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Why Dollar Bulls Hate BRIC Currencies

Chuck Butler (July 8, 2009)

Wednesday, July 8, 2009

Chuck ButlerTuesday ended up being a very nice day, except for the currencies. After signing off yesterday, I watched the euro climb back to 1.4025. But it looks like the euro just couldn’t hold that figure or add to 1.4025.

And all the thoughts that had held the dollar hostage earlier that morning, China going to G-8, and so on, just faded like a black shirt put through 100 washes!

When I came in on Tuesday, the euro was 1.3920. When I came in this morning, the euro was trading 1.3925. Back and forth, back and forth, the currencies seemed to be in a rut.

So, what happened? Well the fact that U.S. stocks saw selling to the tune of -161 points in the DOW certainly isn’t helping foreign currencies.

I saw a story last night that came from a UBS report. The report said the euro will suffer in the coming weeks because of the U.S. earnings season putting pressure on stocks. Now, I agree with that statement sort of.

I agree that right now, currencies are tied to risk assets like stocks, all thrown in the barrel like some college fraternity drinking party mix. (Not that I would know anything about that. But I’ve heard about it for sure!)

So, any way, back at the ranch… I agree that the corporate earnings season in the U.S. is going to be very disappointing, causing stock prices to be weaker, and that will put pressure on the other risk assets, like currencies, and commodities.

But it doesn’t have to be that way! For as long as I can remember, well, back to 1992, when I began dealing currencies, I have not seen stocks, currencies and commodities all tied together for any long period of time.

How they are thrown together now, has not been rationally explained to me by any one! But they are. The markets have done this, and the markets are “never wrong.”

How Long Will Currencies Be Tied to Stocks?

Folks, markets always do what they are supposed to (which in this case would be a split of currencies and commodities from stocks), just not “when” they’re supposed to. Even though we’ve seen signs of the “break-up” the link / tie is still there, maybe not as strong, but still there.

So I can hear you asking, “Hey Chuck, what’s it going to take to get these asset classes to break the link to each other?”

Well, it will take a return to fundamentals. And I don’t think we’ll see that in earnest until the U.S. shows some life, and all the talk about additional stimulus goes away.

The faster we put 100 miles of desert between the financial meltdown and where we might be going, the better the chances of a return to fundamentals.

The Fed Supports vs. the Inflation Fighters – Who Will Win?

There’s a BIG debate going on with the two sides in completely different colored corners.

In the blue corner we have those that fear the $1.1 Trillion in money supply that the Fed has put into the economy. Those same individuals are scared that the Fed will leave rates too low for too long, thus creating inflation on the other side of this current phase of asset price deflation.

In the Red corner, we have those that are true believers of the Fed. They’re buying the story that the Fed will be able to remove the stimulus of money supply and lower interest rates without even a hint of inflation.

In the Blue corner is where you’ll find me, John Williams, and Morgan Stanley among other notables.

In the red corner is where you’ll find a handful of economists, and Goldman Sachs. Speaking of Goldman, you wouldn’t expect them to say anything else but to support the government and Fed on this would you? I mean, it’s almost like they are related to each other! It gets a little creepy for me. But I think you get what I’m saying here…

More Good News for the “B” of the BRIC

Down south in Brazil, there’s one piece of good news after another. We saw in yesterday’s announcement that Moodys was going to review Brazil’s ratings for a possible upgrade, which was followed by a research report from Merrill Lynch.

The brokerage that owns a bull, but is now owned by Bank of America, issued a research report saying that “Brazil’s real may gain the most among Latin American currencies in the 2nd half as a rebound in prices of the country’s commodity exports buoy the trade surplus.”

Well the 1st half wasn’t so darn shabby for the real, as it gained over 16% vs. the dollar in the 1st half of 2009. But we must temper this euphoria with the real with a dose of “reality” (get it?).

Seriously, this real is one volatile currency! The wild swings are enough to give the faint of heart a need to grab the heart pills! It’s still an emerging market currency folks. That means it’s prone to big swings. And we all know big swings like that can be trying on one’s patience.

Okay, having said that… You can’t deny that Brazil has really turned things around from eight years ago.

Why Dollar Bulls Hate the BRICs

Now Brazil has teamed up with heavyweights Russia and China, and brought along India, to form the BRIC’s.

These BRIC nations have been giving dollar bulls major headaches in recent days. Why? For starters, these countries are demanding to be a part of the world’s financial discussions. They’re also working together to bring an alternative currency to the world’s stage.

The G-8 meeting that has been on most currency traders’ minds is going on as I write. At this point, China has not been allowed to speak, but they will be given that chance soon enough. Right now, the discussion is going on about how to make oil markets more stable.

Hmmm… I’ve got the answer to that one. Find an oil reserve in your country, and then forget about everyone else’s oil problems! Haha!

That’s it for today… A crazy day in the currencies yesterday. Glad that’s behind us!

I had a nice long talk with an economist friend yesterday. She is always so upbeat about stuff, and I’m always so reality based that we even out the conversation! I look forward to these conversations that take place about twice a year. I wish it were more, but she’s busy, and I’m busy, and there just aren’t enough hours in the day sometimes! I asked the question… If the government thought AIG was too big to fail, how can they sit there and watch what’s going on in California, the world’s 7th largest economy falling deeper and deeper into the abyss? We came to the conclusion that the government probably won’t watch it too much longer without reacting. So, there! You were a part of an economist discussion! Made your day, I’m sure! Okay time to get to work…

 

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