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China’s Quiet Attack on Your Savings Continues…

jhaddock (May 6, 2009)

Wednesday, May 6, 2009

Also In Today’s Letter…

By Chuck Butler Last week in Bermuda, someone asked me why I have my little sayings like Wonderful Wednesdays, and Fantastico Fridays. I told him that it had to do with my cancer scare almost two years ago, and that I now celebrate each and every day!

(Well, maybe when I had pneumonia two weeks back I wasn’t celebrating…)

On to currencies… Most foreign currencies have run into a dollar roadblock today. It’s all about the Stress Tests this morning folks. It now appears that Bank of America (BAC) will need approx. US$35 billion, and not the measly US$10 billion rumored yesterday. That’s quite a boatload of money, folks.

Now all eyes are on the stress tests results, which are expected tomorrow. But this BOA rumor is weighing heavily on the risk assets this morning. In response, the bias is toward risk aversion.

For Now, The Euro Is Driving the Uglier Car…

The euro didn’t get any help from the latest retail sales this morning either. Eurozone retail sales in March fell by the largest amount on record. The Eurozone recession is deepening, no doubt about it!

But remember this… In 2002-2003, the euro ignored the recession that had a tight grip on Germany, the Eurozone’s largest economy. Instead, the euro rallied strongly vs. the dollar.

At the time, it was simply a case of “your car is uglier than mine” when comparing the buck to the euro. The euro is the offset currency to the dollar, so when the dollar suffered… Voila! The dollar’s car looked uglier than the euro’s car…and the euro rallied.

One thing I also want to mention is that we saw the euro climb back above 1.34 again yesterday morning briefly. It sure seems to me that the euro is performing like many other currency moves I’ve seen since 1992. I’m talking about how the euro keeps probing higher to 1.34, only to be knocked back down again. This can be good or bad, depending on how patient traders are…

Usually, a currency goes above a level that sees a ton of resistance (selling/profit taking,), and it falls back. The currency will do this a few times. Around that point, traders can see this as a challenge, and push the currency higher with their buying. Or, traders can grow impatient and allow the currency to drift lower.

We’ll have to keep an eye on this in the next week…

Why the Aussie Stubbornly Refuses to Fall

There is one currency that has pushed past the dollar roadblock: The Aussie dollar.

So far, the Aussie is not giving up – advancing 74-cents the other day. Sure, the Aussie has given back some ground after the Big Dog euro sank, but it has NOT fallen below 74-cents – at least not yet.

Also, the Aussie dollar got a boost overnight from the improved March Retail Sales. The latest numbers reversed the 2% drop from February and rose 2.2%.

Of course, the government has sent out a round of checks about this time. So, one would expect this to happen… It will be important to see if this is a one-and-done, or if this economic improvement has legs.

China’s Quiet Attack on Your Savings Continues

So yesterday, I opened Pandora’s Box of inquires when I told about the Chinese / Argentina currency swap line story. ( Inquiring minds want to know more! Well I researched this more yesterday, and this whole development is beginning to scare the bejeebers out of me folks!

First of all, this China-Argentina swap line is actually the sixth currency swap line that China has orchestrated since last fall. China now has swap lines with South Korea, Hong Kong, Malaysia, Indonesia, Belarus, and now Argentina on the books.

What that means is: These countries are now trading in their local currency with China. They’re NOT converting their currencies into dollars to facilitate payment on their trades. For example, the latest swap line now means that Argentina will trade their pesos for yuan on all China-Argentina trading, rather than converting to dollars first.

Now, I’ll be honest. I didn’t think too much about these previous swap lines when they were first announced. But things are different now.

Stop for a minute and think back to the past two months. China has been calling for an end of the dollar’s reserve currency status.

Now, don’t these swap lines take on a new meaning now that China has made their intentions known? To me, all these swap lines are like pieces of a puzzle. They’re fitting together very nicely for China. I believe they’re leading to two things…

  1. China is trying to gain wider use of the renminbi in Southeast Asia…
  2. China will continue to add pieces of the puzzle, and when all the pieces are in place, China will go back to the G-20 ministers and say, “I want the dollar removed as the world’s reserve currency,” once again.

So the Big Question: What Does This Do to the Dollar?

Well, take a look back at the reserve currency of the world, the pound sterling. Once the pound lost its footing as the world’s reserve currency, the pound underwent a long slow decline that took years to recover, and then recovered only briefly.

Consider if this happened to the dollar. To each and every consumer in the U.S., a weaker dollar will mean a loss of purchasing power, as witnessed last year before the financial meltdown.. Remember back around this time last year, I came up with some data that really illustrated the loss of purchasing power of the dollar?

Well, it went something like this… In the past six years, oil has risen 319% in dollar terms, while oil rose only 94% in euro terms and 50% in gold terms. So, that’s what the U.S. consumer can expect: A loss of purchasing power.

That is, unless they have a “hedge” against this scenario. I can hear you asking right away, “What’s this “hedge” Chuck?

Ahhh grasshopper, the “hedge” is anything but the dollar – specifically to diversify part of your portfolio into stronger currencies and metals.

A Tale of Two Sad Central Banks…

News from Switzerland this morning says the Swiss National Bank (SNB) is watching any advances from the franc very closely.

Hmmm… Recall that I explained to you that the SNB was NOT going to allow the franc to strengthen too much vs. the dollar? The SNB wanted a weaker currency to bring inflation into their economy.

The SNB is scared to death about the prospects of deflation getting a grip on their economy. But debasing the currency to achieve this? I don’t think this should be their route. I’m not a fan of the SNB right now…

And tomorrow is meeting day for the European Central Bank (ECB). ECB President, Trichet, is between a rock and hard place… He wants to continue to provide price stability, but his economy is diving deep into a recession.

So what’s a prudent central banker to do? The markets believe he will cut rates at this meeting, which is also a weight on the euro this morning. I’m on the fence with this one folks. I know in Trichet’s heart of hearts, he wants to keeps rates unchanged. But I don’t think he’ll be able to follow his heart…

That’s it for today… So how was your Cinco De Mayo? Mine was fun…went out with friends, and then was back home in plenty of time for bedtime for yours truly. Hope yours was fun too.

I had a reader send along a note yesterday that was quite amusing… He claimed that his wife thinks that he and I resemble each other, but claims he is the better looking of us two! No Duh! That should be a lay-up! Well, it’s a rainy day, which is fine with me, get it out of the way for tomorrow’s day game!

With that… I hope you have a Wonderful Wednesday!
Chuck Butler

EDITOR’S NOTE: Exactly what’s coming next for the buck? Read our FREE special report on the next attack on the dollar here.

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