The ECB's Strong Dollar Policy?

Good day… And a Happy Friday to one and all! A Fantastico Friday as well, as all our prayers were answered once again, and my scans were clean! YAHOO! They did see something in my lung… It’s called pneumonia! I knew this “thing” I had was more potent than anything I had ever had before… So… The proper medicine was dispatched, and hopefully in about four days I’ll have this whipped! I’ve got the whole weekend to rest, and drink plenty of fluids! Now if I weren’t sick, that last sentence would take on a whole new meaning, if you get my drift!

OK… Now that we have that housecleaning out of the way, it’s time to go to work! Well, the currencies traded in a very tight range yesterday, only to see the euro (EUR) lose ground in the European session this morning, as ECB President Trichet deep-sixed the currency this time!

Recall, yesterday I told you how European Central Bank (ECB) minister Axel Weber, confused the markets with a statement that left the markets scratching their collective heads. Well, this morning, ECB President Trichet, failed to calm the markets, and their fears of a split in the governing body of the ECB is weighing heavily on the euro. Trichet has got to get these split factions of the ECB together.

In one corner, we have Weber, who does NOT want to see interest rates fall below 1%, and does NOT want quantitative easing.

In another corner, we have the Greek contingent, which DOES want to see deeper rate cuts, and quantitative easing if needed.

And then finally we have Austria’s Nowotny, who agrees with Weber on the rate cuts, but believes that quantitative easing makes sense.

If Trichet can’t get these factions to come together, then the euro is going to get bogged down in all this mess, for nothing will get done. Trichet tried to put on the “company face” and tell reporters in Tokyo this morning, “We have a very united Governing Council”… But he must not have been convincing enough…

So, with the Big Dog getting weighed down, the rest of the little dogs have to remain on the porch, and that means dollar strength, folks… Shoot Rudy, even the Japanese yen (JPY) lost ground last night, reversing what had been the trend for the week, with the high yielders backing down, and yen ratcheting up… But not last night and this morning! The dollar has walked into the saloon, and told the bartender to “spray the infield” with dollar strength! I say this because; this is what he told reporters in Tokyo… “To say the euro was weak would not reflect the current situation”; and he, “agrees with the U.S.’ Strong Dollar policy.” Hmmm… First time I’ve ever heard an ECB President talk about a strong dollar policy. He must have something up his sleeve, ala Bullwinkle, or… He’s drunk the Kool-Aid that the United States is serving…

If you want to know what I think about Trichet’s venture into “strong dollar policy land”, read on… If not… Skip to the next paragraph! I think Trichet is just trying to keep the euro from exploding higher here. All the talk on the street these days is that the United States will have no other choice but to continue to debase the dollar in order to finance debts. Now, Trichet can’t have the euro – which is the offset currency to the dollar – going on a rampage from people selling dollars right now! If Trichet were to say how he really felt, he’d say, “The euro is strong, and will remain strong as the dollar retreats”. But a politically inspired euro surge against the dollar would deepen the Eurozone recession, and most likely really spike the already sensitive feelings among some members about the strong euro… So… I think Trichet is playing his card here. So far, the markets are “all-in” with that card… Now, if I were some BIG TIME market mover, the markets would read this and call Trichet’s bluff… But, I’m not… So… We have to deal with euro weakness for now. I think Trichet should be listening to the old song by Max Frost and the Troopers… “Nothing Can Change the Shape of Things to Come”!

OK… For those of you who skipped the previous paragraph, you missed some of my best stuff in years! HA! Well, let’s get jiggy with the rest of the currencies! Since the dollar is stronger this morning, let’s take a look at just why that is…

Well, it couldn’t be the data that’s printed this week… That’s not the stuff that a strong currency is made of, for sure! Yesterday, for instance… RealtyTrac issued a report that painted a really sad picture, folks… Let’s take a look… “In the month of March we saw a record level of foreclosure activity – the number of households that received a foreclosure filing was more than 12% higher than the next highest month on record.” Aye-Yi-Yi!

San Fran Fed Head, Janet Yellen, was in the news last night… She came out and said that “allowing Lehman Bros to fail was a mistake.” She went on to say, “Lehman Bros was too big to fail and its bankruptcy caused a quantum jump in the magnitude of the financial crisis.”

Hmmm… I wonder what her boss, Big Ben Bernanke will have to say about this statement… Now, that would be really something to see the Fed Heads air their dirty laundry with Big Ben… Talk about causing problems! YIKES! It will be interesting to see how this “coming clean for Yellen” plays out…

Gold sure got whacked yesterday. I looked up at one point in the day and saw it down $15, and it’s down another $5 at the London Morning Fixing… UGH! Silver is barely hanging on to the $12 handle too. It’s been an ugly week for the precious metals.

OK… There was a great story on the UK Telegraph the yesterday by Ambrose Evans-Pritchard, regarding China and gold… Here’s a snippet of the story…

“Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

“China’s State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

“Nobu Su, head of Taiwan’s TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

“China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years.”

Now, that’s interesting! The article goes on to suggest that the Chinese are also doing this with their reserves so that they don’t have to continue to push their currency higher versus the dollar.

I’ve said for some time now that Treasuries are a bubble. And that bubble was probably about ready to pop when the Fed announced that they would be buying Treasuries… But that just prolongs the inevitable in my opinion… And now, if this story has any legs, the Chinese could be backing away from the Treasury auctions… I’m back on the Treasury bubble-popping wagon. The Fed may have kept the bubble floating for six months to a year, but haven’t’ we learned with past bubbles that the longer you keep them floating, the bigger they get, and the nastier the mess is when they pop?!

I noticed the other day that the Canadian dollar/loonie (CAD), had rebounded to 82-cents and change, and yesterday with all the dollar strength, the loonie held its ground at 82-cents. Yesterday we saw Canadian manufacturing sales in February rise for the first time since July 2008 increasing a strong 2.2%! So… There’s a pulse here, at least!

The negativity in the overnight markets toward the currencies has lifted a bit since I came in and turned on the screens. The high yielders like rand (ZAR), real (BRL), and Aussie (AUD) are all coming back strong right now. I’ll do a quick look around the playing field to see if there’s anything behind this move by the high yielders…. OK, I’m back now, didn’t see anything right now.

OK, before I head to the Big Finish I wanted to share with you something Tim Smith thought of yesterday… Capacity utilization was so bad that maybe we could shorten it to CAPUT!

Currencies today 4/17/09: A$ .7210, kiwi .5725, C$ .8270, euro 1.3070, sterling 1.48, Swiss .8585, rand 8.9275, krone 6.7250, SEK 8.4525, forint 225, zloty 3.29, koruna 20.49, yen 99.20, sing 1.5010, HKD 7.75, INR 49.84, China 6.8325, pesos 13.10, BRL 2.17, dollar index 85.79, Oil $49.75, Silver $12.01, and Gold… $868.15

That’s it for today… My beautiful bride told me yesterday morning that she thought I had pneumonia… I said, “No way”! But as Wayne says to Garth… “Way”! Nice win in Chicago yesterday for my beloved Cardinals. A long 4-game series in the Windy City should make for some good baseball watching this weekend. We’ve had some miserable weather here in St. Louis, but today, it’s supposed to be 70 degrees and sunny! YAHOO! I received a note from our travel person extraordinaire, Gena, yesterday, reminding me that it’s time to plan for the Las Vegas Money Show scheduled for May 11-14, at the Mandalay Bay Conference Center. Time to eat my apple, and get ready for the trading day… I hope your Friday is Fantastico, and your weekend is wonderful!