The European Sovereign Debt crisis has depreciated the Euro, FXE, This has had an effect in China and Japan as UBS’ Andy Lees writes:
Japan’s May trade figures showed a slowdown in exports for the 3rd consecutive month, down 1.2% m/m. “Exports grew at a slower than expected pace apparently due to the effects of China’s tightening” of banks reserve requirements according to the Norinchukin Research Institute in Tokyo, which also expects the weaker euro to impact because of the resulting loss of Chinese competitiveness; “Europe’s debt crisis is also expected to impact China’s exports to Europe in the coming months as the euro’s drop hurts Chinese firms competitiveness. This in turn is likely to prevent Japan’s exports from recovering fully”. What it seems to be saying is that the model of outsourcing to China and then onward export has lost its competitive edge against Europe given the euro fall. This follows the Herald Tribune report earlier in the week, quoting BIS data, suggesting that Chinese competitiveness has fallen to its lowest level since 1994. As far as direct exports to Europe go, they rose 17.4% y/y (+2.4% m/m) due to demand for auto parts, electronic parts from Germany and other capital goods such as chemicals and metal products registering double-digit gains.
In a sense, Germany, EWG, has gained from the Euro’s fall with some “increased demand for Japanese parts and materials” which it uses in remanufacturing and export. Germany is an export country; the lower Euro has helped its exports remain strong.
Lees quotes Itochu Corporation as saying: How long does it take before the Chinese takes action to lower the value of its currency, CYB, to recapture lost trade? This quote raises a most interesting question; as any fall in its currency will trigger Timothy Geither to give the nod to Senator Schumer to pass protectionist legislation with sanctions and embargoes, which of course would result in an all out disastrous trade war.
On April 26, 2010, the currency traders went long the yen and short the global currencies as is seen in this MSN Finance chart of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar to rise; as can be seen in this chart from April 26, 2010 to June 7, 2010 with the
British Pound Sterling, FXB,
Swiss Franc, FXF
Swedish Krona, FXS
and the Australian Dollar, FXA being sold off the most; click on chart to enlarge.
Then on June 7th, a stock rally commenced, on the announcement of the EFSF, and lasted until June 21, 2010. Spanish shares, EWP, and German shares, EWG, rose as is seen in the chart of EWG, EWP, EWJ and JSC. Notice from the chart how a rising Yen, FXY, has benefited the smaller Japanese companies, JSC, more than the larger ones, EWJ.
Then on June 21, 2010, the bear market of April 26, 2010 recommenced; and the currency traders went long the British Pound Sterling, FXB, on the Cameron austerity plan, and long the Swiss Franc, FXF as the Swiss Central Banks stopped intervening and stopped buying its currency. The Canadian Dollar, FXC, has been sold off as seen in this chart of trading from 6-21-2010 to 6-26-2010; the former two up 1.5 and the latter one, down 1.4% for the week; with the Euro, FXE, breaking even; and the Yen, FXY, rising 1.7%. Chart of FXE, FXC, FXF, FXB, FXY click on chart to enlarge.
The June 21, 2010 through June 26, bear market recommencement can be seen in the chart of JSC, EWJ, EWL, EWU, EWC and EWP with Spain falling the most as its banks are terrifically impared by the European Sovereign Debt Crisis.
TraderMark relates that David Cameron is calling for austerity measures in the UK in part to assure that the nation will not come under any fiscal federalism from the EU and to help preserve its AAA currency rating for the British Pound Sterling, FXB, and thus the value of its sovereign debt, and the liquidity of its financial institutions.
Interest in the Chinese Currency, CYB, over the last three weeks has strengthened base metals as seen in this chart of the base metals, DBB, and China, FXI.
This week, Base Metals, DBB, and oil, USO, strengthened with Gold, GLD, and Silver, SLV, maintaining; chart of GLD, SLV, USO and DBB; click on chart to enlarge.
Stockcharts.com provides the chart of West Texas Intermediate Crude, $WTIC, having a strong Friday trade, taking it up and out of a death cross. Oil is very much as a cross roads. It’s decision time for the currency traders and commodity traders; either it is going up or it is going down. Speculation of currency traders and a likely military strike on Iran to deter its nuclear ambitions may keep oil, USO, high. But, ”We are now walking on deflationary quicksand,” said Albert Edwards from Societe Generale; this statement is applicable to oil, base metals, currencies, stocks, corporate debt and sovereign debt alike; that is everything except for the hard assets gold, GLD, and silver, SLV. The Stockcharts.com of base metals, DBB, shows a death cross, that is deflationary quicksand.
It is unlikely that the US Dollar, $USD, will move above its previous high, as its chart shows a parabolic turn lower, and demand for US Treasury Debt, TLT, and IEF, will likely be topping out, on concerns of the extremely high US Federal deficit; and as such, investment demand for gold, GLD, and silver, SLV, will remain high.
The chart of distressed debt mutual fund FAGIX, compared to TLT, IEF, and AGG, suggests a market top is forming in debt of all types.
Soon, even the Rupe, INR, will fall, as will investor enthusiasm for the India shares, INP. Then INDZ, which is 200% inverse of the India shares, will join TZA, which is 300% inverse of the Russell 2000, in going higher. Institutional investors should be entering shorts in INDZ at the current time, as the chart of INP relative to INR is maxed out – stocks have risen about as high as they can on the Rupe which is a relatively stable currency. When India, INP, is compared to Brazil, EWZ, and the emerging markets, EEM, the chart shows that India is truly is over-valued; chart of INP, EWZ, and EEM.
One can use this Finviz Screener of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, CYB, BZF, XRU, FXB, FXY to view the individual currency charts.
Up until the June 7th to June 21, 2010 rally, the European Financial shares, EUFN, stimulated by the European Sovereign debt crisis, had been leading the way down, chart reveals. Now the European financials have turned lower again falling 3% this week.
Natasha Brereton in Wall Street Journal article Data Show Big Exposure for Banks in Euro Zone reports that French and German banks continued to hold the greatest exposure to euro-zone countries facing market pressures at the end of last year, underscoring their interest in restoring investor confidence in the region. Data released Sunday by the Bank for International Settlements showed that banks based in the 16 countries that use the euro accounted for $1.58 trillion, or 62%, of all internationally active banks’ exposures to residents of Greece, Ireland, Portugal and Spain. That included $727 billion of exposure to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece, with about half of the Greek.
The chart of EWG, JSC, EWJ, EWG, EWU, EWL, EWP, and EWQ, shows the bear market returning the week of June 21, 2010 to June 26, 2010 and the 8% fall on Spain, EWP and France, EWQ, shares due to the exposure to sovereign debt crisis debt and banking ill-liquidity.
Gold, GLD, and perhaps silver, SLV, is the only currency which will survive competitive currency devaluation; and the only investment that will survive debt deflation.
Debt Deflation has wiped out an entire municipality, the City of Maywood decided to self liquidate. Hector Becerra of the Los Angeles Times reports on June 23, 2010: “Maywood, a small working-class community south of downtown Los Angeles, plans to lay off virtually all its employees, disband its Police Department and turn over its entire municipal operations to a neighbor — an action that appears to be without precedent among California cities. Several cities in the state have said that they are close to bankruptcy because of the sharp drop in sales and property tax revenues.”
All currencies, except gold, and possibly silver, will tumble progressively lower into the pit of fiat abandon, until each is totally mutually destroyed.
Disclosure: I am invested in gold coins