US Dollar Rally Means World Currency Bargain

Sometimes I say things that I believe will happen, and most times I hope they don’t… Like months ago, when I told you dear readers that when the end of QE2 was near, the Fed would sound the all-clear horn, which they have in the many speeches they’ve made, and money would flow back into the dollar, thus weakening the currencies and metals… I think I even said all risk assets, for I sure don’t believe that stocks are going to get out of this in one piece…

Well… Front and center this morning… The euro (EUR) has dropped 2 more cents overnight, adding to the over 1-cent loss yesterday. And the only currencies holding their heads up this morning are the Swiss franc (CHF) and Japanese yen (JPY)… Both are weaker than they were earlier this week, but the slippage is minimal compared to the euro. Even the commodity currencies, which earlier this week, were pumped up by the strong economic data in China, have succumbed to the selling pressures on the euro, and have rolled over to the selling side of the ledger.

So, folks… This is what I was talking about when I told you that as non-dollar investors you’ll need to either batten down the hatches (like in 2005 and 2008) through all this dollar strength, or if you were going to sell, you should have already done so… For I told you that the markets wouldn’t wait until the “actual end of June”… And if you want to take advantage of the much cheaper prices of currencies and metals, then the next couple of months should be your cup o’ tea… Because that’s certainly what we have going on today, and most likely for the next couple of months, like I said.

And, you’ll recall that I said this dollar strength would last until the Fed can’t stand to see the stock market losses mounting like they will be, yields rising again on Treasuries, and of course unemployment remaining a real pain in the neck for them. I know, I know… The Fed members have all said over and over again that there will be no more stimulus… But I’m sure they said the same thing after QE1… Once more stimulus is discovered – and I say “discovered” because I’m of the belief that the there’s no way that the Fed wants to admit (when it happens that is) that they were wrong about not needing more stimulus… So, we could see more back door buying from the primary dealers of Treasuries… But, when it’s discovered, I feel that the markets will reverse the dollar buying.

Of course, it’s like a perfect storm for the euro, given the end of QE2 and the Greek debt problems coming to a head at the same time… And I think this perfect storm for the euro is like manna from heaven for Swiss franc investors… The flow of euros to Swiss francs is seeing some tremendous volume. The “cross price” between francs and euros is below 1.20 for the first time…ever! (Well… The euro has only been around for 12 years)

The news from Greece yesterday didn’t help the euro any… It was reported that Greek Prime Minister George Papandreou has proposed forming a national unity government with Greece’s opposition political parties in an effort to build a consensus for austerity measures and other economic reforms. And that he would consider stepping down if it would bring the unity government together…

Well, that sounds all nice, but it’s the last thing the markets want to hear right now… They want a steady Eddie government, and no shuffling go on. I understand what the Greek PM is attempting to achieve here, but it’s a bit of too little, too late, and at the wrong time!

So… The Greek problems are outweighing the strong economic data from China, with regards to global growth directions. The traders around the world have become myopic with regards to Greece… And that’s too bad… And plays into the perfect storm that’s hitting the euro.

One thing to keep an eye on (I know I will!) is this latest round of China bashing… A couple of years ago, lawmakers Schumer and Graham were making noise about introducing legislation that would aim at forcing the Chinese to faster appreciation of the renminbi (CNY). In other words… Trade Sanctions or Trade Protection, whichever you prefer to call it. I call it, ridiculous! And something that if taken further could put the brakes on this dollar rally in a heartbeat. For protectionism is never viewed as a positive for a currency.

Well… I was reading last night and saw that Mr. Schumer is preparing to revive the legislation… Now, this legislation has been proposed for each of the last six years, but has never been voted on in the Senate. Hopefully this legislation will not get voted on either! In November of 2009, I wrote this in the Pfennig about proposed legislation… “I’m not for any protectionism measures, as I see grave things – or I should say, grave unintended consequences – coming from protectionism measures… Can you say Smoot-Hawley? I thought you could! For non-history buffs, go ahead and Google Smoot-Hawley, and you’ll see that most economists blame these protectionism measures as one of the key reasons the Great Depression was so bad.

“If you do not stop to learn from the mistakes that took place in history, then you will repeat them… it’s that simple… “

OK… When I mentioned above that the dollar was rallying against most currencies, with the franc and yen holding their heads above water, I was remiss in not mentioning the Chinese renminbi. The renminbi continues to march higher versus the dollar, day in and day out. In fact, I saw something last night about the renminbi reaching a 17-year high versus the dollar… So… When it’s all said and done, I would think the lawmakers in this country would be careful here, for the unintended consequences of ticking off China are far greater than any accolades you would receive for getting the Chinese to move faster with their currency appreciation… Shoot! They’ve already allowed it to get stronger than it has been in 17 years… Give them a break!

And then I saw this story in The Wall Street Journal this morning, and just had to talk about it… “The cost of insuring Brazil’s one-year sovereign debt fell below the price of credit default insurance on comparable US Treasury.”

Are you kidding me? Brazilian debt is viewed as “safer” than US Treasuries? That’s pretty strange, and I checked the story a couple of times to make certain that I was not reading it incorrectly. Is this what we’ve done to our government bonds? They are reduced to playing second fiddle to Brazilian government bonds? And, deficits don’t matter, right? A man decides to jump off of the top of the Empire State building… As he passes the 56th floor, he says… “So far, so good!” That’s what the people who believe “deficits don’t matter” remind me of… So far, so good for that fellow because he hasn’t met his fate on the concrete sidewalk yet… But, it looks like the “deficits don’t matter” crowd is getting closer to the sidewalk…

And did you see the data results from yesterday? The Empire Manufacturing Index showed a steep drop, but in reality, this could be a delayed reaction to the national ISM manufacturing Index, which dropped by quite a bit last month. The stupid CPI (Consumer Price Inflation) showed that inflation, according to the government, rose 0.2% in May, moving the annual rate of inflation to 3.6% (core was 1.5%, but who doesn’t use food and energy?). A quick visit to John Williams’ Shadow Stats, shows inflation is really 6.5%…

The bump up in CPI, though, did get the interest rate hike flag wavers out on the street, which is another reason for the dollar strength this morning.

And while Industrial Production rose 0.1% (Big Wow?) Capacity Utilization slipped to 76.7% versus 77% forecast… So, no great shakes of direction here, which plays well with the thought that the economy has come to a standstill.

The other piece of data yesterday was the Total Net TIC Flows for April… (The data is so far behind, that people just pass over it.) The data showed that in April the actual net flow was just $30.6 billion… If we skip back to April’s trade deficit, it will show us that the deficit was $43.68 billion… That means we didn’t attract enough investment in April to finance the deficit… And it gets pushed to May… But like I said, people forget about this data, because it’s in the rear view mirror.

Then there was this… From CNBC.com… “It’s official: The housing crisis that began in 2006 and has recently entered a double dip is now worse than the Great Depression. Prices have fallen some 33 percent since the market began its collapse, greater than the 31 percent fall that began in the late 1920s and culminated in the early 1930s, according to Case-Shiller data.”

I wonder if the Fed members are looking at this because, if they are, they should be taking it into consideration when trying to figure out if the economy has enough strength to stand on its own… In addition to the housing double dip… We still have unemployment at 23% in reality, and 9.1% according to the government.

To recap… The end of June has come early for the currencies and metals, as the dollar goes on a rally for the ages against most currencies. Francs, yen and renminbi are the only currencies that can stand up to the dollar this morning. It’s a perfect storm on the euro, as the end of QE dollar buying coincides with the Greek debt debacle coming to a head… I warned you all that this dollar buying would happen… So batten down the hatches, and look for bargains…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning