Fundamentals Make a Comeback

On Friday I left you  with the story of a currency rally for the ages… And it didn’t let up there! Although the rest of the day on Friday the bias was to sell dollars, the real chunk of the dollar wasn’t taken until last night in Asia… Here’s the deal, folks, and this won’t be the first time you’ve heard this from me either…

Fundamentals! The fundamentals are coming home to roost, and the rot on vine is being exposed… Just an example of what I’m talking about… GM will file for bankruptcy today… Soon, they will become the new GM… And not Government Motors… (A reader gave me that line!)

But more importantly is simply the fact that the thing that drove up the dollar’s value beginning last July until March of this year, is simply Treasury buying… And now those Treasury purchases are showing HUGE losses for those holders that “thought” they were “safe”! And… As I kept telling you, once holders grew weary of paltry yields, or the losses, the reversal of those Treasury purchases would be as swift as the move to Treasuries last summer.

So… The move in the Big Dog, euro (EUR), overnight in Asia and now in the European session has produced yet another move through a line of resistance at 1.42… And we all know that when the Big Dog leaves the porch, all the other smaller dogs get to stretch their legs too… And so it is that Swiss francs (CHF) are 94-cents, Aussie (AUD) 81-cents, and so on…

And, as Hannibal Smith used to say… I love it when a plan comes together! Not that I’m cheering on the losses in Treasuries… I’m patting myself on the back for telling you over and over again that it would happen!

OK, so I see the our esteemed, diligent taxpayer (NOT!), U.S. Treasury Sec. Geithner, was promising the Chinese that the U.S. “wants to shrink the budget deficit”… Hmmm… I doubt the Chinese believed him… Of course I’m not a Chinese official, so I don’t really know what they are thinking… But having watched them smile and tell former U.S. Treasury Sec. (Mr. Bailout) Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would business as usual… Same thing for Graham and Schumer who thought their prestigious status as lawmakers would get them some place with the Chinese…

It all comes down to the fact that the U.S. needs China, more than the other way around… Sure it would have been sweet for China if the previous boom went on forever and ever… But that’s not the way of the markets… Booms are followed by busts… And for all you youngsters out there, that didn’t believe this could really happen, even though you might have spent 5-minutes on it in college… Booms really are followed by busts… The secret to not having them end up like this one, is to not allow the Boom to get out of control… Irrational exuberance, eh Big Al? I’m choking on that, because he’s at the root of this problem!

And China? Well… As I boldly told you months ago, that the Chinese would be the first to come out of this economic malaise… The rest of the world has caught up and now the optimism for China is spreading… This is perception folks… And you are what you are perceived to be… And in China’s case, they are perceived to be an economy on the mend, which means their strong growth might return… Well, when China’s growth is strong, they have outrageous demands for commodities, raw materials, and the rest of the lot.

That’s manna from heaven for Australia… And to a lesser degree, New Zealand and Canada… But when commodities get to rising, all the commodity currencies get to rise, because, besides Canada, they have higher than the average bear interest rates… And yield demand becomes the pet rock of the ’70s, the cabbage patch doll of the ’80s, and the tickle me Elmo of the ’90s.. Everyone has just got to have it!

Aussie and kiwi currencies are approaching 8-month highs… The difference here is that 8-months ago, these two were on the slippery slope down, and now their on the escalator going higher, and higher…

And the euro… The Big Dog’s 3-month rally (recall I pointed out weeks ago that the turn happened around March 1st), is the steepest rally for a 3-month period in the last 7 years… The thing though that’s really stuck out for everyone to see, is how the move in the past week has been really swift, and the momentum seems to be picking up steam… I made a bold forecast to the people on the desk the other day… And NO I can’t share it with you, because that would be making a call on a currency, and the legal beagles won’t let me do that any more! Let’s just say the move to 1.42 and change is a move in the right direction!

And this rise in the euro, comes with the Eurozone economy in a recession… But for all those out there that think this “can’t happen”… There is precedence here… Back in 2002-2003, German, the Eurozone’s largest economy, was in a recession, and yet the euro posted large gains in those years of: 17.96% and 19.59% in those respective years… So there you go! And… As long as the euro is the “offset” currency to the dollar, it will retain this ability to gain in value even with the Eurozone’s economy in a recession… The other title, besides “offset currency to the dollar” that the euro has picked up, is the one people are using currently, calling the euro the “anti-dollar”…

We have several Central Bank meetings this week… The Reserve Bank of Australia (RBA), Bank of England (BOE), European Central Bank (ECB), and Bank of Canada (BOC) all meet this week to discuss rates… I read this note and found it to be funny… OK, the BOC is meeting this week… And when asked about the recent rise in the Canadian dollar / loonie, the Finance Minister, Mr. Flaherty had this to say… “We’re always concerned when there are fluctuations in the value of the Canadian dollar, and it has been relatively rapid in the past few weeks, and I know that the governor of the Bank of Canada is monitoring that as it’s his job.”

What’s so funny about that? Well… I find it funny when people in power give ultimatums to others, in “not so many words”… In this case, Flaherty is telling Mark Carney (the Gov. of the BOC) that he needs to do something to halt the loonie’s rise… Cut rates, would be his choice, but interest rates already near zero, I think he’s giving Carney the “high sign” to implement Quantitative Easing… As you can see what that’s done for the U.S. dollar!

The RBA is the only Central Bank that has “fat to cut”… It will be interesting to see if the RBA keeps their interest rate arrows in their quiver… I tend to believe they will hold on to them… But that’s just a hunch…

The data cupboard will get a real work-out this week beginning today with two of my faves… Personal Income and Spending. The Big Banana today is the ISM Index (manufacturing)… Given the rot on the Chicago ISM’s vine last week, one would think that the national (ISM) index would take a hit… But… I tend to think that the Chicago one was pushed lower by the goings on in Detroit, and that the national index will, while still being recessionary, be a bit stronger… And if it is stronger (42 is forecast VS 40 previously), I think the currencies will continue to take liberties with the dollar, as risk assets will ride on!

We end the week with the May Jobs Jamboree… After last month’s hefty addition to jobs by the Bureau of Labor Statistics (BLS), it will be interesting to see how the BLS monkeys with the May number… One thing all their playing around with the numbers can’t do is change the unemployment rate, which is expected to go to 9.2% in May…

I’m seeing what is probably profit taking as the NY trading desks come in and see the 1.42 handle in euros… The euro has backed off its level of 1.4235 from when I came in and turned on the screens… A couple of years ago, we had this game of give and take going on between the U.S. players and Asian players… Overnight, Asia would push the currencies higher and sell dollars, only to see that wiped out by the U.S. players… I sure hope we don’t see a return bout of that game of give and take… It sure gave me a rash watching that each day!

Well… Before I head to the Big Finish… Gold & Silver have really jumped on the risk assets rally’s bandwagon. Gold is $985 this morning… A mere hop, skip and a jump from $1,000… You know, maybe we’ll get to talking about how buying Gold on the dips below $1,000, like I used to do with the dips below $900!

The Daily Reckoning