More Strong Data Sinks the Dollar

Well, the non-dollar currencies are darn near where they were a year ago, gaining back a good chunk of the ground they lost during the financial meltdown last fall and winter… Not that I’m a cheerleader… More of a “this is what I believed would happen, and glad to see a plan come together” kind of guy!

OK… So… Here we are, one year later, having survived the Lehman Bros. collapse, and credit default swaps, and government bailouts. According to Big Ben Bernanke, he saved the world… Hmmm… I’ll save those words for my grandchildren, and their children… For what we’re doing to them is immoral! But that’s not what I was going to talk about with the one-year later stuff, so, let’s skip over to that!

A year ago, I was on the road with FX University, giving one-day instructional presentations on currencies… At the end of each day, all the “professors” (HA!) would get in front of the “students” who would question us. One day we had a heated debate when one of the guys said that “the euro would collapse” and that it was happening now… Hmmm, you know me, I couldn’t let that pass, so I stood up, and said that that may be true… One day… But not now, and not in the next year, and that the euro (EUR) should bottom our around 1.25 (It was 1.47 at the time, having fallen from 1.60). The euro bottomed out around 1.23, and hasn’t seen those levels in over 10 months! I’m not gloating here, just putting this all into perspective.

So… The euro isn’t the only currency taking liberties with the dollar these days… And so, as I said above, they are all – for the most part – taking advantage of this dollar weakness and gaining back ground they lost last year.

But as long as I was on the euro, I might as well stay there… BNP issued a report overnight that is calling for the euro to reach parity with the British pound sterling (GBP)… It would be a combination of euro strength and pound sterling weakness that would achieve this, the report said. Hmmm… This makes sense on one hand… But on the other hand… How could the euro continue to gain versus the dollar, and not drag sterling along on the crosses? This would be a strange twist of fate for sterling should it be found trading at parity to the euro.

Tuesday it was the strong retail sales figure that dropped a bomb on the dollar. Yesterday, it was a combo Strong Industrial Production and a rising CPI… Holding with the trading pattern that has existed – except for rogue days – that whenever the data is strong in the US, the dollar gets hammered, this day was just like many others we’ve seen. The thought that is on every trader’s minds, and investors, and hedge fund managers, and whomever else is out there participating in the markets, is… What’s good for the US is good for the rest of the world, and they are spending money they don’t have like there’s no tomorrow!

My friend, Bill Bonner here at The Daily Reckoning says it best… Bill was talking about how the Fed is desperately trying to get consumers to spend, and to that they will artificially inflate CPI. “If they can successfully inflate consumer prices (not just producer prices) the whole picture might change.” Bill said. “Then, we’d have an inflationary depression rather than a deflationary one.”

He went on to make some very good comparisons to Japan’s 20 lost years. I’ve made a lot of these over the years… Remember when I would due that ’80s song “I’m turning Japanese”… I’m sure you do… But it’s important to revisit these things from time to time so that people don’t forget.

Did you know that the Japanese introduced 11 different stimulus packages worth 30 trillion yen? The Japanese thought that bailing out banks that should have been allowed to fail was the way to go… And today? Well, the government is saddled with a huge debt, and the banks are still wobbly… And when the “you know what” hit the fan in Japan, the Japanese began to save… They had always been savers… But now they really started saving… Thus the on again/off again deflation that has existed in Japan for 20 years…

Doesn’t that sound like us? I mean the consumers… We used to spend, spend, spend, more than we made… But when the “you know what” hit the fan here, we began to hunker down and save again… Which is why I think the retail sales data from the other day is comprised of nothing but government spending programs and cooked books… The US consumer looked spent! Oh, but looky here! They showed life when they saw the Cash for Clunkers program, and this is what the government is licking their chops about… They dangled a carrot and US consumers were led down the same debt-taking road as before.

So, maybe this is where we don’t follow the Japanese any longer. If the government can get US consumers spending again, they can re-light the spending torch… There’s just one big problem… Unemployment… All those millions of consumers who are unemployed! I’m sure the government has a plan to deal with this, though…

The best performing currency in the past 24-hours is the Canadian dollar/loonie (CAD). Yesterday, it was reported that: Manufacturing sales in Canada rose by a stronger-than-expected 5.5% in July following June’s revised 2.2% increase. So, loonies are being marked up versus the US dollar. This was a good report for a recovering economy that I believe has exited their recession.

And speaking of Canada… The Canadian newspaper The Globe and Mail carried an article written by Nassim Taleb on 9/15 that I think had some good thoughts… Here a couple of them…

“In the first place, the financial crisis was not a black swan. It was perfectly predictable. They ignored the phenomenal buildup in leverage since 1980. They acted like airline pilots who’d never heard of hurricanes!

“Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren.”

OK… Let’s go to another country and see what we can find there!

Well…it’s not another country, but a commodity! Don’t look now, but oil has pushed past $72 overnight… The price of oil rose 2.2% yesterday and last night after a report showed that stockpiles in the US had dropped to their lowest levels in nine months…

A strong oil price, though not appreciated at the gas pumps, does help push certain currencies higher, as they have a “petrol” component to them… Currencies from countries like: Norway (NOK), Brazil (BRL), Canada, Mexico (MXN), UK, and Russia (RUB)…

Speaking of Russia… Not that we can trade/offer this currency except in our BRIC MarketSafe CD, but the ruble has been on quite a tear in the past two weeks, gaining 11 of the past 12 days versus the dollar… I talked to a lot of people when we first issued the BRIC MarketSafe CD, and they told me they wished we had made it a “BIC CD” and taken out the “R” for ruble, as they were very leery of Russia and the ruble… I would tell them, I understood, and that the only way I would ever think of Russian rubles was in a “MarketSafe CD”… And… To think of rubles as an “oil play”… Let’s hope that continues to be the case, eh?

Hey! Did you hear the President the other day talking about the $200 billion Supplementary Financing Program (SFP)? He was happy that the government was going to be able to remove it from the budget, because financial institutions are getting healthy… Well… Not that I’m going to pull a Joe Wilson here, and call him a liar, but I am going to throw my 2-cents in here, and say that I believe removing the SFP $200 billion from the budget is due to the fact that Congress is having to raise the debt ceiling again, and this would give them some extra room.

So… I’m watching the currencies trade this morning, and ever since I came in, the euro has been weakening versus the dollar… It has gone from 1.4755 when I came in, to 1.4715, and it doesn’t look as though it will stop there! But… Before you panic, we’ve seen this a lot lately. Overnight, the euro gets traded upward, and then late in the European session (like now) it gets sold… Then the NY traders take it back up again. Looks like a classic example of profit taking in Europe to me!

Yesterday, I told you about the Japanese Finance Minister, Fujii, and his announcement that a strong currency was a good thing for the economy… Well, those words were echoed last night by Japan’s Central Bank Chief, Shirakawa… Mr. Shirakawa said, “In the medium and long term, a strong yen can help push up the economy.”

Hopefully, these two statements on consecutive nights will be enough to push the fears of traders, specifically that the Bank of Japan would intervene to keep yen from getting too strong, into the back seat…

Gold was unable to add to yesterday’s push up to $1,018. I’m convinced that gold can go higher… But, it could very well go lower first! I’ve seen some calls for gold to go to $3,000 and even higher! All I have to say whenever I see that is simply… That would be nice for gold holders (like me!), but I sure wouldn’t want to see what the shape of the US economy is in if gold is at $3,000! YIKES!

Geez Louise, I wrote all this, and haven’t mentioned the data results from yesterday! UGH! OK… Real quick, because I’m running late… CPI was up 0.4% versus July… industrial production was strong, gaining 0.8% (versus 0.6% forecast), and capacity utilization edged higher to 69.6% (still a long ways to go to get back to the days of 85%!) And finally, the TIC’s data… Total Net TIC Flows into the US were a negative $97.5 billion! OUCH! I’m going to spend a lot of time today trying to find out what China’s purchases (or lack of thereof) were!

OK… To recap… The non-dollar currencies are close to their levels a year ago. Yesterday’s move came as a result of strong data from Industrial Production and CPI. The Canadian loonie was the best performer in the past 24-hours, and we had more jaw-boning for a strong yen in Japan.

The Daily Reckoning