Tuesday, May 5, 2009

Also In Today’s Letter…

• Stocks Say “Jump” Currencies Say “How High?”
• Bank Stress Tests Not Official Yet, But Rumor Has It…
• Charting Tricks of the Pros Part I

By Chuck Butler It’s Cinco De Mayo! A few years ago, I talked about Cinco De Mayo, and some guy took exception to it. He called me something I’d rather not say here.

So, I’m not going to go on about Cinco De Mayo, except to say, go have some fun tonight!

Okay, enough of that. You should have seen that currency rally yesterday! Wow! The Big Dog euro traded all the way to 1.34 and change, saw profit taking, which caused it to drop back down, only to end the day moving past 1.34 again.

Overnight, the euro hit 1.3438, but once again we saw profit-taking overnight. Also stock futures are showing weakness, so that brought the Big Dog back under 1.34.

Before I left for Bermuda, my colleague Chris mentioned that the euro was having a problem getting past 1.31.Well, that’s in the rearview mirror now, isn’t it? And I would like to think that eventually the 1.34 handle will be in the rearview mirror too.

Not that I’m rooting for the Big Dog… I say that, because then fundamentals would be in play once again.

The Aussie dollar also saw a nice bid all day long yesterday, and moved past 74-cents, and remained there overnight! The Reserve Bank of Australia (RBA) left rates unchanged last night, and delivered a fairly balanced statement afterward.

I like their approach, as they keep reminding the markets that they need to see what’s in the pipeline after all the previous rate cuts! This non-move was exactly what the Aussie dollar needed to continue its march higher.

Stocks Say “Jump” and Most Currencies Say “How High?”

Now I don’t like having to say this, but the strong performance in stocks (+214 points) yesterday actually helped strong currency moves. As we’ve been discussing for some time now, it’s just like when one emerging market currency gets whacked, most emerging markets take a beating too.

Stocks and currencies are considered “risk assets,” and have only been in lock-step with each other on occasion throughout the years. So, when “risk assets” are going good, all “risk assets” get going. And vice versa.

Like I keep saying, it’s rare to see stocks tied to foreign currencies but it is happening.

Judging from the speakers at the Total Wealth Symposium in Bermuda last week, this had better end soon. The fellow experts I chatted with all believe this recent stock market boost is nothing more than a bear market rally. This rally just doesn’t have the legs to make us all forget about the rot on the U.S. vine.

Heads Up: We Have a Euro Rate Cut and Dollar Pressure Coming

It looks like the European Central Bank (ECB) will meet this week, and some of thoughts in the markets here, is that the ECB will move rates lower. Those thoughts are also responsible for the drag on the euro to bring it below 1.34 this morning.

You know what gets me though?

Everyone in the world who follows these things has known since December that the ECB would be meeting this week. Do you think they just had a V-8 moment this morning, and remembered the ECB was meeting and might cut rates this week? No!

Of course they knew, and they have known the whole time the euro was rising like the Phoenix bird from the ashes the last four days.

Remember, a month or so ago, I told you about the games traders are playing every night and every day now? Traders are trying to keep the euro from going off on a moon shot vs the dollar. The dollar’s rally since July 2008 is looking very worn out at this point.

Shoot Rudy, even Treasury yields are rising. That indicates the unwinding of all those safe haven trades.

Now, I’m not saying that this is in full swing yet but it sure is showing signs. So, as I’ve explained a few times in the past, if the “safe haven” buys get unwound, we’ll see some fierce pressure on the dollar.

So, if the ECB “remembers” to remind the media that they have a rate meeting this week, after it looks like the euro is going to the moon, then you can put that down to “managing the rise.”

From Bankruptcy to World Domination…In Less Than 10 Years

Have you heard of the Chiang Mai Initiative?

It’s an agreement by Asian nations that will create a US$120 billion fund to serve as a “liquidity pool” by the end of the year. They will use this money to promote growth in the region and to defend currencies and guard against financial ills arising from the economic crisis.

www.bloomberg.com

I yelled across the desk yesterday when this news hit the wires. Ty Keough said, “They’ve come a long way from a decade ago.” He was referring to the Asian Crisis that happened a decade ago, when all Asian countries, led by Thailand, melted down. It’s taken these Asian countries a decade to deal with this, but at least they have done so now!

I like this idea. And on a sidebar… About five years ago, the Big Boss, Frank Trotter, and I put our heads together on an idea for an Asian Currency Union (like the European Union) with a single currency we called the “pan.” Could this be the baby step in that direction?

Speaking of Ty, he also sent me a story from the Financial Times (FT) last night regarding the China, Argentina currency swap.” Okay, so what does that mean?

Well here’s the FT to explain… “China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed a 70 Billion renminbi ($10.24 Billion worth in dollars) currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.”

Folks, the Chinese are serious about ending the dollar’s dominance as a reserve currency.

They’ve proposed using a new SDR (Special Drawing Rights) basket consisting of a veritable Whitman’s sampler of currencies. And now this… You’ve got to think that they are working on more of these types of currency swap agreements.

Stress Tests Still Officially NOT Official, But Rumor Has It…

And then there was this… Still no “official” word on the results of the stress tests. Just news that Bank of America (BOA) and Citgroup© will both have to raise US$10 Billion in capital. The Wall Street Journal reported that yesterday… The longer we wait, the more the rumors will circulate about the results.

The rumor is that 10 of the 19 so-called Big Banks that were stress tested will be told they need to raise more capital. That number (10) has come down though, just yesterday the rumors had it at 14!

Real: Yesterday’s Big Currency Mover

The “winner” for yesterday’s currency run vs. the dollar, was the Brazilian real! I looked at the currency screen late in the day yesterday and saw the real had gained 2.76% vs. the dollar in one day.

That’s a good day, but what about the recent performance of this once high flying currency (before the selling began in July last year)? It’s not too shabby… The past three months has seen the real gain nearly 8% vs. the dollar!

Another high yielder that had a strong performance yesterday was the Mexican peso. Just in time for Cinco De Mayo! Yes, the Mexican militia defeated the French. But it’s not, as most people think, Mexico’s Independence Day. That’s September 16.

Oh no! I did it, I talked about Mexico. I can see the emails now! Oh well. The peso did have a strong performance yesterday.

That’s it for today… So I was way off yesterday in my thought that I had two weeks before traveling again. The Las Vegas Money Show is next week! Ugh! Also, Cardinals’ centerfielder, Rick Ankiel had to be carted off the field last night after running into the outfield wall… Sure hope Rick is OK… All righty then…

I hope your Cinco De Mayo is fun, and you have a Terrific Tuesday!
Chuck Butler

EDITOR’S NOTE: The dollar is already taking a hit on this latest news. With all the quiet China moves against the dollar, on top of the horrible data streaming out of the U.S. on pretty much a weekly basis…it could be time to take some evasive action with your dollar-based savings. Find out how here.