Euro Gets Caught in Yen-Dollar Crosses

Front and center, I can tell you the lofty figures the euro (EUR) reached Friday, after the US printed a 2.5% third quarter GDP, just couldn’t hold through the night last night… You see, there are just too many questions being thrown at the Eurozone leaders about how their “Grand Plan” is going to be carried out.

I’ll tell you another thing weighing on the euro this morning, is that the Bank of Japan (BOJ) stepped in to intervene last night, selling yen (JPY) and buying dollars… Just the weight of dollar buying on those yen/dollar trades has carried over on the crosses to euro/dollars… I’ve explained this currency cross thing before, so I won’t go there again, as it is quite wordy… But for new readers, just think of large trades selling yen, and buying dollars… Well, the euro is the offset currency of the dollar, so on the euro/dollar cross, it begins to take on water too, as “buy dollars” is the trade du jour!

This is the first time since August fourth that the BOJ has tested the intervention waters, although, we’ve heard a ton of warnings from the BOJ, and other Japanese officials. Well, the intervention weakened the yen by pushing it to 79.53, from 75.82… But, the markets are not going to let the BOJ get off Ollie, Ollie Oxen Free, as they have pushed the yen price back to 78… (Remember, yen is a European-priced currency, so as the price goes down, the more value it returns versus dollars, and vice versa.)

Japanese Finance Minister, Azumi, pledged to keep selling the yen… Well… In my opinion, he had better, or else the markets will take the yen right back to the lofty figure of last Friday!

Another currency that hasn’t been able to hold on to the lofty figures of Friday, is the Aussie dollar (AUD). The rising Aussie dollar in recent weeks, is seen to give the Reserve Bank of Australia (RBA) room to cut interest rates, as the stronger Aussie dollar helps to keep inflation at bay… But the rate cut could be a double-edged sword, in that investors bail from the Aussie dollar, thus weakening it, and there goes any defense Australia had against inflation! That’s what it looks like to me here… That would not be good for Australia or the Aussie dollar…

The markets are of the belief that the RBA will cut rates this evening (tomorrow for them) and the weight of that prospect has just been too much for the Aussie dollar to deal with, and it is 1&1/2-cents cheaper this morning…

I know that I’ve gone out on the limb a few times already when the markets thought the RBA would cut rates at a specific meeting in the past, and said I just didn’t see the RBA cutting rates… Not with the strong data prints we’ve seen from Australia recently… So, on that thought alone, I’ll climb back out on the limb again, but this time, I’m not so sure, so I’ll just be wishin’ and hopin’, and thinking’ and prayin’ that the RBA doesn’t decide to debase their currency!

The RBA isn’t the only central bank to meet this week… We’ll see the Fed Heads get together, and Mario Draghi will call to order his first European Central Bank (ECB) meeting on Thursday. Last week I told you that I expect that Draghi will present a dovish statement this Thursday, that will pave the way for a rate cut in December… That’s my story and I’m sticking to it! I would think that once Draghi sounds dovish, the euro would feel the pressure, that is, unless the markets are still in the mood to reward currencies from countries that cut rates to promote growth… What an insane market mentality that is… But it is what it is, folks…

And then the Fed meeting on Wednesday… This meeting will be no great shakes regarding any new direction for the Fed Heads… However, after the meeting, Fed Chairman, Big Ben Bernanke, will hold a press conference… I can tell you that if I were there, and they called on me… (Hand up in the air, “Ooh, ooh, call on me Mr. Kotter!”) I would ask him about the mortgage backed securities that the Fed admitted buying back last week… And then, I would follow that up with a question on QE3, and watch him squirm!

China got back to allowing the renminbi (CNY) to appreciate versus the dollar last week, after about a week of weakening the renminbi or just leaving it flat. The bill to punish China, which was passed by the US Senate, has been in the House of Representatives now for a couple of weeks… So, China must believe that it will die there, and they’ve gotten back to allowing the renminbi to appreciate versus the dollar. But don’t go out and buy that new red dress to go out dancing in… The Chinese are on pace to allow about 5% appreciation in the renminbi per year… Hey! It’s better than losing 5% a year, which is what will happen to dollar holders!

Speaking of China… Chinese President, Jintao, will be attending the G-20 meeting this week in Cannes. And this is where a deal could get done to assist the Eurozone… China is more than willing to assist the Eurozone, but needs to know how and in what capacity… That could all get ironed out this week…

Eurozone leaders have called on the G-20, saying that more has to be done globally to prevent what happened in the Eurozone from happening again. So… Maybe it will all come together in Cannes, this week… Probably not, but maybe… Especially when the Chinese official news agency Xinhua prints a story like the one they printed last night… “China’s state media Sunday warned that the country will not [be] a ‘savior’ to Europe. China can neither take up the role as a savior to the Europeans, nor provide a ‘cure’ for the European malaise. Obviously, it is up to the European Countries themselves to tackle their financial problems.”

And then gold… The shiny metal is off by $21 this morning… More and more, you see this asset manipulated and manipulated… A friend of mine (Thanks, Dennis) sent me a note that should cheer up gold holders like me… From Swiss America…

Gold will continue rising in value over the coming years for one reason: The primary buyers are purchasing physical gold for wealth preservation, and there simply isn’t enough physical gold to satisfy their appetites. The recent pullback was by no means the bursting of the gold bubble. Bubbles are characterized by months of extended exuberance and consistently higher highs — not the two- and three- hundred-dollar corrections we’ve seen twice in the past few weeks. Such pullbacks are healthy as they indicate gold has much, much farther to go.

Those who buy gold for wealth preservation are happy. Gold has outperformed all other asset classes for most of the past decade. As other asset classes, such as bonds, currencies and stocks, become more positively correlated to each other, gold continues moving in the opposite direction and therefore continues serving its true purpose of wealth preservation effectively.

Then there was this… We receive tons of calls each week from people that would like us to deal in Iraqi dinar… But, the mere fact that it is an illiquid currency, crosses it off our lists… But it’s more than that, folks… If you would give me $100 for every time a caller or someone I talked to at a conference, “guaranteed me that the dinar would revalue on a given day” I would be ready to retire… OK… First of all… The dinar is sold by many outlets, but in my quest to find a “liquid market” I’ve not found one of those dinar dealers that would buy the dinar back… Ahhh, so it’s only a one-way market? That alone should scare the bejeebers out of you… And then add in this question: Once the US leaves Iraq, will the current dinar remain the currency there? That question too should scare the bejeebers out of someone. So… In the end… This could either be the trade of the decade, or it could very well be a scam… I don’t think you have to read between the lines to tell what side of the aisle I’m on here… So… If you believe in this story, be careful!

To recap… The lofty figures in the currencies last week could not be held overnight and this morning, as the euro had two things weighing on it. First we have the details in the “Grand Plan” that are yet to be worked out… And 2. The Bank of Japan intervened in the markets overnight, selling yen and buying dollars, and the euro got caught in the cross trades. We have some central bank meetings this week, starting with the RBA tonight, the Fed on Wednesday and the ECB on Thursday. It looks like we’re going to see some rate cuts sooner or later from the RBA and ECB, and if the deed isn’t done at these meetings, they’ll simply be paving the way for a rate cut at the next meetings.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning