Huge Currency Rally Gets Stopped

Friday was absolutely crazy in the markets. The currency screens lit up, the price of oil was on the rise, and Treasury yields were rising, thus pushing the value of existing bonds downward. An absolutely crazy day that scared the bejeebers out of the Chinese… So, let’s go to the tape to see what’s going on here…

Front and center to talk about this morning is the Jobs Jamboree… The mass media would have you believe that the recession has ended, and there are no longer any problems with the credit markets, and liquidity – not to mention the sorry state of financial institutions… Why? Because after the previous month’s job losses were revised up from 663,000 to 699,000 (nobody cared about that!) the April figures came in at, according to the media, “just” 539,000… YAHOO! Let’s have a party, according to what I kept seeing on the TV!

Well… Before we go and buy the party favors and balloons, let’s take a closer look at the number, to see where the jobs were created… Something an old-time journalist would do, before claiming it to be party time! Well, what to my wondering eyes did appear? 72,000 jobs created by the government. That’s right… Add those back and the civilian job market did add/create some jobs… But not the lofty number of jobs the media would have you believe. It’s not that I want to see jobs lost, folks… I just want things to be reported correctly, so that investment decisions can be made on facts, not fiction.

So… Here’s how I would have reported it… “April’s job losses finally put a tourniquet around the labor market and created jobs for the first time in 6 months. The ‘absolute’ number of jobs lost remained above 600,000, but, April’s figures do give hope that we will see further gains in future months.”

OK, enough of that! The hoopla over the labor data kick-started the risk assets, as, if you recall, I said they would on Friday. Currencies led the way, with commodities in second, and stocks finally getting a clue later in the day. The Big Dog, euro, led the little dogs (the rest of the currencies) off the porch to really chase the dollar down the street. This chase lasted all day, and by late afternoon, I yelled across the desk that the dollar index had moved to the downside of its 200-day moving average! This move really lit a fire under the dollar bears, and they came out to play for the first time in a month of Sundays.

So, the risk assets were kicking some tail and taking names… What was hurting? U.S. Treasuries! As I’ve said over and over again in the past, holders of Treasuries are growing tired of the paltry yields… And now, the currency the Treasuries were denominated in was getting hammered. The move out of Treasuries drove down the price, and pushed the yield higher… I doubt the Fed and Treasury are happy about that! The Fed will have to start buying more Treasuries to get the yield under control.

Another entity that wasn’t happy about watching their $750 billion-or-so of dollar denominated Treasuries get double whacked like that in one day… The Chinese! How would you like to take on losses like that?

But really, folks… Yes, the price action in the currencies and Treasuries were violent on Friday, but… This has been happening for about two months now… Yes, we’ve seen the back and forth of these assets, but when you put a line on the 2-month performances, you’ll see this wasn’t just a one-and-done!

OK, so the Chinese watched all this and thought they were in a horror picture show! I saw a Chinese official try to wipe out China’s harping about “the need for a replacement reserve currency.” Shoot Rudy, wouldn’t you do the same thing?

So… The “backing off” by the Chinese, has everyone re-thinking Friday’s price action… For if the Chinese are going to balk, the rest of the world needs to stop and take a breather. Again, folks, this is one of the very bad things that I’ve tried to explain to you over the years regarding the imbalances between the U.S. and China… With China doing the “rope-a-dope” regarding their call on the dollar, the euro and other currencies have backed off their lofty figures of Friday… The Big Dog, euro (EUR) was nearing 1.37 on Friday afternoon, when I left for home… It’s back down to 1.36 this morning.

The move on Friday proved to be just too fast… And the currencies are coming back to fill the gaps they passed up on Friday.

Did you hear that the Fed used a “different” method of valuing the banks? The Fed’s “yardstick” Tier 1 Capital surprised quite a few observers… Many analysts thought that the Fed would use what’s called “tangible common equity,” which would look at the assets and make them accountable for unrealized losses… But NOOOOOOOOO! Had the Fed used “tangible common equity” the total hole the banks would be in would be $68 billion deeper!

My dad used to tell me… Chuck, figures lie, and liars figure…

Not that I’m accusing the Fed and Treasury of just going through the motions on this… No wait, I guess that IS what I’m doing!

Let’s go back to the mention above regarding the dollar index moving downward through its 200-day moving average… The dollar index is a measure of the value of the dollar relative to a basket of foreign currencies. It is a weighted geometric mean of the dollar’s value compared to the euro, Japanese yen (JPY), pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK) and Swiss franc (CHF).

It was started in March 1973, soon after the dismantling of the Bretton Woods system. At that time, the value of the Dollar Index was 100.000 and has since traded as high as the mid-160s but also into the low 70s. It currently stands at 82.63…

The dollar index is heavily weighted toward euros.

Many institutional investors use the dollar index as their means of trading the dollar… And to see it fall through its 200-day moving average was enough proof for them that the dollar is heading south.

The 200-day moving average, for those of you unfamiliar with this term, is a long-term moving average that helps determine the overall health of the asset, which in this case we’re talking about the dollar. It is for all practical purposes a dividing line, if you will, between an asset being healthy and one that is not.

OK, enough of the lessons! I mentioned at the top that the price of oil was on the rise Friday, and although it has backed off now, with the Chinese comments, for a while there on Friday, you could see the bubbling crude, black gold, Texas Tea, spouting off toward $100 again. Yes, oil saw a $60 handle briefly on Friday… But it’s back down to $57.42 this morning… Now, that’s one thing we DON’T need is a rising oil price!

The Canadian dollar/loonie on the other hand, loves a rising oil price! Recall, I told you a few times in the past that the loonie needs a stronger oil price to really go a tier higher… But even with the move in oil recently, the loonie has been moving steadily higher versus the dollar. When I say recently for oil’s move, I’m talking about the last two months. In the last two months, crude oil is up 31% (since March 1st)… WOW! No wonder the loonie has gained almost 12% since that same March 1st date.

In fact, I just ran a currency scorecard using March 1, 2009 as my beginning date, and the currency moves since that date have been phenomenal! Except for yen, which is flat during the past two months. How do these sound? Kiwi +22%, Sweden +19%, Norway +12%, and so on…

The U.S. data cupboard is empty today, but gets restocked tomorrow with the latest trade deficit report… The way the trade deficit has been falling in the past six months, I might have to say trade balance, and not assume it will be a deficit some day! Well, the fall in the trade deficit is a direct result of the U.S. recession. U.S. consumers “finally”, taking a breather on spending… The reduction in the trade deficit however, has NOT been a result of improving exports, which would be the preferable method of reducing the trade deficit. If exports were leading the way, it would mean that U.S. manufacturing was hitting on at least 6 of 8, and that would be good for the economy! But… Instead, we get a reduction from a lack of consumer spending… A combo of both would be great! But that’s pie in the sky stuff!

We’ll also see April’s retail sales on Wednesday. March’s retail sales were awful (-0.9%)… I do expect to see April’s figures to be stronger, according to the BHI… (Butler Household Index)…

At least all the rate cuts are over for this month. The Bank stress tests are a thing of the past, and we can maybe… Just maybe, return to the fundamentals!

The Daily Reckoning