Forex: The Return to Risk Aversion

By Chuck Butler

When I left you last Wednesday, I thought that we could be on the cusp of a "change" in the currencies, as the trading theme that had held a tight grip on them since July was thrown to the side for a couple of days… But I doubt "that" has happened, as a return to risk aversion is back on the table, which means the currencies and precious metals get sold, while Japanese yen and U.S. Treasuries (read dollars) get bought.

And Japanese yen is "getting bought!" Yen is trading in the 93 range this morning. Strong, very strong!

When this all began, I truly believed that it would last through the elections and on to the end of the year. Then the magnitude of the problems was revealed, and I changed that to lasting probably through to spring. The longer it takes the "boys," Paulson and Bernanke, to get this credit market crisis unlocked, the longer it will take before we return to the fundamentals that continue to get worse by the day.

On Friday, Chris printed some thoughts I had left him regarding the data that printed on Wednesday. Wasn't that just downright scary? I know that a ton of you had that day off, and didn't see the Pfennig, so for those of you who missed class on Friday, here's what I had to say about the data prints from Wednesday:

New-Home Sales Sink 5.3% to Lowest Level in 17 Years

U. Michigan Confidence - New Low Since '80

Chicago PMI Collapses, Consumer Spending Fell to 7-Year Low in October (manufacturing for that region)

Americans' Food Stamp Use Nears All-Time High

Of all that bad data, the only one that will have a good outcome in the end is the Consumer Spending falling to a 7-year low. We've gone on with this spending more than we make for far too long! Now, if we could just get the government to do the same!

Now onto this week… So, as I said above, the risk aversion theme is back… There will be a ton o' data printing this week, with it all culminating on Friday with the Jobs Jamboree. Just peeking ahead at Friday, the "experts" believe the job losses for November will be 320K, with the unemployment rate moving to 6.8% from 6.5%. That's downright ugly, folks.

Speaking of ugly… Today, we'll see the color of the November ISM (manufacturing) Index, which collapsed to 37 last month, and is expected to have fallen to 32 in November. All that this "bad data" does is put the trading theme front and center even more…

OK, The Chinese renminbi (CNY) has fallen 0.73% overnight, which is the largest drop for the currency since dropping the peg to the dollar in July 2005. I find it interesting that the banking officials allowed the renminbi to drop by that large of an amount right before U.S. Treasury Secretary Paulson is about to visit. Can't you just hear the Chinese saying something like this to Paulson… "See, Mr. Treasury Secretary… We can play games with our currency too. And so now, if you'll just get yourself back on that plane and leave us alone, we'll see where the currency goes next."

The Chinese have their own problems right now, and making sure their currency continues to strengthen isn't one of them! China has shifted from "inflation fighting," which requires a strong currency, to "promoting growth," which doesn't! And with exports set to collapse next year, given the U.S. recession, a currency strengthening just isn't on their agenda any longer.

There will be a truckload of central bank rate meetings this week, beginning with the Reserve Bank of Australia (RBA) tonight. The Reserve Bank of New Zealand (RBNZ), Bank of England (BOE) and European Central Bank (ECB) are all expected to cut rates this week, and then next week, we'll see rate cuts from the Bank of Canada (BOC) and the Fed Reserve.

Global rates are going lower and lower, folks, and we had all better be prepared for this, as it is going to happen - no doubts. For instance, I fully expect the RBA to announce a 75 BPS rate cut tonight or tomorrow - whenever they do it.

Now… Enough rate talk… How about we visit the goings-on with the bailouts? Oh, goodness gracious, no! I don't want to go there! My blood pressure is doing just fine today! Oh? I have to? The little guy on my right shoulder is telling me to not go there, and the little guy on my left shoulder is telling me to do it, NOW! Hmmm… OK, I won't do it… But what I will do is give you a thought from a reader, who is an investment advisor regarding all of this, and the government taking ownership of banks… Let's listen in…

Does anybody out there have any memory of the reason given for the establishment of the Department of Energy during the Carter Administration? Anybody? Anything? No? Didn't think so. Bottom line… We've spent several hundred billion dollars in support of an agency, the reason for which, not one person who reads this can remember. Ready? It was very simple - and at the time everybody thought it very appropriate. The Department of Energy was instituted on August 4, 1977, TO LESSEN OUR DEPENDENCE ON FOREIGN OIL. HEY, PRETTY EFFICIENT, HUH? AND NOW IT'S 2008 - 31 YEARS LATER - AND THE BUDGET FOR THIS NECESSARY DEPARTMENT IS AT $24.2 BILLION A YEAR. THEY HAVE 16,000 FEDERAL EMPLOYEES, AND APPROXIMATELY 100,000 CONTRACT EMPLOYEES AND LOOK AT THE JOB THEY HAVE DONE! THIS IS WHERE YOU SLAP YOUR FOREHEAD AND SAY 'WHAT WAS I THINKING?' Ah yes, good ole bureaucracy. And now we are going to turn the Banking system over to them?

Now, that's one of those things to which you say, "Whoa there, pardner!" I've warned about this government sticking their hands into banks and acting like owners before… But that's exactly what's happening, folks.

OK, enough… Let's talk gold a bit. Mark O'Byrne, executive director at Gold & Silver Investments, has his attention on the open interest numbers.

Comex gold futures open interest - the number of outstanding contracts - declined sharply this month, falling to 289,700 contracts in the week ended November 18, according to the Commodity Futures Trading Commission. That's down 9.3% from a month ago.

What the low open interest means is "that nearly all the speculative froth has been liquidated and remaining longs are 'strong hands'" O'Byrne says. "This will encourage more long interest to enter the market and should contribute to markedly higher prices in the coming weeks."

Okay. But… we need to see the markets return their focus to the fundamentals to weaken the dollar before we get any "real traction" in gold -- at least that's my opinion, although gold did have its best month in nine years in November, gaining 11%.

The good news from the weekend was that the Black Friday retail sales were stronger than expected. But what's going to happen when, as I said above, job losses post a 320K figure at the end of the week? I think it takes the wind out of those sails in a heartbeat!

I've gone on a bit this morning, but there's a lot to talk about, and that means an Iceland update! Reuters reported on Friday…

REYKJAVIK, Nov 28 (Reuters) - Iceland's parliament passed legislation on Friday to curb currency outflows and the central bank vowed to restrict credit as authorities moved to restart trade in the collapsed Icelandic crown.

'The bank will maintain tight control over the access of banks to central bank credit until exchange market stability has been achieved,' Sedlabanki said on its Web site.

It said temporary currency restrictions, which had been necessary for Iceland to function at a basic level, would be lifted in stages.

A considerable proportion of crown-denominated securities are owned by foreign investors. Lifting restrictions by stages will make it possible to unwind their crown-denominated positions in a systematic way, as the external balance permits, without undue impact on the exchange rate.

There have been quite a few individuals that have ripped us for our handling of the Iceland meltdown, but as you can read above, there were CURRENCY CONTROLS in place…

One industry that's not experiencing slowing sales: Guns. Barack Obama is apparently the best salesman the gun industry has had in years! With many buyers worrying about higher taxes or limits put on guns and ammo, sales are quite brisk since the election… I sure wish I was talking about home sales being brisk, or computers, or something like that…

Currencies today 12/1/08: A$ .6425, kiwi .5355, C$ .8045, euro 1.2675, sterling 1.5040, Swiss .8285, ISK 230, rand 10.25, krone 7.0280, SEK 8.1825, forint 207.35, zloty 3.0425, koruna 20.2330, yen 93.90, baht 35.75, sing 1.5285, HKD 7.7518, INR 50.29, China 6.8842, pesos 10.25, BRL 2.3735, dollar index 86.71, Oil $52.07, Silver $9.94, and Gold… $794.00

That's it for today ... I hope you have a marvelous Monday.

Comments

[NOWHEREMAN:]

I'm commenting strictly on the Title:

How does the Title tie in to the rest of the Article?

Ah... using the Bait and Switch technique?

Well you got me.

2008 Dec 02 08:52 AM