The Dollar Swings a Mighty Hammer

Good day… And a Tub Thumpin’ Thursday to you! My beloved Cardinals blew a lead in the eighth inning last night. Of course I was sleeping by the time that happened, so I just saw the news… Not a good way for me to start a day! But! I made all my green lights on the way to work today… YAHOO! (See, it’s the little things that make me happy!)

OK… Boy, when I said yesterday that Fed Head Hoenig had thrown a cat among the pigeons, I meant he threw a Big Fat Cat among the pigeons, because the scattering was felt around the world. The euro (EUR) lost more ground yesterday than it has since the dollar propping days of 2005. So, with the Big Dog getting whipped, all the little dogs were in line for their whipping too… Shoot Rudy, even the Chinese renminbi (CNY) got taken to the woodshed!

The Japanese yen (JPY), skirted the sell off in currencies, as stocks were sold… More on that in a minute…

Speaking of renminbi… I don’t know if any of you have been charting the currencies in the roundup every day and noticed, but the renminbi’s rise versus the dollar has stalled out. Ever since moving below the 7 figure, the moves higher have been miniscule, and in the last week they’ve stopped. Here’s the skinny from my point of view in the cheap seats…

The markets have decided to call off the dogs on renminbi appreciation hitting +10% this year. That has the speculators moving on to other things to drive me crazy. What this has done is finally get the forward points back into the atmosphere. Normally, forward points are used to adjust the interest rate differentials between two countries. So in this case it would be dollar/renminbi… But the speculators were pushing the envelope and caused dealers to mark the points to also reflect the forecast level of renminbi next year.

Believe me when I tell you that this scenario caused major problems for us, and our ability to offer renminbi deposits. In marketing it’s called a “loss leader”, on my trading desk it’s called something I can’t print! But… The points have “normalized” in recent days, and it all has to do with the outlook of the renminbi, and dollar strength. So… If you were looking to make +10% this year in renminbi, you might want to re-think that thought, as the markets are backing off that thought now.

Well… The NY Times said yesterday that “After six years of stumbling against the euro, the dollar may be showing signs of getting back on its feet”. So, hey! If the NY Times said it, we might as well throw in the towel, eh? NOT!

The story goes on to tell us that the Fed’s signal to pause in rate cuts last week is the reason for this change in dollar sentiment. A former Fed Head, and old Mark Twain Bank advisor, and Chris Gaffney’s old economics professor, Larry Meyer had this to say…

“The decline of the dollar is a factor weighing on the Fed that makes them more reluctant to continue easing interest rates.”

OK… So the Fed may pause with rate cuts… Does that change the rest of the awful fundamentals hanging over the dollar like the Sword of Damocles? I don’t think so, Tim! But, I will say this… We’ve seen this sentiment shift before. For new readers (or new customers) it was in 2005. The media jumped on the bandwagon that the weak dollar trend was over. (Well actually, these guys wouldn’t know a weak dollar trend unless I told them that’s what it was!) I remember that year… I was inundated with nasty emails telling me how wrong I was, and how I had caused people to lose money, etc. etc.

But I stuck to my guns, and discovered the dollar props. Once the dollar props were removed (corporate amnesty tax for foreign profits, and Fed rate hikes) we returned to the underlying fundamentals that said the dollar should be weak… I suspect that’s what we’ll see this time around too.

I was talking to the Big Boss, Frank Trotter yesterday, which is not a common occurrence since we’re both so busy all the time, and he said something like the “the media thinks we have a strong dollar again”. I said, “I wouldn’t consider the dollar to be strong until the euro is back to parity!”

So… Here I am out on the limb again. Don’t worry, I’ve picked out a big strong limb to support me… But I’m here out on the limb of sticking to the fundamentals… I’ll take a lot of flak out here, but I’ll not come down and give in to the media.

Speaking of the media… Don’t forget, the Sunday (Mother’s Day) edition of the NY Times, will have the NY Times Magazine article that contains an interview with me. Should be interesting, especially now that the NY Times has printed the story I talked about above!

One thing to keep in mind here is that a couple of weeks ago, I wrote about how my “chartist friend” said the euro was due for some weakness, but that the long term trend was still in tact. The other thing that just got completely out of hand, was the negativity level in the dollar. Shoot Rudy, even McDonald’s has a commercial talking about the sinking dollar!

Our friend, Jim Rogers, thinks this is what happened too. Jim was talking in Singapore last night and said, “Too many investors are bearish on the dollar.” He also went on to say that “the dollar is losing its status as the world’s reserve currency and China’s yuan [same as renminbi] would be the next best replacement in the longer term.”

Stocks sure have taken it on the chin this week. I told you that I thought it was a house of cards… But, then I’m not even your last choice as a “stock guy”.

This oil price of $200 thing has gotten some wind in its sails… And along with the news that the financials were getting sold like Pet Rocks in the ’70s, the overall stock market has not set too well. Oil did hit $123.53 yesterday… So oil is now up 29% for the year, and more than double its level of 52 weeks ago. UGH!

With stocks selling off this week, the carry trade is back to unwinding, and that’s good news for the Japanese yen, and Swiss franc (CHF), who had seen weakness recently due to the carry trade being en vogue. This carry trade on again, off again drives me crazy! I used to say it was like Wayne and Garth’s hockey game… Game on… Game off… But it’s not even funny anymore. Let’s hope this time it’s going away for good!

Another thing to come back here with U.S. stock weakness… If stocks sell off, what are the foreigners going to buy to finance the deficit?

The commodity currencies tried not to cry as they were spanked yesterday, holding on better than their counterparts in Europe. The Aussie dollar (AUD) was the best performer of the bunch, only losing a small chunk of ground. The Canadian loonie (CAD) remains above 99-cents, and kiwi (NZD) is still hanging around this town on a corner.

Speaking of commodities… Our metals trader supreme, Kristin, sent me a note from Jim Sinclair. You may know Jim Sinclair… Or you may remember that I put in the Pfennig a couple of weeks ago, a challenge by Jim Sinclair to anyone in the media regarding gold. Here are his latest thoughts…

Jim Sinclair, of, isn’t mincing his words on the subject. “Keep in mind,” he writes, “that the fundamental reason for gold’s normal violent reaction was the euro coming off the $1.60 level, seen by some as a top. It is NOT!”

He goes on to say that “it is unlikely that the ECB will join the Fed in the race to 0%. Considering inflation even at the manufactured rate the PPI and CPI show, the Fed is giving away money in exchange for garbage paper at ZERO percent.”

Sinclair concludes: “I dare to say the bottom in gold has occurred this week. Gold will take out $1024 on the third try. Now the magnet is at $980 to $985.”

Some people think that one of the reasons gold has sold off from $1,000 were the discussions about the likelihood of International Monetary Fund (IMF) gold sales. But let me make certain that everyone understands. The IMF board may say they are going to sell gold to meet budget shortfalls and improve IMF finances… But… There are rule changes required to enact gold sales. The IMF constitution requires an 85% majority of the voting rights. That brings us to the U.S.’s part in the IMF. If the U.S. Congress must approve a change in the rules that would allow gold sales by the IMF… And here’s where the cheese binds… U.S. Senators from gold producing states are not going to back this rule change… And so that’s the end of the IMF’s proposed gold sales.

I believe that once this is made public, gold will bounce off its bottom here. We’ll see, eh?

Currencies today 5/8/08: A$ .9430, kiwi .7730, C$ .9910, euro 1.5350, sterling 1.9575, Swiss .9475, ISK 77.10, rand 7.61, krone 5.1340, SEK 6.0610, forint 164.60, zloty 2.2250, koruna 16.39, yen 104.20, baht 31.88, sing 1.3770, HKD 7.7950, INR 41.77, China 7.00, pesos 10.56, BRL 1.6840, dollar index 73.56, Oil $123.55, Silver $16.58, and Gold… $869.55

That’s it for today… Good news from our colleague Don Ries yesterday, as he will return to work next Monday. That’s good, because Chris and I will be gone! This Sunday is Mother’s Day. This is your second notice on that! Rain all day today is what the weather guy on the radio just said… I wonder at times if somehow I got transplanted in Seattle! The old saying “right as rain” just doesn’t have the same ring to it these days… But there’s nothing I can do about it… So… Let’s move onward and upward! I hope your Thursday is Tub Thumpin’!

Chuck Butler
May 8, 2008