Make Way for the Currency Turnaround

I heard someone say yesterday, “Well, we sure turned around today in the currencies.” And I thought, why not name it Turn Around Tuesday? Then I went back to the history page on my trusty Bloomberg, and saw that on four of the last five Tuesdays, the currencies did in fact “turn around” their performances from the day before! Not that this is something we can hand our hats on, and make trades accordingly on Monday nights/Tuesday mornings… But, it’s an interesting fact nonetheless!

So… The currencies, led by the euro (EUR), came back strong versus the dollar yesterday. There were quite a few things on the list of reasons for this rally. I could do this David Letterman style, but I don’t have 10 reasons… So… I’ll do Chuck’s Top 5 Reasons the Currencies Rallied Yesterday… (Imagine me throwing the card away after reading each reason!)

#5. There were rumors that a Big Swinger Fund Manager was interested in some large chunks of euros, Aussie dollars and gold…

#4. The supply thing again… $35 billion in Treasury Notes had to be auctioned off…

#3. The risk traders were out in force, with the news that 10 financial institutions were going to be allowed to pay back their TARP funds.

#2. Goldman Sachs issued a “buy euro” recommendation to their clients…

And the number 1 reason the currencies rallied yesterday…

#1. The markets are celebrating the 345,000 job loss as reported by the BLS last Friday, as proof the recession is coming to an end, and therefore there’s no further reason to own the safe haven dollar!

To that… I have to say HOGWASH! Not that I’m going to say the markets are wrong, because that’s something I learned many moons ago… The markets are never wrong. Stupid, maybe… But never wrong! What I’m saying is that I’ve proved that the BLS number was a farce, printed to make us feel good… And what a job it’s doing, eh? And even if we accepted that the number was -345,000, why would that be a good thing?

On my list of economists that I often read, is Paul Kasriel of Northern Trust… Let’s hear what he had to say about this. “The last thing Fed Chairman and Great Depression scholar Ben Bernanke wants to do is ‘abort the recovery by premature tightening,’ which is what his predecessors did in 1936 and 1937, says Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. “At what other time has a 345,000 job loss been a reason to celebrate?”

OK… Let’s not look a gift horse in the mouth, eh? The euro rallied all the way to 1.41 and change. Right now, as I type it’s 1.4090. As I left you yesterday morning, the euro was trading, according to the currency round-up, at 1.3890… I had my head down doing some reading before trading, and looked up to see the euro had skipped right through the 1.39 handle… I never saw it trade with a 1.39 handle! It was that quick!

You know, the “number two” reason for the currencies to rally yesterday was quite interesting… Goldman Sachs Group Inc. advised buying the euro versus the dollar as risk aversion eases, prices of commodities rebound and talk of alternative reserve currencies undermine confidence in the greenback.

And the “number three” reason for the currencies to rally yesterday has more “air time” today, as the U.S. will have to auction $19 billion of 10-year Treasuries. Yesterday’s 3-year auction was well bid… But think about this for a minute… The Chinese have shortened up their Treasury holdings to average 3-years… So, a 3-year note probably wasn’t going to have that much trouble getting sold… But 10-years? Ahhhh grasshopper, this could be the cheese that binds… We’ll have to see if this auction is as “well bid.”

The commodity currencies are watching the price of oil rise to over $71 a barrel, and loving every minute of it. I’m not of course, as it will affect the price of the gas I put in my vehicle. But… This is the fuel the commodity currencies needed to get moving. Aussie (AUD), kiwi (NZD), loonies (CAD), real (BRL), and rands (ZAR) really got moving yesterday and overnight. Regarding the loonie… I’ve told you over and over again that the price of oil could be the harbinger for a better loonie price… And voila!

I was talking to a very good/old friend – one whom I’ve known since we were in the second grade – the other day, and he asked me what was going on with the price of oil, as he reasoned that with the recession going on, gas consumption was down, and thus the demand would be reduced. I agreed with him, but added… The difference here, I believe, is the fact that investors are looking ahead and believe they already see inflation, and are buying oil contracts as a hedge versus that inflation they see in our future.

Loonie holders don’t care where the move comes from; they are just rejoicing a move to 91-cents!

The “winner” for the day in performance versus the dollar, was… Drum roll please… The New Zealand dollar/kiwi… I found this strange given the fact that the Reserve Bank of New Zealand (RBNZ) meets tonight to discuss rates. I take it that traders don’t believe the RBNZ will cut rates. In the Pfennig on Monday I said that I was on the fence with this one… “I’m leaning toward leaving rates unchanged, but jawboning for further rate cuts… Which is about the same as actually cutting them! So… Just cut the darn things! Quit beating around the bush!”

So… Kiwi was the winner for the day! Now we need to wait-n-see what the RBNZ does tonight!

Kiwi’s kissin’ cousin across the Tasman, Australia, saw June consumer confidence rise sharply by over 12% – the biggest one-month rise since 1974.

Gold and silver also enjoyed the day on Tuesday, and overnight, with gold moving to $960… Recall, yesterday – when gold had dropped the previous two days – that, “With gold hovering around $950 and silver around $15, it certainly provides an opportunity to buy at cheaper levels than last week’s lofty figures, eh? I would use these dips to my advantage… But then that’s just me… It doesn’t mean that it’s the right thing to do!”

As I’ve been talking about all week, the trade deficit and budget deficit both print today… The trade deficit is expected to grow to $29 billion from $27.6 billion because of the steady rise in the price of oil. The budget statement which couldn’t even post a positive balance in the month April, will probably add $180 billion to the deficit column… UGH!

This afternoon, the Fed’s Beige Book will print, which gives us a glimpse of what the Fed Districts see going on… There’s rarely something here to move the markets, so… These are not the droids you’re looking for… Move along there’s nothing here to see!

And finally… I wonder what’s going to happen with this one… I’m talking about the House of Representatives issuing a subpoena to the Fed for the documents related to the Bank of America (BOA) purchase of Merrill Lynch… You may recall that BOA Chairman, Ken Lewis, told the lawmakers that the Fed and U.S. Treasury made him take on Merrill Lynch, and not disclose the losses on Merrill’s books. There are more laws broken in that statement than you can shake a stick at… So… It will be interesting to see if the lawmakers find anything there. I doubt they will, because they are all in cahoots with each other in this financial mess… But, to me… There’s smoke here… And I always tell you that where there’s smoke there’s fire! And I believe that the fire is raging here… I’ll tell you what we nee… We don’t need no stinkin’ lawmakers going through the records… We need old ironsides… Barnaby Jones… Or Mannix! Now, those guys would get to the bottom of this!

The Daily Reckoning