of consumer-price gains accelerates to 4% by the end of the year from 3.3% in August, the Monetary Authority of Singapore said in a statement following a semi-annual policy review. The center of the policy band remains unchanged, the bank said.

Singapore’s economy did “moderate” in the third quarter to 10.3%, but the forecast for the year 2010 was raised to 12.3%… So, it’s all good in Singapore these days… And to think that it was our “highlighted currency” in the Review & Focus this month!

And the precious metals… WOW! As I told you yesterday, dollar weakness is the main driver of gold and silver these days, and with all this dollar weakness, you can bet your sweet bippie that gold and silver are pushing higher… And it’s not just against the dollar… Gold is so strong that it’s been gaining on the euro too! But, for our purposes, we only really care about gold versus the dollar… And to that… Gold is $1,380! And silver is $24.50… And those levels were higher briefly overnight, but the precious metals and currencies have taken a breather this morning… Let’s see what the NY boys and girls have up their sleeves when they arrive this morning.

As I said above, China allowed the second largest fixing amount since July 2005, when they dropped the peg to the dollar and allowed a 2% overnight appreciation… On Tuesday night they allowed almost 1% appreciation, and last night they allowed over 1.3% appreciation… The speculators are going wild over these moves, and driving the price of the forwards in renminbi to unbelievable levels!

For those of you new to class, the renminbi is traded as an NDF (non-deliverable forward), which means there’s no delivery of the currency, and it can only be settled in dollars… The Chinese governmen4t “fixes” the currency level supposedly to a basket of currencies. So the markets can’t really “move spot prices of renminbi”… But, they can mess with the forward prices… So, they drive the forward prices higher on expectations that the Chinese will keep up this appreciation pace, or… Allow the renminbi to float…

OK… Hope I didn’t muddy that up for you!

Today, the US data cupboard has the monthly visit with the trade deficit on the docket… With oil prices rising recently, I would expect the trade deficit to have widened in August… We’ll also see the color of the latest PPI (wholesale inflation), and with it being a Tub Thumpin’ Thursday, we’ll also get the Weekly Initial Jobless Claims, which really remain a bug-a-boo for the economy, given that close to 450,000 jobless claims are filed each and every week!

Then there was this from Reuters

The US Treasury Department might have created a conflict of interest and compromised its oversight duties by signing big contracts with Fannie Mae and Freddie Mac, the Congressional Oversight Panel said. “Treasury may be less likely to expedite meaningful reforms of Fannie Mae and Freddie Mac when it has employed them for combined arrangements of $240.5 million and when these firms agreed to provide their services at cost, receiving no profit from the deals,” according to a report from the panel.

Wouldn’t you really like to know the truth about what went on at the US Treasury before, during and after the financial meltdown? I know I would!

To recap… The currencies and precious metals are on the rampage against the dollar this morning, as the negativity toward the FOMC’s pending QE just weighs very heavily on the dollar. The Monetary Authority of Singapore gave the green light to traders to take the Sing dollar higher to fight inflation. (At least these guys understand the importance a strong dollar plays.) And China allowed the second highest overnight appreciation of the renminbi since the dollar peg was dropped in July of 2005!

Chuck Butler
for The Daily Reckoning