Emerging Markets Decouple

The dollar came back with some vengeance yesterday pushing the Big Dog, euro (EUR), back well within the 1.38 handle, and all the other little dogs, other currencies, followed. There wasn’t data to speak of yesterday to push the dollar higher, it was simply a case of fright, as safe haven flows went the dollar’s way after the news of a N. Korea attack warning spread throughout the markets.

Funny thing… I get a daily email from a news source that gives the highlights at mid-day… And yesterday, the email contained these two headline stories… 1. “Crude rises for third session”… And 2. “Gold down for second day”… I then glanced at the screen, and saw crude oil trading down on the day, and gold up $5.80 on the day… So much for that news source, eh?

Yesterday, I talked about the high-yielders, highlighting Brazil’s return to a current account surplus… But the high yielders have more to say about the dollar’s future value. You see, it’s more than the commodity currencies… It’s also the emerging market currencies, which seem to have a life of their own. There was a lot of talk last year about how the emerging market economies had decoupled from the U.S.; and how a U.S. slowdown would no longer affect them as negatively as it would have in the past. For a few months there, the decouple story was laughed at, as the emerging markets sold off just like everyone else. But then, like the Phoenix Bird, they rose from the ashes… And it’s these emerging market currencies that have taken the biggest bite out of the dollar this year!

OK… This is not an endorsement to run out and buy Chilean pesos! You’ve got to be very careful with these emerging market currencies, as they are smallish, they are illiquid in most cases, and they have wild swings. Take for instance two of the more “mature” emerging markets, Brazil and South Africa… These two do NOT fall into the illiquid category… But currencies like S. Korean won, and Chilean pesos definitely do!

The real point here was to talk about the decoupling… It’s happening just as those that saw that it could, said it would. It just took some time to get legs underneath themselves. Remember last year they called the action from July to December, “De-Leveraging”. This simply meant people were selling everything non-dollar and buying dollars… You might recall me questioning this thinking, but who am I to say this was wrong! Well, I read yesterday that this price action in emerging markets is being called the “Re-Leveraging”!

Speaking of an emerging market country/currency… The Russian ruble (illiquid!) was in the news yesterday… And here’s where I just didn’t get the dollar strength yesterday… Here’s the skinny… Rumors were flying around yesterday that Russia is planning to revise the weightings in their basket of currencies they use to value the ruble… The rumor had the weighting in euros for the basket, changed from 45% now, to 55% in October, and 60% in December….

Now… If true… This would be HUGE for the euro! Now we just need to all be Sherlocks and find out what’s going on here… The Truth is Out There!

OK… Back to the majors!

The euro has recovered a bit this morning on the news from the European Commission, who, this morning said that European Confidence in the economic outlook increased to a six-month high this month. The people surveyed repeated the thought that record-low interest rates, and the Government spending plans may be starting to work, and the economy may have bottomed… Hmmmm… I hate to be the bearer of bad news to these people, but I don’t think their economy has bottomed.

I say this because I truly believe there’s another hiccup for not only the European economy, but also the U.S. economy. I see where quite a few economists are now saying that the U.S. recession will end this year… Hmmm… Here’s what I think… I do think that we’ll see a single quarter later this year with positive growth… But then I think it’s followed by a negative growth quarter, thus… A bump.

And… Yesterday, I talked about how we might be seeing the end of the link between stocks and currencies, and stocks had gained the previous day, and currencies had not… Well, yesterday stocks sold off, and so did currencies… But this time, I think it had more to do with the N. Korea news than any “link” between the two… I really do think we’re beginning to see a break… Let’s hope so, because that would mean that we’re taking baby steps toward getting back to “fundamentals.”

And these fundamentals include the fact that stocks and currencies have a low correlation to each other, and different pricing mechanisms.

U.S. Treasury yields continue to climb with the 10-year Treasury gaining 19 basis points in yield yesterday. That pushes the annual climb in yield for this note to 148 basis points… Hey! You can’t say I didn’t bring this to your attention before it happened!

My friend, Bill Bonner, had this to say about Treasuries yesterday, right here in The Daily Reckoning, “The US Treasury market is in a bubble. Like all bubbles, it will pop. And as always, when bubbles pop, there are those who get hurt – and those who profit. The difference is how well you’re prepared for it.”

Oh, and one more thing… With Treasury yields rising… Mortgage rates will HAVE to follow… And that’s not going to make Messrs Obama, Bernanke, Geithner – and anyone else involved in artificially keeping mortgage rates low – happy… But, that’s fine with me! I don’t really care if they are happy with this development or not! They are responsible for this rise in yields, so they can only be unhappy with themselves!

In New Zealand overnight… The 2009-2010 budget printed, and showed remarkable restraint (for New Zealand!) The Finance Minister, Mr. English, then spoke about how near-term deficits are high, and how he believes that they are at a “peak”… Which is Finance Minister parlance for: We’ll see our debt to GDP ratio shrink from here on out! That kind of talk is manna from heaven for kiwi investors, and the folks over at S&P liked it too, as they immediately raised the outlook for New Zealand’s debt from negative to stable.

Last week, we had S&P lower the U.K.’s debt outlook and the pound sterling (GBP) took off for higher ground… Sort of backwards thinking, eh? Anyway… Kiwi (NZD) has responded favorably for the time being, but without the Big Dog, euro, off the porch chasing the dollar down the street, kiwi will have a difficult time adding to these gains.

Someone asked me yesterday why I hadn’t mentioned the Canadian dollar/loonie (CAD) lately, given my statement that crude oil was rising yesterday… OK… The reader was right! I should have been all over the loonie like a cheap suit! The loonie has gained 13% since March 1st, and crude oil has moved from $40.15 to $63.40 since March 1st.

It was a year ago, that the loonie was basking in the sun of parity with the U.S. dollar… All the talk then was that the loonie could go into uncharted waters versus the dollar… We all know that didn’t happen… And the reason? Oil fell and commodities like gold fell… But guess what’s happening again? Oil and gold are rising again… Hmmmm…

I saw something yesterday that hit me as strange… Forbes Magazine had a lead story titled: “Make A Buck On The Rising Euro”. The reason I found this strange, is that I’ve heard Steve Forbes talk the past few years and each time he emphasizes that the dollar is strong and will remain strong… But now his magazine had a story on how to make money buying the euro… Which means, to make money in the euro, (for dollar based investors) the dollar would have be weak! Strange, eh?

Anyway, the writer, Ryan Campbell, went on to talk about how the euro has risen versus the dollar since March (something I told you weeks ago!), but also adds that the “charts sound the all-clear for euro bulls.” Interesting… I hadn’t heard from my charts guy lately; maybe this will wake him from his slumber!

And Swiss francs (CHF) continue to defy the Swiss National Bank (SNB)… Francs have pushed to near 92-cents… Recall that the SNB issued verbal warnings pre-90-cents that they were not happy with franc strength… Well, apparently that’s all the SNB has… Verbal warnings, because they have not stepped in front of this franc fueled bus!

And Swedish krone (SEK) is seeing some selling pressure this morning, as the old story regarding the Eastern European Banking woes, was brought up again… This is old news! Wrap it up in newspaper and carry it out with the other trash!

So… As I get ready to head to the Big Finish, I see that the currencies, led by the Big Dog, euro, are getting off the porch once again to chase the dollar. One currency that’s not participating is the Japanese yen (JPY), which has taken a big spill overnight to near 97… However, that bad performance in yen hasn’t spilled over to other currencies…

The Daily Reckoning