Risk Assets Get Pumped Up Next to Profit Taking

I went on and on yesterday about how rate differentials could be coming back as the top dog of currency valuations… But then a dealer friend sent me a note, and gave me something else to think about, and that is… Currencies like the Aussie dollar (AUD), and Brazilian real (BRL), could very well be rallying, not on rate differentials alone, but also, just the renewed enthusiasm for risk assets… Hey, stocks went past 12,000 yesterday in the Dow… Talk about a “risk asset”!

Well… I won’t argue with that thought that risk assets are really getting pumped up right now, like Hans and Franz… The reason I say this is… Well, take Australia… They’ve just suffered through a summer of floods, and now a cyclone is bearing down on them that could be the strongest cyclone they’ve ever witnessed! But… The currency continues to plow though parity, onward and upward!

Whatever the reason, or reasons, the currencies put on one of the strongest 1-day rallies that I’ve seen in a while…or maybe ever! The Aussie dollar was up nearly 2-cents on the day! The euro traded to and beyond 1.38…and the moves in Norwegian krone (NOK), and Swedish krona (SEK), were so strong that I’m sure currency traders were not going to get in front of those buses!

So… Why all the renewed enthusiasm for risk? I mean, the unrest going on in the Middle East is very disturbing, and one has to wonder just what is going to come of all this.

The food riots are really beginning to grow in numbers… These people are rioting because there’s not enough food. Hmmm… Makes you wonder, doesn’t it… With all the deficits that we have in this country, and we have 43 million people on food stamps… Nah… Chuck, don’t go there, you’ll only get yourself in trouble.

A couple of Canadian readers took me to the woodshed yesterday, because I was talking glowingly about their country, and they disputed that I said there had been no stimulus, no bailouts, no quantitative easing… They tell me there was some stimulus, and so on… But the idea here is that it’s nowhere near the size of the waste we created with TARP, stimulus, bailouts, and QE1 and QE2!

Speaking of QE2… I saw something yesterday that plays well with my thought that we’ll probably see QE3, and then maybe QE4… CABAL (read Fed) head, Hoenig, who normally is known as a “hawk,” mentioned something yesterday that the markets probably missed… He said, “QE3 may get discussed if data disappoints”… Well, pucker up Mr. Hoenig, and kiss QE3 right on the kisser, because… QE1 and QE2 are not going to create jobs… It only causes people to get comfortably numb and begin to spend again, and then it all comes crashing down, because consumption does not create wealth!

So… I overslept this morning (something I rarely do), and unfortunately I got here an hour later than usual (which is still plenty of time before anyone else gets here), and when I turned on the currency screens, I saw selling going on… The euro (EUR), which traded up to 1.3860 overnight, has fallen back below 1.38… And all the other currencies have come down from their lofty figures from the gains they made yesterday.

So… All the enthusiasm for risk assets that has prevailed the first two days of this week, is taking a breather today, and that’s OK… Trees don’t grow to the moon, and rallies don’t either! You have to have these give and takes, so that people/investors who want to get in – but who drag their feet – get the chance to buy at decent levels. I searched all over the newswires to see what put the speed bump down on the road for the risk assets, but couldn’t find anything that made much sense…

OH! There it is! S&P downgraded Ireland’s credit rating from A to A-… You just have to love those credit ratings guys, eh? Oh well, if this downgrade works like the one that Japan suffered last week, then there are no worries for the euro, as the Japanese yen (JPY) has done nothing but rally since it saw a credit rating downgrade last week!

I saw that the Scandis (Norway, Sweden, Denmark) all saw profit taking after posting some very large gains yesterday versus the dollar…and the euro! So, even Europeans got into the act of taking profits! The Asian currencies remained well bid overnight, and have not participated in the European session profit taking. Singapore dollars (SGD), Chinese renminbi (CNY) and Japanese yen, are all stronger this morning, than they have been in some time.

One European currency bucking the trend of seeing profit taking is the pound sterling (GBP)… The pound, as I prefer to call it, is really getting some wind in its sails this morning, on the news that the calls for a rate hike to combat their growing inflation pressures in the UK are getting louder and louder… One BOE member said, “The longer we delay the more there is a risk that interest rate rises when they come will have to be larger.” Which is central bank parlance for… Hike rates now before it gets too late… Or – if they were being “Chuck like” – they would say, “Hike rates now before it gets too late, like it is in the US because the CABAL wouldn’t know inflation if it was a hatchet stuck in their foreheads”

I saw a Canadian banker on the Bloomie TV station this morning talking about how strong Canadian Banks are… He mentioned that Canadian banks have not only weathered the financial crisis storm, but have gotten stronger while doing so. He said that their capital has doubled! WOW! That sounds a lot like a bank that I know, here in the states… Of course I’ll get hammered from a few people for this, but it sounds like the guy was talking about EverBank! You know… For getting stronger the past three years… Oh well… There it is…

The reason I talk about these Canadian banks being so fundamentally strong, is that this is the foundation of an economy… Norway is in the same boat. You never heard one bad word about a Norwegian bank during the financial meltdown, when brand name banks in the US had to be bailed out…either through the front door, or, as we have now learned, through the back door, thanks to the CABAL…

Gold and silver just can’t seem to put two rally days together! They are both selling off again this morning… I saw a quote by the well-respected precious metals guru, James Turk, yesterday regarding gold and silver… He said, “The selling of gold and silver [is] nearing an end.” Hmmm… I sure hope so! I don’t like talking about gold and silver selling off all the time, when I know in my heart of hearts that higher prices are coming…

Well… The US Manufacturing Index (ISM) really took a leap higher in January… The ISM leaped from 58.5 to 60.8! WOW! That’s a good sign for the US economy, folks… But one that’s still very tepid… Here’s a piece of the index data that rarely gets noticed but caught my eye yesterday… The “prices paid” portion of the data leapt too, going from 73.5 to 81.5… That’s NOT a good sign, folks… That means if the manufacturers are paying higher prices, guess who they are going to pass those prices on to?

Today’s data cupboard has the Challenger Job Cuts data, which is a precursor to the Jobs Jamboree, which will make an appearance this Friday… The forecasts are still calling for 140K jobs created in January… Which is still far below the number needed to grow the economy.

Then there was this… From reader, Scott, who sends me stuff all the time… This is from the FT

The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing, according to official figures.

That’s shameful on the CABAL’s part… I guess we no longer have to worry about China owning so much of our debt, eh? Think about all this, folks! It’s downright scary to know that we have monetized that much debt!

To recap… The currencies and metals had a very nice/strong performance yesterday, with a renewed enthusiasm toward risk assets… But the European currencies are backing off a bit this morning, except pound sterling, which is stronger on louder calls for a rate hike to combat inflation pressures. The Asian currencies rallied overnight, and are not participating in the profit taking going on in the European currencies this morning… And Ireland’s credit rating was downgraded by S&P.

Chuck Butler
for The Daily Reckoning