Losing Confidence in the US?

The non-dollar currencies all drifted on Friday, with the dollar seeing a bit of buying… But that’s all been thrown to the curb this morning, as the non-dollar currencies, for the most part, are in rally mode versus the dollar.

The Big Dog, euro (EUR), has really pushed the envelope this morning, rising from 1.4860 to 1.4945 as I write. The Aussie dollar (AUD) is also working alongside the euro, pushing the dollar down. I just put the finishing touches on both the Review & Focus monthly letter, and my “other letter” – The Currency Capitalist – yesterday, and I had some strong words for the government that has allowed this weakness in the dollar. And trust me, if the US government wanted a strong dollar, all they would have to do is say so with conviction, and not this wamby pamby stuff they try to get away with just to put a governor on the dollar’s decline. Think about this for a minute… It’s true, it’s really true… Your government doesn’t care about the currency… And they think it will always be there for us to spend.

WOW! I really got carried away there, eh? I don’t need to get up on the soapbox already on a Monday morning! But… These are the things that need to be said, and I’ll say them! Not like our wamby pamby media, that will talk about the weak dollar, but never what causes it!

The government finally got around to printing their final Monthly Budget Statement that would end their fiscal year (September 30th). The final total was $1.42 trillion in the red… That’s 10% of GDP! That’s the highest level since World War II! And remember when I kept telling you that the expenditures for this administration in 2009 would come in at $3.5 trillion dollars? Well, that’s just about where they came in… And with revenues dropping 16.6% from 2008, we are left with this atrocious deficit of $1.42 trillion! And don’t forget (here I go sounding like an infomercial again) that the next 10 years is forecast to add an additional $9 trillion to our national debt!

OK, so what’s up with the TICs data from Friday? Remember now… The TICs data is an accounting of the net foreign purchases that are needed to finance that atrocious deficit… So how’d we do? Well… The big picture of all the flows in and out for the last 12 months turned negative, and is just shy of the worst recorded level, which was in 1982… OUCH! Central banks seem to be buying about the same amount, which isn’t a good thing when you consider the increase in Treasury issuance… But the real fall-off has come from the moms and pops… The private investors if you will. So… This could be just an aberration, or… It could very well be a loss of confidence of global investors in the US.

There was a hint of this loss of confidence on Friday in the China Daily newspaper… And it wasn’t the fact that the story was in the paper, it was the fact that the story was front and center for everyone to read… It was a quote by Big Al Greenspan, our former Fed Chairman who said that he “fears the budget deficit of the US more than the collapse of the dollar.” Hmmm.

What the heck is Big Al talking about? He knows full well that the deficit is the cause of the dollar depreciation! And just the fact that the Chinese put it front and center on their daily newspaper tells me that they are making fun of Big Al, and at the same time telling their readers that they should avoid dollars… I don’t know what it tells anyone else, but that’s what it tells me!

Recently, I’ve talked about seeing signs of a return to fundamentals… I really do believe that we’re headed in that direction once again, which would be like manna from heaven to your Pfennig writer! Fundamentals are much easier to understand that these crazy trading themes that go against normal logical thinking!

Well… The boys over at PIMCO, the world’s largest bond fund, seem to believe that “Fundamental forces are set to put downward pressure on the dollar as the recovery gathers momentum. Those forces include massive budget deficits, bets the Federal Reserve will keep borrowing costs near zero for an extended period, and prospects for a double-dip recession in the US.”

Sounds about right to me! Given those fundamentals for the dollar, and take away the “flight to safety” trading theme, you’ve got a Betty Crocker award winning recipe for a dollar decline!

The Bank of Canada (BOC) meets tomorrow… I’m going out on a limb here to say that I think the BOC will remove that statement they’ve repeated for a few months now that interest rates would remain at current levels near zero until the second half of 2010. Why do I think that, when the BOC has been so adamant about this statement in previous meetings? Ahhh, grasshopper… First of all, Australia has already raised interest rates, and their central banker has already talked very hawkish about future rate hikes. The other “commodity countries” of Norway, New Zealand and Brazil, are also beginning to talk up rate hikes… So, in my mind, the BOC will begin to “feel the heat” of their commodity brothers raising rates, and the only way they’ll be able to move then is to remove the statement about leaving rates unchanged… NOW!

Getting back to the euro for a minute… I find this move higher by the euro versus the dollar this morning to be quite impressive, given that The Financial Times (FT) had an article saying, “It was time for the ECB (European Central Bank) to get serious about an overvalued euro”… Funny, the timing of this article… The Eurozone Finance Ministers are meeting today… And in the face of all this… The euro rallies!

And as I mentioned earlier in the letter, the Aussie dollar is stronger this morning… It’s my feeling right now that the negativity toward the US dollar is really seen and magnified in the performance of the Aussie dollar… And why not? You’ve got a country that was not affected by the financial meltdown, that was the first to raise interest rates, that is rich in the commodities that China demands (and China is forecast to grow 9% in the third quarter), and that has a central banker that has given the green light for appreciation of the Aussie dollar versus the US dollar!

The data cupboard is full of second tier data prints this week, so I really don’t think the markets will get any direction from the likes of PPI, Housing Starts, etc. But maybe they will! You never know with these fickle dudes!

So… To recap… The TICs data last Friday indicated a loss of confidence in the United States; the budget deficit for the US was $1.42 trillion for the fiscal year ending September 30th; the currencies, for the most part, are rallying this morning versus the dollar; and the data cupboard will fail to give the markets direction this week.

The Daily Reckoning