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The Straw that Broke Stocks’ Back

Chuck Butler (May 18, 2009)

Monday, May 18, 2009

And Also Sunk Key Currencies…

Also In Today’s Letter…

By Chuck Butler Thanks to Chris for picking up the ball here in FX University on Friday. I returned home on Friday with a very swollen leg and foot from all that walking in Las Vegas. One of these days I’ll learn, eh? Anyway after a restful day on Friday, I’m now ready to go again!

Well as much as I dislike having to say so (because I told you it could happen), the currencies have lost some major ground vs. the dollar since Friday morning. It’s all tied to the euphoria going around the markets the week before about stocks and the U.S. economy. That euphoria came to a screeching halt last week.

Stocks & Major Currencies
Drop Together…

I’ve been saying for a while now how many foreign currencies have been tied to stocks’ performance. Actually long-time readers know I’ve been hoping this odd link would break. But unfortunately, that didn’t happen and voila!

Now that there’s a falling demand for stocks, so many foreign currencies have tanked too… Ugh!

Not that I’m cheering for currencies to go one way or the other. But I am rooting for currencies to start trading based on their fundamentals instead of stock performance of all things… And apparently, that did not happen!

The One Straw That Finally Broke This Stock Rally Last Week

The proverbial straw to break the stock rally’s back was the Industrial Production data on Friday.

Not that Industrial Production is really that big a piece of data. Industrial Production was just another piece of bad data that shot down all those so-called green shoots! For the record, Industrial Production declined .5% in April, and March’s already bad figure was revised downward to -1.7%.

So, the “glass is half full crowd,” would say, “Hey! The pace of decline has slowed – that’s showing a bottom is coming!” Unfortunately, that’s not how the market participants saw it. You have to think outside the box here, and recall all of the announced shutdowns that will be coming down the pike. I fully expect this data to reverse itself and go deeper into the tank.

We also saw the “stupid” CPI (inflation) number on Friday… CPI fell .7% VS a year earlier, which on the outside screams “deflation!” But, that’s not what I see here…

I see a CPI that’s dominated by food and energy, and we all know that energy prices have plummeted from last year. So, to me, this is strictly price deflation of energy, and not overall deflation that would include a contraction of money supply. (Like that’s going to happen any time soon!)

No and I’m sure there are few readers that will beg to differ with me on this, but this data continues to suggest the risk of deflation remains remote, since the drops are still mostly centered in energy and energy-related products.

Good News for TWO Asian Currencies (And No, It’s Not the Yuan)

So if we’ve gone back to the black cloud over risk assets that existed July 08 through February 09. That means you can see the Japanese yen as the lone wolf rallying major currency.

Recall what I told you last week about the opposition party in Japan, calling for a boycott of U.S. Treasuries denominated in dollars? Well, recently there has also been news about how the Chinese have made coordinated efforts against the dollar (including their new trading swap lines with Argentina).

Well, imagine for a moment that there’s no rift between China and Japan. It isn’t hard to do. I could see China and Japan getting together for currency cooperation. Hmmm… Makes you shiver, eh? Anyway the yen is back on the rally tracks and trading this morning with a 95 handle…

But wait! What’s that I see? Is that a White Knight currency for risk assets?

Another Asian currency that I talk about occasionally, the Indian rupee has been through the spin cycle a few times in the past year. Just when the rupee looks like it’s on a run, the spin cycle turns on again and the rupee comes out looking wrinkled.

But we might be seeing a change… This past weekend, India held their elections, and the Congress Party-led alliance chalked up a decisive victory. Led by Prime Minister Singh, this party is pro-growth, pro-economic reform.

And the decisive victory sent the Indian stocks soaring… Along with the rupee, that’s now trading with a 47 handle for the first time in five months! So the rupee has it all going on today, eh?

This news from India also helped turn stocks around in Japan overnight. That’s a good thing! If stocks can maintain this momentum, then that will help boost risk assets.

I’m being pessimistic here, but I just don’t see how the Indian stock market euphoria can outweigh the bad data here in the United States. But I guess we’ll have to wait-n-see, eh?

“Recovery Could Take At Least Three Years” – WSJ

I was reading an article in the Wall Street Journal this weekend and this article caught my eye, “Economists Say Full Recovery to Take at Least 3 Years“… I bet they didn’t make Obama and Bernanke happy with that call!

Here’s snippet of the story from the Wall Street Journal…

“Economists in the latest Wall Street Journal survey see an end to the recession by August, but say it will take years to eat up the slack created by the downturn. Nearly half of the economists said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years.”

“The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months.”

All Part of the “Sink Dollar” Strategy: China Squirreling Away Commodities

Some time ago, I told you that I believed the Chinese were stockpiling commodities. They knew they would need them, and it sure seemed like a better investment than buying more dollar denominated assets…

Well, the Royal Bank of Canada (RBC) just issued a report that agrees with my earlier statement! Let’s see what RBC had to say… “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline. It’s part of an overall desire to decrease its exposure to dollar assets.”

That’s been a reoccurring theme here lately hasn’t it? I’ve spent a ton of time writing about China and their newfound diversification bone.

China Uses Recession to Build
Up Their Commodity Reserves

I’ve told you about all this here, in and If you are a subscriber to my monthly “paid” subscriber newsletter, The Currency Capitalist, then you’re getting the full story on China’s latest diversification move in my next issue. This is BIG NEWS folks! And it’s growing more intense with each passing week…

We have a holiday in Canada today… Victoria Day… A reader asked me the other day why I talk about Australia more than Canada. Hmmm, I said… I did talk about Canada twice last week!

But he’s right, I do talk about Australia more. That’s because the Aussie is a more attractive currency right now. We have the story playing out about China, that looks to be coming out of the economic doldrums before any other country, and demanding more raw materials from Australia. If that’s the case, the Aussie will profit.

Now, if oil prices were to soar to US$75 or higher, than I’d be talking about the “juiced” Canadian economy more and more once again…

Trichet Is Still Not Playing Nice With His Buddies

Before I left for Viva Las Vegas (admit it, you were doing your Elvis voice there!) I talked about the “rift” going on between the European Central Bank (ECB) and Germany’s Central Bank.

Well, ECB President, Trichet hasn’t done anything on the outside to calm the waters there since I left. Bundesbank (Germany’s Central Bank) President, Axel Weber has been a very outspoken voice against Quantitative Easing. He probably stirred up the hot blood again overnight. Let’s listen in to Mr. Weber…

“The ECB has done enough to help the economy and shouldn’t consider further measures unless things get a lot worse.” He went on to say a bit more… “The ECB doesn’t see the risk of a broad credit crunch or deflation in the euro area.”

I’m sure his opposition in Italy, Spain, and Ireland, to name a few, will take offense to those statements, and we’ll get the “rift” going again, which won’t be a good thing for the euro to have to deal with.

That’s it for today… An absolutely gorgeous day yesterday here in St. Louis, not a cloud in the sky. Seashells and balloons for sure! I complain about Las Vegas a lot, but there was a really bright spot last week, when our group went to Bobby Flay’s Mesa Grill. I’m a big fan of Bobby Flay. When I was at home recovering from my cancer surgeries two years ago, daytime TV would have been a bummer without Bobby Flay on the Food Network! I thought I knew quite a bit about grilling before, but I sure know more now! Anyway, the food at the Mesa Grill was absolutely incredible!

Okay, I’m home now, so time to go through this pile on my desk!

I hope your Monday is Marvelous!
Chuck Butler

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