The Junkyard Dog Bites!

Good day… And a Wonderful Wednesday to you! Well, the Junkyard Dog got a hold of the euro yesterday, and even though the U.S. Banks, thus the majority of currency desks, were observing Veteran’s Day, the move down in currencies versus the dollar, led by the euro, was drastic!

The Junkyard Dog I’m talking about is Jean-Claude Juncker, chairman of the Euro group… I stopped the euro in its tracks from its nascent rise in the past month, by saying the “euro’s recent rise was undesirable”… He also deep-sixed the euro, and thus all the currencies save yen, by saying he “didn’t see any reason there couldn’t be more rate cuts by the ECB”… (The ECB is of course the European Central Bank) Well… These two comments tore through any gains the currencies had mounted versus the dollar in recent weeks, like a Junkyard Dog tears though some raw meat! It was a knife to the euro’s heart…

And so it was to be, a massive dollar rally, on Veteran’s Day. And it didn’t get any better in the overnight markets, as Japan, and then early European trading has taken the dollar even higher and the euro drops to the 1.25 handle… A handle it thought it had left in the rear view mirror back in October… Boy! If comments from a guy that’s not even the President of a Central Bank in the Eurozone, can deep six the euro like that, you have to sit back and wonder what’s going on… Was it simply a case of watching the euro rally in recent weeks, and even get within spittin’ distance of 1.31 last week, and needed to stem the rise? Well, if that’s the case, the plan worked! And like Col. John “Hannibal” Smith used to say… “I love it when a plan comes together!”

And it just so happens that Bank of England (BOE) head Gov. Mervyn King added to the currencies’ worries by announcing that the BOE policy makers are “prepared to cut interest rates again to prevent a recession pushing inflation below its target.”  All this on a day when most U.S. currency desks were absent… Hmmm… Sure seems to me as though this was a “planned” jawbone intervention to support the dollar…

So… Like I said above, the currencies, save yen, got whacked yesterday… But not Japanese yen! When things get really dark in the U.S. and with all the investment choices except U.S. Treasuries getting sold, that’s when the dollar and Japanese yen shine… Which to me is still a strange phenomenon, that the dollar can be strong VS almost every currency on the face of the earth, but losing ground to yen. You would think that the other currencies would get some love just based on the dollar/yen cross!

Recall, I’ve explained the currency pairs and crosses before, and how one major pair’s (like dollar/yen) usually carries over to the other currencies… But since the dollar and yen were the two major currencies used to fund the Carry Trade, they are getting bought at the same time, causing all kinds of ripples in the currency karma…

Looks like the good folks over at Bank of America, have been reading their Pfennigs each and every day! I say that because, Bank of America (BOA) issued a report that; “U.S. dollar gains are increasingly at risk toward year-end as declining credit market rates switch investors’ focus to the slowing economy.”

WOW! If that’s not just rewording what I’ve been saying in the Pfennig almost daily for a couple of months now, then I’m a monkey’s uncle! The go on to say that, “A weak economy and declining stock prices are not a solid foundation for any currency over time. Persistent strength in the dollar is more related to the unwinding of long positions in the euro and pound and not a sign of optimism about U.S. economic prospects.”

It’s nice to see someone other than me, keeping my eye on the ball here… OK, I know all too well that it’s not just me, but it sounds good, eh?

Well… There’s another “bailout” plan, although the media now calls them “rescue plans”, being talked about… This one is for the automakers… The Speaker of the House wants the bailout package NOW! Unfortunately, for her, and the automakers, it doesn’t look like a bailout package will be passed with this “lame duck” Congress… The “new guys” don’t come into office until January 6th. Maybe, just maybe, this thought that every freaking business that runs into trouble because they didn’t run their business correctly, and therefore “deserves” a bailout from the government, which will mean in the end, taxpayers, will go away… I doubt it… But there’s always a chance, somebody, someone, somewhere, at sometime, comes up with a hoola-hoop, and we don’t have to go down this bailout road any more!

Hey! Whatever happened to U.S. Treasury Sec. Paulson’s “bazooka” that he threatened to aim at the U.S. credit crisis back in July? A quick check of the financial scorecard since then, shows that stocks are circling the bowl, the Fed has had to step in to conduct commercial paper operations, U.S. Consumer Confidence is at 1982 low levels, and loans are still difficult to get on the books… I’d say his bazooka was much like the bubble gum I used to chew as a kid, with the Bazooka Joe comic inside the wrapper… Sweet and satisfying at first, but soon petered out and the taste was gone, soon to be disposed of properly!

Speaking of Treasury Sec. Paulson, or King Henry, as I so named him during his ascent to the top of decision-making with regard to the financial crisis, will be speaking today! King Henry will be giving an update on the Bailout packages… Should be interesting…

Our friends down under in New Zealand think they are far removed from the financial mess going on in the U.S. and Europe… But then, the European thought they were far removed from it too before the walls began crumbling down on top of them with bad debt! But, in New Zealand’s case, I think they are on top of it… Mainly because the strong Central Bank… The Reserve Bank of New Zealand, (RBNZ) is big on fiscal discipline, and stated in their quarterly Financial Stability Review, that… “we are far from seeing the final impact of the financial and economic disruption. However, Kiwi banks and the Australian parents of the majors, are well positioned to withstand the economic downturn.”

It would a HUGE feather in the RBNZ’s cap, and further the kiwi’s cap should the financial meltdown pass them by without causing major problems… The Kiwis get a glimpse at the state of their economy tonight when Sept Retail sales are printed.

Well… The euro is creeping back up as I get ready to head to the Big Finish this morning…

You know… On Monday I talked about the Chinese announcement to provide $586 billion worth of renminbi liquidity to their economy, and how that had gotten the currencies around the world excited… And yesterday I talked about how that excitement dissipated… But there’s one more thing to discuss here… And that’s the fact that if the Chinese are going to focusing on keeping their economy going and their billions of citizens happy, they won’t be focusing on buying U.S. Treasuries… And the funding problem that still exists, even though its not the markets’ focus right now, will get even trickier for the U.S. and the U.S. dollar…

And… One more thing before I head to the Big Finish… Oil has fallen below $60 for the first time since March 2007! WOW!

Currencies today 11/12/08: A$ .6610, kiwi .5755, C$ .8260, euro 1.2590, sterling 1.5285, Swiss .8450, ISK 182, rand 10.45, krone 6.9830, SEK 8.0150, forint 215.50, zloty 2.9920, koruna 20.21, yen 97.30, baht 34.98, sing 1.5050, HKD 7.75, INR 49.25, China 6.8298, pesos 13.06, BRL 2.2665, dollar index 86.93, Oil $58.40, Silver $9.70, and Gold… $732.42

That’s it for today… Mervyn King also said… “we are living in unprecedented times” Oh, thanks! Like we didn’t already know that! It was a great day yesterday for catching up on email, etc. I also got a huge chunk of our monthly newsletter to clients, The Review & Focus, finished too… Hey! Chris has the conn on the Pfennig tomorrow, I will not be in the office. Don’t know what the baseball writers were smoking, but they named Tim Lintecum as the National League Cy Young winner… Ahem… Brandon Webb won 22 games last year, Ahem… My darling daughter Dawn, phoned last night to tell me that my precious granddaughter, Delaney Grace, heard the song “Amy” on the radio and began to dance around and jabbering like she was singing… Dawn knows that I used to play that song on my guitar and sing it when friends would make me… I told Dawn, that Delaney Grace has good taste in music, she’s like Me! HA! OK, enough… I hope your Wednesday is Wonderful!

Chuck Butler
November 12, 2008