The US Dollar Gets Ambushed

Well… The currency actions versus the dollar have been amazing! The dollar got ambushed overnight, as the euro (EUR) shot right straight through the 1.47 handle, and has just traded 1.48! Hmmm… Didn’t I say yesterday that I didn’t think the dollar strength we were seeing was any change in the recent trend? I love it when a plan comes together!

Traders have found a “soft spot” in the dollar, and are really going after it! I don’t recall the last time I saw this kind of a move overnight. It must have been back when the dollar was getting sold like funnel cakes at a state fair, almost every day in the spring of 2008. But, I really don’t recall… But, that doesn’t put a damper on this morning’s move! No way!

The only thing I can think of, or find in the news, that brought about this HUGE move in the currencies versus the dollar, is the fact that European Central Bank (ECB) Council Member, Axel Weber pretty much gave the “green light” to traders, when he said in an interview that the euro’s strength is not out of line with fundamentals… That’s right! That’s central bank parlance for… “Go ahead and drive the euro higher!”

Weber also said, “There were some stronger data coming from the Eurozone compared to some other regions. So, I think that the behavior of the foreign exchange markets is not out of line with these developments over the recent months.”

Now… These comments carry even extra weight due to the position Axel Weber holds as President of the Bundesbank… Buba, as I used to call them, is Germany’s central bank, and has always held a position of influence on the ECB.

So, Axel Weber says the euro’s rally is OK with him… That’s big, folks… Because currency traders like to know that they can run up or down a currency and not fear that the central bank is going to step in with currency intervention to stop the run. And, for all intents and purposes gives them the green light.

OK… Now that the euro has pushed the envelope to 1.48, I expect to see some strong profit taking when the US traders arrive… But keep this in mind… The euro hit 1.48, and therefore, we now know that traders will take it there a few times before they give up. So, if the euro falls back into the 1.47 handle, look for it to bounce, at least a couple of times. It really comes down to how badly the euro bulls want to push the envelope… Or the how badly the dollar bears want to push, too!

The euro isn’t the only currency gaining versus the dollar… Swiss francs (CHF), kiwi (NZD), and Swedish krona (SEK) have all hit 2009 highs overnight, with kiwi gaining to 0.7215… A quick look at yesterday’s currency round-up shows that kiwi was trading at 0.7040. Using my “new math” talents… That’s a 175 pips move! WOW! New Zealand received some very good news on their deficit problem, as their annual deficit fell from 8.1% of GDP to 5.9% of GDP… Still too high, but moving in the right direction!

For once, it seems, the Aussie dollar (AUD) followed its kissin’ cousin from across the Tasman, kiwi, higher… It’s normally the other way around!

You know what I think? I think that the markets are beginning to look at the man behind the curtain at the Fed, and realize he’s just pulling levers, and creating special effects.

OK, I’ll explain… Yesterday, I talked about how the “new record” in the size of Treasury Auctions will be shoved down the throats of the markets this week, to the tune of $112 billion worth of 2, 5, and 7-year notes…

Well… I came across this yesterday, from Morgan Stanley…

“Households reduced Q2 Treasury purchases from their blistering pace in Q1 Foreign accounts reduced Q2 UST purchases as the Fed ramped up Q/E ops. Bank Q2 purchases remained anemic.”

In normal speak, that’s saying that “mom and pop” buying of Treasuries has backed off… You may recall me telling you many months ago that mom and pop buying of Treasuries had taken up the slack from declining foreign purchases, as it was credited to the “flight to safety”, when the walls came crashing down last fall…

So… If “mom and pop” buying is backing off, and it was used to offset declining foreign purchases, who’s left at the table to buy the Treasury’s issuance this week… And in a couple of weeks… And a couple of weeks after that?

Well… It’s the Fed… I read this, and just couldn’t believe my eyes! The Fed is taking on more and more. I read where it is believed that about 50% of US Treasury issuance in the second quarter saw Fed intermediation… $164 billion in the second quarter ended up on the Fed’s books, while foreigners bought $101 billion and “mom and pops” bought $29 billion. When you add in the primary dealers, the total of non-Fed buying was $158 billion…

Let me be perfectly clear on this… This is only speculation at this point… But it certainly makes sense doesn’t it?

Now… Why isn’t the mainstream media all over this? Where are the questions about how the upcoming record amounts of Treasury issuance will be taken, and by whom? Why am I the only one asking these questions? It’s just little old me and my laptop… Oh, and let’s not forget that the administration has already given us the bad news that $9 trillion in budget deficits will need financing in the next 10-years…

This all makes me sick to my stomach… I mean come on! This deficit spending has got to stop! And we’ve got to say NO to any additional new deficit spending! Stop it, right here, right now! Cut government in half… Get rid of non-Constitutional agencies… Audit the Fed, and turn this around!

Remember last week, when I told you about the IMF wanting to get permission to sell quite a bit of their gold? And at that time, I said… “China, are you ready to buy?” Thinking, of course, that China would be the only country that could/would buy up the 403 tons of gold that the IMF is putting up for sale.

Well… Guess who answered my call? That’s right, China! It is reported this morning, that China is considering buying the gold that the IMF is offering. It’s not clear whether they want just “some of the offering” or “all of the offering”… My guess would be the latter… As this would just add to China’s goal of diversifying their US dollar reserves.

And… If China does take down 403 tons of gold, that will take away from their Treasury purchases, don’t you think?

But, I’m not going down that Treasury road again… I’m staying on the high road with gold, which at one point yesterday morning looked weak… I even mentioned on the desk that it looked like gold was getting spanked, as it was down over $10… But, later in the day, the shiny metal had come back and was on the positive side of the ledger for the day! And now, this news that China is considering buying the IMF’s offering of gold, has gold on the high road too… Gold is up $12 this morning, back to $1,016!

So… Throwing stones at the dollar this morning on two fronts… The currency and precious metals fronts…

You know, each day, when I’m writing the Pfennig, the currencies are all trading, except… The Brazilian real (BRL)… The real is still not a floating currency, as it goes through a “fixing” each day, but then the markets take it over, and trade it the rest of the day. So… When you have an overnight market like we’ve just had, when the non-dollar currencies have all spring-boarded higher, I sit with anticipation for the “fixing” for real, and then watch as the markets play catch-up… The move will be stunning, I’m sure… As real is much like South African rand (ZAR), when it come to the wild swings.

There’s not really any data in the US cupboard this morning… In fact, the only thing I see globally is July’s print of Canadian retail sales… And with it being so delayed, I doubt it will mean much when it does print!

Remember when the Swiss National Bank said they would intervene to keep the franc weak? Or… Remember when the Brazilian central bank Governor said that he would do everything in his power to keep the real above 2? OK, I’ll stop there… Oh… Swiss francs? They have gained almost 15%… And Brazilian real? Well, it’s trading at 1.82… So let’s just say that the “2” thing wasn’t in the cards!

So, what am I getting at here? Well… I’ve told you for years now that central bank intervention can stop currency runs for short periods of time only… And that central bank jawboning will only last as long as traders want it too, for if the central bank doesn’t back up the jawboning, then just like a child, traders will then push the envelope.

So… Traders have ambushed the dollar overnight, and Axel Weber has given them the green light to do so. Could the Fed be the major buyer of Treasuries? China may be the buyer for the IMF’s gold sales… And today, there’s no data today to speak of…

The Daily Reckoning