Japanese Yen on the Loose!

Good day… A Tremendous Thursday! Well… More dollar buying was the flavor of the day on Wednesday as the liquidity/credit crunch seems to have settled down for now, and the risk positions have been closed out. When risk positions are closed out, investors go to the most liquid currency there is. And for now… That’s the dollar.

They are not buying the dollar for fundamental reasons other than that – as I said on Tuesday – the currencies had seen euphoric times in the spring and early summer, so a consolidation/technical correction was due. And when this scary situation with liquidity arose last week it made sense to start the consolidation now.

But as I said yesterday, this consolidation seems to be moving faster than any that I’ve seen in my years trading currencies. It gives us a glimpse of the amount of risk positions there were out there, eh? The euro (EUR), which in my opinion, should rival the dollar any day of the week, has fallen through 1.34 overnight.

My friend, Bill Bonner of The Daily Reckoning had this to say about the dollar buying yesterday: “But why the euro – easily as safe as the dollar – should fall against the greenback is another thing that calls for a question mark. The euro has lost 1.5% of its value, compared to dollars, over the last two weeks. Why?

“Our guess is still that the dollar is doomed…maybe not in the short-run credit crunch. Definitely in the long run. But when will the long run arrive?”

And long time friend of ours Doug Casey has this to say about owning dollars, “Okay, so forget about stocks, forget about bonds. What about cash? How about T-Bills? No, because T-bills are denominated in dollars, and the dollar is an ‘IOU nothing’ issued by a corrupt and bankrupt government.

“It’s a floating abstraction. If you hold dollars today, you’re going to be as dumb as an Argentinean who held pesos ten years ago. And you’re going to have the same fate. So forget about that.”

So… As you can see… I’m not the only one saying that the dollar has long term problems, and as far as other currencies are concerned – none are backed by gold… But some have central banks that are far more credible than the bubble creation machine we have here in the United States. The euro is the first to come to mind… The Aussie dollar (AUD) is next… Pound sterling (GBP)… With the currencies from Norway (NOK) and Sweden (SEK) not far behind.

As I’ve always told people when they were looking at currencies – look at the currency as the “stock” of the country. Look at that country’s fundamentals like you would a corporation’s fundamentals before buying its stock… And the central bank of a country like the corporate treasurer of the corporation. If you stick to these criteria you should be able to pick out strong performing currencies.

OK! The data yesterday was mostly pro-dollar, as the TIC (security flows) were really strong, coming in at $120 billion, more than covering the needed $80-85 billion needed on a monthly basis to finance the current account deficit. As I said yesterday, there are “rogue” months of data, but I suspect we’ll see more of this in the next months – remember this data is two months behind – as people/investors flock to dollars during this liquidity/credit crunch.

Industrial production and capacity utilization ticked up, which makes sense given the lower trade deficit data. Obviously the weaker dollar this summer had helped manufacturers with their exports, and now it shows with their production and utilization. So… Like I said the other day… Go ahead investors/traders; run the dollar up and ruin this great scenario… The only good sign for manufacturers in a decade!

And get this! The government tells us that CPI (inflation) didn’t grow last month! What a bunch of hogwash! I’m so tired of this stupid CPI not tracking what’s really happening with our wallets! No inflation?! Just who do they think they’re kidding?! Duh… Throw me the ball coach… “Pass it? I didn’t even think I could swallow it”! That’s how dumb they think we are! No inflation! What a bunch of bunk!

Everywhere I look I see more and more talk about “unwinding carry trades“. The trading pattern sure looks like that could be happening, given the strength of the yen (JPY), and the weakness of the New Zealand dollar/kiwi (NZD). It’ll take time to see if this pattern continues, as we’ve had a few false dawns recently. I think it really has more to do with “risk positions” being unwound.

Speaking of kiwi… New Zealand’s Finance Minister, Cullen, said yesterday that the New Zealand dollar is “still higher than justified”. I wouldn’t pay too much attention Cullen. He’s been a sore loser over the strength of the currency, which if he would stop for a fleeting moment with his rhetoric and think… He would have a V-8 and say, “Wow that stronger currency sure helped out with fighting inflation”!

I see that U.S. Treasury Secretary Paulson was out on the speaking circuit again last night… This time telling all that would listen to him that while the turmoil in global markets will “extract a penalty” on growth, the financial system and economy was strong enough to withstand it without provoking a U.S. recession.

OK… In the red corner we have Henry Paulson who claims that this mess will not provoke a recession… And in the blue corner we have… Oh, look, it must be a tag team! We not only have respected economist Nouriel Roubini, but that smart aleck Chuck Butler saying it will provoke a recession! Gentlemen – and I use that word loosely – come out fighting!

Well… In my opinion… Wouldn’t you want to at least protect your hard earned savings and investments in case there is a recession? Maybe there won’t be… But we don’t know that… And so for my money, I’m remaining diversified with currencies and metals!

You know what I’ve been watching is the flight to U.S. Treasuries during this liquidity/credit crunch. Stocks are getting hammered, and the flows to Treasuries are impressive. The 10-year Treasury note, which is the one everyone watches, is now yielding 4.72%… And falling. So, if this keeps up, won’t that trigger yet another round of housing refi’s – and get this housing bubble all started again? Uh-Oh…

Just remember… The longer a bubble lasts… The louder the bang will be when it explodes, and the pieces will spread everywhere!

It looks as though the emerging markets are getting pulled into the currency-selling going on right now too. Shoot Rudy, even China’s renminbi (CNY) has weakened this week! But nothing like the losses seen in Brazilian real, Turkish lire, and the rest of the lot!

The emerging markets have been the darlings of currency investors for some time now, with only brief dips when risk aversion would come along. But this time, risk aversion is for real. Be careful with these…

The exception of course would be China. While the renminbi has softened this week, it really has nowhere to go but up versus the dollar.

One of those emerging market currencies that we’ve liked for some time now is the Indian rupee (INR). The rupee might be in the same corner as the renminbi, although it does have the ability to float more than renminbi, so the losses could be more. I’m going to stick my neck out for rupees though and think they can withstand this selling.

So… Before I head to the Big Finish, I must say that Japanese yen is kicking butt and taking names later! Yen has moved into the 114 handle, something it hasn’t seen since Moby Dick was just a guppy! So, for all you long time yen holders, like me, that have suffered while euros rose, and sterling hit “2” and so on… This is nice, eh? Oh yeah! Japanese yen on the loose!

Currencies today: A$ .7845, kiwi .6775, C$ .9245, euro 1.34, sterling 1.9820, Swiss .8225, ISK 69.23, rand 7.50, krone 5.9790, SEK 7.0170, forint 194.27, zloty 2.8650, koruna 20.58, yen 114.20, baht 33, sing 1.5410, HKD 7.8160, INR 41.3650, China 7.6080, pesos 11.27, (no dollar index) Silver $12.40, and Gold… $674.20

That’s it for today… Equity losses are really spurring sales of all kinds of assets. It’s not a nice day to receive a call from a brokerage margin clerk telling you there’s a big cavity in your account and he needs to fill it. I got to visit my darling daughter and that darling granddaughter Delaney yesterday… What a cutie! Sure was glad the Big Boss, Frank Trotter wasn’t carrying a “pink slip” with him when he came to visit me yesterday! Nah… Nothing but seashells and balloons! So, on that note… Have a Tremendous Thursday!

Chuck Butler
August 16, 2007