Forex View: Last Man Standing

Although there is no new government money going into the Citibank (C) coffers following the announcement of potential conversion of preferred for common share status, investors are concluding that systemic risk is growing and not falling. Today the dollar is once again emerging as the ultimate fantasy-island survivor as more currency traders cast their votes against any remaining contenders. The dollar was a penny higher against the euro at $1.2640 this morning and reached a high for the week against the Swiss franc at $1.1714. As it flexes its muscles, a rising dollar is forcing a growing number of commentators to sacrifice long-term deficit-related pessimism over the dollar on the altar of price discovery thrust into their faces as fresh bad news is delivered.

Click on link for updated table throughout the week.

The 800-pound gorilla in the room has been the growing U.S. budget deficit as government borrowing creates a yawning gap. We have refuted this aspect before in that in this global meltdown, every other nation’s budget gap will become a function of that of the U.S. In other words ALL governments will have to replace private demand through government spending and deficits will become relative.

The dollar also received a vital shot in the arm this week as more investors are again having to abandon the view that overseas governments, central banks and private agencies will no longer step up to the plate and swallow the growing debt issuance. This week at the five-year note auction there was a huge indirect appetite for debt from overseas agents. It’s hard to maintain a dollar short position based on a long run view when the position loses money to hotter intra-day flows of global capital.

The dollar did lose out to the Japanese yen overnight and recoiled to ¥97.86. There are a few factors at play. There has been a run on the yen and as ever, investors get overly excited, sending prices to an extreme and creating a vicious snap-back as the last seller tried his luck. Some even think the move was overdone. Second, since it’s the last day of February, many Japanese companies are repatriating overseas earnings, which naturally have to be converted to yen. Third, despite dire industrial production numbers overnight showing a 10% plunge in January’s output, the revision to final fourth quarter growth in the U.S. showing a 6.2% contraction makes the Japanese contraction of over twice that amount a little better. Expect further yen weakness next week.

The euro today made a new low for the week and is down on last Friday’s close. Having reached almost $1.30 against the dollar during the week, when the technicians look at the chart after all of the hubris and melee, it’s going to look like a pretty bearish performance and we reiterate the appeal of $1.2330 below here imminently.

Here’s an interesting note to make. This week American financials rallied sharply thanks to the start of so-called stress testing at the nation’s top 19 banks. By Friday, however, increasing government intervention at Citibank was apparently failing to allay fears over its viability. Now, while that’s a far cry from the statement of going concern apparent in GM’s quarterly report by its auditor, the reality doesn’t instill economic confidence any. So today’s announcement in Europe of a triple-legged stance from the EBRD, the EIB and the World Bank standing firm with as much as $31 billion in assistance for the central and eastern European banking system doesn’t really instill much confidence either. While eastern European currencies may have rallied today on the news, we’d flag the reality of what’s happening to the U.S. financial system as a precursor to further developing currency turmoil next week.

Earlier this week we clung to the view that dissipating volatility across asset classes was mistakenly being interpreted as a sign of recovery. We noted to watch the commodity dollars. Both the Aussie and Canadian are sharply lower today and again at fresh weekly lows versus the dollar proving that price discovery beyond the hubris is key.

Comments

[Dave Wrixon:]

Yep, no doubt the ultimate financial bubble is building to it climax in the dollar.

When it bursts as it surely must as first the Real Estate, Stock Market and Oil bubble have before it, it will destroy vast swathes of what we now regard as the World Economy. It will presage a New World Order in which the US and the dollar just won't be that important anymore.

I'm sorry to say it, but I believe that Obama risks to do even more damage than Bush.

Feb 28 05:31 AM

[know nothing:]

What goes up must come down. The best of the worst, so buy dollars? WOW thats scary!

Feb 28 08:27 AM

[Vuke:]

Rushing into the dollar is liking pushing to the rising bow of a sinking supetanker loaded with paper currencies - while just over to the side are lifeboats made of gold and silver.

Why not make for them? They still have a little extra space.

Feb 28 10:38 AM

[learn to think:]

Go ahead inflate the dollar some more while the rest of us stock up on gold at dirt cheap prices. They're going to intentionally crash the dollar soon to make way for the one world currency, so why should we trust this little pop in the dollar.

Feb 28 01:19 PM

[Mad Hedge F...:]

BG jk There is a lot of talk today about the recent weakness of the yen, which along with gold, became the focus of the “short America” trade. The Japanese currency has backed off from its ¥88 peak a month ago to ¥98, breaking several key technical levels, and seems poised to go lower. Other than flight to safety, there was never a reason to go long of this currency. The trade and current account surpluses are in free fall, as Toyotas, Lexus’s, Hondas, and Infinitis pile up on west coast docks. The economy is even sicker than ours, and with zero interest rates for the past 14 years, this certainly is nobody’s yield play. Clearly the yen became the global carry trade’s cheap date, and the cross has emerged as a highly sensitive indicator of global risk taking appetite. Could this bout of weakness be a mustard seed of economic recovery, a light at the end of the tunnel? Watch the Proshares Ultra Short Yen ETF (YCS), which gives you a 200% short play, and is up 25% in a month.

Feb 28 03:14 PM

[Stephen Str...:]

The last bubble will not be the USD - but gold.

It is common enough for anyone to be able to take part. And as soon as it gains real momentum, and becomes a dead cert for going up, every man woman and child in the world will want in. No single country or even group of countries will be able to stop it.

Of course, I'll jump off just before the bubble bursts ;-)

Feb 28 05:37 PM

[Dave Wrixon:]

Well Buffet has US Treasuries down at the latest and perhaps one of the most extraordinary bubbles.

uk.reuters.com/article...

When the Treasury bubble pops the dollar goes to hell. As the Chinese are still pegged to the dollar the only currency currently in a position to take over as Global Reserve is the Euro. I think a massive revaluation of the Euro against the Dollar is inevitable. Because of the prevailing negative sentiment the shift is likely to swift and devastating. The timing, however, is impossible to predict. How can you tell the precise moment when investor sentiment will crystallize?

Feb 28 07:57 PM

[Fabien Hug:]

I don't believe in the EUR; it is a political currency. They have to keep alive about 100 mios people in the former Eastern block. Their problems are much worse than the States'. Stay away from EUR.

Feb 28 09:30 PM

[fahrender:]

in my crystal ball i see ........

back to the barter system! we're all gonna DIE!!!!!!!!

Mar 01 01:24 AM

[traders india:]

The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers.

Apr 08 03:11 PM