Strong Stocks Equal Strong Currencies

Well, today is Cinco De Mayo… It’s a fun day so go have some fun! A few years ago, I talked about Cinco De Mayo, and some guy took exception to it, and called me a really nasty name… So, I won’t get all flowery about the day, except to say, go have some fun!

Of course, to me, the saying “go have some fun” is a staple of my being! Especially these days! I realize that I need to have “more fun”, but work, and all that gets in the way, darn it! HA!

OK, enough of that! Well! You should have seen that currency rally yesterday! WOW! The Big Dog, euro (EUR), traded all the way to 1.34 and change, saw profit taking – which caused it to drop back down – and then ended the day moving past 1.34 again… Overnight, the euro hit 1.3438, but once again, profits and the fact that stock futures are showing weakness have brought the Big Dog back under 1.34… Before I left for Bermuda, Chris mentioned that the euro was having a problem getting past 1.31… Well, that’s in the rear view mirror now, eh? And I would like to think that eventually so would 1.34. Not that I’m rooting for the Big Dog… I say that, because then fundamentals would be in play once again…

The Aussie dollar (AUD) also saw a nice bid all day long yesterday, and moved past 74-cents, and remained there overnight! The Reserve Bank of Australia (RBA) left rates unchanged last night, and delivered a fairly balanced statement afterward… I like their approach, as they keep reminding the markets that they need to see what’s in the pipeline after all the previous rate cuts! This non-move was very much what the Aussie dollar needed to continue its march higher!

Now… I don’t like having to say this, but these strong currency moves were helped along by the strong performance (+214 points) in stocks yesterday. As we’ve been discussing for some time now, it’s just like when one emerging market currency gets whacked, all emerging markets end up getting whacked… Stocks and currencies are considered “risk assets,” and have only on occasion over the years, been in lock-step with each other. So… When “risk assets” are going well, all “risk assets” get going… And vice versa… And, like I keep saying, this is rare to see, but we’re seeing it anyway, and judging from the speakers at the Total Wealth Symposium in Bermuda last week, it had better end soon enough, for those speakers all believe this stock market rally is nothing more than a bear market rally, and doesn’t have the legs to make us all forget the rot on the vine here in the United States.

Whew! That was long run-on sentence, that I should go back and fix… But, hey! People talk like that, why not write like that! HA!

It looks like the European Central Bank (ECB) will meet this week, and some of the thoughts in the markets here are that the ECB will move rates lower. Those thoughts are also responsible for the drag on the euro to bring it below 1.34 this morning. You know what gets me, though? Everyone in the world that follows these things has known since the central bank meetings were announced in December that the ECB would be meeting this week. And do you think they just had a V-8 moment this morning, and remembered the ECB might cut rates? This is all crazy! Yes, they know, and they did know, all the time the euro was rising like the Phoenix bird from the ashes the last four days.

Remember, a month or so ago, I told you about the games that people play now, every night and every day now? They have to do things like this to keep the euro from going off on a moon shot versus the dollar. The dollar’s rally since July 2008 is looking very worn out. Shoot Rudy, even Treasury yields are rising, which indicates the unwinding of all those safe haven trades. Now, I’m not saying that this is in “full swing” but it sure is showing signs. So, as I’ve explained a few times in the past, if the “safe haven” buys get unwound, the pressure on the dollar will be fierce. So… If the ECB “remembers” to remind the media that they have a rate meeting this week, after it looks like the euro is going to the moon, then you can put that down to “managing the rise.”

So… Have you heard of the Chiang Mai Initiative? It’s an agreement by Asian nations that  will create a $120 billion fund to serve as a “liquidity pool” by the end of the year. This money will be used to promote growth in the region and to defend currencies and guard against financial ills arising from the economic crisis.

I yelled across the desk yesterday when this news was announced, and Ty Keough said, “They’ve come a long way from a decade ago”… This was in reference to the Asian Crisis that happened a decade ago, when all Asian countries melted down, led by Thailand… It’s taken these Asian countries a decade to deal with this, but at least they have done so now! I like this idea… And on a side bar… About five years ago, the Big Boss, Frank Trotter, and I put our heads together on an idea for an Asian Currency Union (like the European Union) with a single currency we called the “pan”… Could this be the baby step in that direction?

Speaking of Ty… Did you know that he once played on the U.S. national team, and would have played in the Olympics, but President Carter boycotted those Olympics held in Russia because Russia had invaded Afghanistan?

OK… Ty also sent me a story from the Financial Times last night regarding China… You’ll want to read these snippets closely…

“China and Argentina in Currency Swap”… OK, so what does that mean? Well here’s the FT to explain… “China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed a 70 Billion renminbi ($10.24 Billion worth in dollars) currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.”

Folks… The Chinese are serious about ending the dollar’s dominance as a reserve currency. They’ve proposed using a new SDR (Special Drawing Rights) basket consisting of a veritable Whitman’s sampler of currencies… And now this… You’ve got to think that they are working on more of these types of currency swap agreements.

And then there was this… Still no “official” word on the results of the stress tests… Just news that Bank of America (BOA) and Citgroup will both have to raise $10 billion in capital. The Wall Street Journal reported that yesterday. The longer we wait, the more the rumors will circulate about the results… For instance, there’s a rumor going ’round that 10 of the 19 so-called Big Banks, that had to undergo the stress tests will be told they need to raise more capital. And that number (10) is a revised number… Just yesterday the rumors had it at 14!

OK… The “winner” for yesterday’s currency run versus the dollar was the Brazilian real (BRL)! I looked at the currency screen late in the day yesterday and saw that the real had gained 2.76% versus the dollar in one day! OK… That’s a good day, but what about the recent performance of this once high flying currency (before the selling began in July of last year)? Well… Not too shabby… The past 3 months has seen the real gain nearly 8% versus the dollar!

Another high yielder that had a strong performance yesterday was the Mexican peso (MXN)… Just in time for Cinco De Mayo! Yes, the Mexican militia defeated the French… But it’s not, as most people think, Mexico’s Independence Day.. That’s September 16… Oh No! I did it, I talked about Mexico… I can see the emails now! UGH! But the peso did have a strong performance yesterday!

The data cupboard is pretty empty today, after yesterday’s second tier reports of Pending Home Sales and Construction Spending printed, and left us guessing about what is really happening in the economy. Today, though, we’ll get a clear, concise, view of the economy from our Fed Chairman, Big Ben Bernanke! OK… I can wish can’t I?

Norway’s Norges Bank meets today… I’m not expecting a rate move here… But then, you never know for sure these days!

And finally… The price of oil has really moved up in the past week… It’s done this before a few times, only to fall back.

Currencies today 5/5/09: A$ .7455, kiwi .5820, C$ .8540, euro 1.3390, sterling 1.5090, Swiss .8855, rand 8.2875, krone 6.5050, SEK 7.9175, forint 212, zloty 3.25, koruna 19.82, yen 99, sing 1.47, HKD 7.75, INR 49.43, China 6.8192, pesos 13.21, BRL 2.1125, dollar index 83.80, Oil $54.50, Silver $13.07, and Gold… $902.55

That’s it for today… As if I don’t get up early enough… I woke up for some unexplained reason 20 minutes before my alarm was to go off this morning. No sense trying to go back to sleep for 20 minutes! UGH! It’s down to the last three hours for my fave show 24… We actually saw Chloe cry last night! (For 24 watchers you know that’s a big deal!) I was way off yesterday in my thought that I had two weeks before traveling again. The Las Vegas Money Show is next week! UGH! I’ll be doing a web-cast at that show on gold… I’ve never done a talk strictly on gold, so this should be interesting. I had better get to work on that gold presentation, so I don’t look like a dork… No wait, no amount of work is going to help me with that! HA! Cardinals’ centerfielder, Rick Ankiel had to be carted off the field last night after running into the outfield wall. Sure hope Rick is OK.

The Daily Reckoning