Risk Aversion Creeps Back into the Currencies

Last night I was doing some writing, and before I put the laptop to bed for the night, I checked the currencies, and while they had drifted in the early Asian session, the Big Dog, euro (EUR) was still trading above 1.50, and the Aussie dollar (AUD) had set a 15-month high of 0.9368… But when I turned the currency screens on this morning after arriving to a pitch-black office, the euro had given back about 0.5 cents, and so had the Aussie dollar. So, it was my mission to find out what caused this slippage.

The only thing I could find was a comment by the Chinese Premier, Wen Jiabao, who said, “the world faces an uneven recovery”. This made traders think twice about the green light they thought they were under to have carte blanche with the dollar.

The dollar also received a bit of love from the comments by US Treasury Secretary Geithner (AKA the Cheater)… Geithner was doing his best Robert Rubin, circa 1995, saying that he believes strongly in the need to maintain a strong dollar and that the United States was determined to get its budget deficit down. HAHAHAHA! That’s a joke, right? OH! He wasn’t joking? Are you sure? Because for a minute there, I really thought he was joking. For what has he or this administration done to back up those words? But he wasn’t joking… Hmmm… And I was all ready to give him a new nickname… The Joker.

Geithner did say that the US was well aware it must work to keep investors confident in US economic policymaking. Yeah, and that’s exactly what you’ve done, right? NOT! Hey Timothy, you might want to check the scorecard on your performance so far… The dollar index has fallen 7.6% this year, and hit a 15-month low of 74.89 yesterday.

OK… I’ve got to go on to something else… But… It sure looks like risk aversion has crept back into the currencies after all these statements… We seem to run into these risk aversion stints about every week… They come, they take away gains, and they go away, thus allowing the gains to be reinstated.

How about that 15-month high for the Aussie dollar yesterday of 0.9368? At least this time the currency was on its way up when it hit that 15-month figure… 15 months ago, it was on its way down! So, here’s the skinny on this move by the Aussie dollar. Australian employers added jobs in October… This was unexpected… But… Caused the immediate response of speculating that the Reserve Bank of Australia (RBA) would raise rates at their next meeting on December 1st.

There was another “push” to the Aussie dollar yesterday… And it came from gold! The shiny metal pushed to yet another new all-time high record level of $1,117 during the day… I might remind you here that gold is Australia’s third most-valuable raw material export… Oh! By the way, Australia’s unemployment rate is now 6.5%, which is still too high, but falling… And doesn’t that have a nice ring to it, versus saying that the unemployment rate is rising past 10%?

The Aussie dollar pulled its kissin’ cousin from across the Tasman – New Zealand dollar/kiwi (NZD) – along for the rally yesterday… Kiwi continues to be haunted by the ghost of deficits past… But, hiding in Australia’s shadow suits kiwi just fine… And New Zealand retail sales just posted a nice, surprise, uptick… There are all kinds of reports going around that say the New Zealand third quarter GDP will be strong… I’m from Missouri, so they’ll have to show me!

There was further news out of China yesterday, from the People’s Bank of China (PBOC)… The PBOC stated, “The exchange rate will be guided in a proactive, controlled and gradual manner and based on international capital flows and movements in major currencies.” What’s the news of this you might be asking? Ahhh grasshopper, sit… Here is the news… That statement is completely different toward the Chinese currency than previous statements that said that the PBOC would keep the currency “basically stable.”

This is central bank parlance for the fact that the PBOC will continue to “gradually” move the renminbi (CNY)… As previously they basically said they would keep it at current levels… The foreign newspapers are all over this statement like a cheap suit, folks… But I think they’re going in the wrong direction. The foreign newspapers are thinking that the PBOC has given the “high sign” that they are ready to allow the renminbi to float…

I just don’t see that way… The Chinese like to play these games with words, to get everyone all lathered up… And then pull the rug out from under them. No rug pulling from under me!

The Wall Street Journal is reporting this morning that central banks around the world, like the Russian Central Bank, are buying dollars to underpin the currency from a free fall… The WSJ also said the Asian central banks have all been buying dollars to keep their currencies from getting too strong… Hmmm… I wonder how that’s been working out for them? Here’s the skinny on that… “Quite clearly, all Asian central banks have found it necessary to intervene, and it’s costing us,” said Korn Chatikavanij, Thailand’s finance minister.

So, it’s kind of nice to see other central banks around the world throwing good money at bad money, like the Fed Reserve has done for 15 months now… At least they’re not throwing money down the toilet… Oh wait… YES THEY ARE! They’re buying dollars! What dolts!

OK… While I was browsing through the WSJ, I saw another story that caught my attention… Here was the headline… “Fannie Mae, Freddie Mac say more losses are possible”… According to the WSJ, the US Treasury has already injected $112 billion into Fannie Mae and Freddie Mac since the government took them over last year… And now, more losses are possible?

Let’s see… The government took them over, and more losses are possible? Sounds like the Post Office… Sounds like Amtrak… What else has the government taken over, and the bleeding continues?

What some more depressing data? October saw 332,292 US homes seized by lenders or listed in default or auction documents according to RealtyTrac… October was the 8th consecutive month of 300,000 or more. There was a 3% decline in October from September, but I wouldn’t get too lathered up about that, given the chart I saw the other day regarding residential loan resets that are coming due in the next two years, with peaks in September of 2010, and September 2011…

Looking at this chart tells me that the cartel – I mean the Fed – will have no other choice but to keep rates low, and to keep buying Treasuries to keep the yield from getting too high. Haven’t we learned anything the past 10-years? You have to learn from previous mistakes or you’ll make them all over again… And that is what I believe the Fed is doing! They tried like heck to keep the tech bubble from bursting by keeping rates artificially low and credit loose as a goose… What were the unintended consequences of those actions? And what will be the unintended consequences of these actions by the Fed? I don’t have an answer to that, but I don’t see how this works out nice for the US economy and taxpayers…

The data cupboard finally gets restocked today, and we’ll see the usual Thursday fare of Initial Weekly Jobless Claims, which remains above 500,000 every week, and something that Tim Geithner might want to pay attention to… The US Monthly Budget Statement, which will be somewhere around $160 billion for October… Annualized, that’s almost a $2 trillion deficit in the budget! OUCH! Say it ain’t so, Joe!

To recap… The non-dollar currencies rallied all day yesterday, but have given back those gains in the overnight sessions. Most of the slippage has been from words, not actions. The Aussie dollar hit a 15-month high last night on a strong employment data report, which has traders thinking another rate hike on December 1st is coming, and the Asian countries have been buying dollars to keep their currencies weak, and according to them they are “paying the cost”!

The Daily Reckoning