You’re hearing about it here first. But I promise that you’ll soon be hearing about it virtually everywhere.

Let me explain.

China’s New Profit Catalyst

Most investors are aware of China’s massive profit potential. But what they may not understand is this: Before all that potential can be transformed into actual profits, this Asian giant needs to develop a modern, fully functional financial system. That obviously can’t happen overnight, and China’s been smart – and avoided making major mistakes – by not rushing things.

In fact, despite some stinging criticism from the West, Beijing has held its companies and its financial markets in check to ensure an orderly development. It’s even left some protectionist measures in place to make sure that opportunistic foreign firms don’t overrun its markets.

Naturally, there’s been a near-term cost. It’s held some China-based companies back, making them less competitive in such developed markets as the United States and Europe. Chinese firms were severely limited in their access to funding, meaning they were also limited in their ability to capitalize on business opportunities in these overseas markets.

But I could see that the long-term profit potential for these companies was huge – and I’ve repeatedly said so to the audiences that I’ve spoken to at events all around the world, or that I’ve written to via my columns here in Money Morning. In both venues, I’ve told listeners and readers that the day would come when these companies were able to raise enough investment capital at home to finance their forays abroad.

The day that occurred, I’ve said, is the day when the real fireworks would begin.

Beijing finally lit the fuse.

By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.

The move is very shrewd, for it brings about the confluence of highly complimentary trends.

• For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
• Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
• These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
• And that comes at a perfect time for – up until now – the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.

Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.

Just how big could this new dollar-denominated financing market turn out to be?

At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone.

That amount tallies closely with China’s estimated $23 billion pipeline of outbound mergers-and-acquisitions deals that have been announced this year, but not yet consummated – especially if you factor in the $9.7 billion worth of deals that were announced in the past three years, but that are still pending, Thomson Reuters reports.

Could New Financing Deals Accelerate the U.S. Recovery?

Many Americans will clearly view a big uptick in investments from China with significant fear – especially if they remember the late 1980s Japanese shopping spree that sent ownership of Rockefeller Center, Columbia Records, Universal Studios and the Pebble Beach Golf Course back to Tokyo.

This is different. In fact, I think the new rules are likely to create entirely new funding sources that will boost international trade and that could actually accelerate the U.S. economy’s recovery from the global financial crisis. In fact, it’s entirely possible that this new form of financing will help facilitate a post-recovery golden age of expansion led by such as-yet unsaturated markets as China.

Call it the “Mother of All Carry Trades” – only this time it will be yuan-based, instead of yen-based.

A carry trade is an investing strategy in which an investor takes advantage of interest rate differences between two countries. He’ll borrow money in a country where rates are low and invest it in another market where rates are higher, profiting from the difference. The rate disparities are often caused by the respective central banks; one may be trying to combat inflation with high rates even as another is trying to nurture economic growth by reducing rates.

There are no actual examples to point to, yet, since the market isn’t yet up and running, but we can draw some inferences based on who’s filed to issue this dollar-denominated debt, and look at who’s likely to file in the months to come.

According to The China Daily News, China National Petroleum Corp., the Red Dragon’s biggest oil company, is planning to issue $3 billion in dollar-denominated bonds and is planning to auction as much as an additional $1 billion in three-year floating debt, whose rate will be tied to the London Interbank Offered Rate (LIBOR).

Traders familiar with the new market suggest that CNPC will probably pay a coupon of 60 basis points to 80 basis points (0.60% to 0.80%) more than six-month LIBOR – a much lower cost than the 2.8% coupon for the $2.93 billion worth of yuan-based, three-year, fixed-rate, medium-term bills issued back in December.

Last year, China’s yuan had appreciated steeply against the U.S. dollar, meaning funding costs were high for Chinese companies. Now, however, the situation is reversed, and companies can issue huge amounts of expansion debt for comparatively little money.

As a byproduct of all this, companies that take advantage of the new dollar-denominated funding markets help take the strain off of the People’s Bank of China, the central bank that has shouldered almost all of the dollar-based exchange risk to date.

In Shanghai, which is China’s financial capital, my trading contacts tell me that six-month dollars – which were quoted at 0.40% earlier this year in China, now reflect approximately 0.80%, which is roughly in line with onshore-dollar yuan forward rates for the same time period.

By comparison, the six-month implied forward rates hit 15% in March 2008. So you can see why Chinese companies have such a powerful incentive to use this new funding venue – especially when so many otherwise-solid global companies have been brought to their knees by the credit crisis.

The Three Keys for Investors

So what does this mean for investors?

In a word, plenty.

First, it’s conceivable that the sheer volume of dollar-denominated bonds could indirectly prop up the U.S. dollar. Not only would that potentially wreck traders who are betting that it’s headed the other way, it could actually solidify U.S. and global markets that are still searching for an anchor. By implication, this could also wreck the “gold bugs” who are betting the farm, instead of investing in the precious metal as part of a disciplined investment strategy.

Second, for those on Wall Street who continue to believe they are the “masters of the universe,” the strength and ferocity with which China’s dollar-denominated bond market may develop will probably come as a rude shock. Not only are the vast majority of Wall Street firms likely to be cut out of the underwriting process, but chances are very good that they’ll probably be relegated to the back seat when it comes time to pony up in the never-ending game of global one-upmanship.

And third, depending on the ultimate size of this new bond market, the prices of resource-based companies and commodities could go sharply higher as investors realize there is a potentially unlimited source of funding chasing relatively few quality assets. To the extent that Chinese companies mirror Beijing’s plans for the future, the same will be true for technology, medical and infrastructure plays.

Will this happen immediately?

Probably not. Even though the market is potentially huge (like just about everything else here in China), Beijing will almost certainly keep its hand on the throttle, meaning it will grow at a reasonably impressive – albeit measured – pace.

Beijing is very aware that an imprudent use of debt was a key part of the elixir that created the global financial crisis, meaning government officials will work hard to make sure the tiger stays in its tank – so it can’t bite anyone.

Over the long haul, however, there’s no question that this new market is an important – and much-needed – step in China’s continued development into a global financial juggernaut that investors cannot afford to ignore.

Source:  How the New ‘Yuan Carry Trade’ Will Add to China’s Global Muscle, and Possibly Even Accelerate the U.S. Recovery

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this; "New Reality"; will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as"The Golden Age of Wealth Creation" The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

]]> http://www.contrarianprofits.com/articles/how-the-new-%e2%80%98yuan-carry-trade%e2%80%99-will-add-to-china%e2%80%99s-global-muscle-and-possibly-even-accelerate-the-us-recovery/16649/feed 0 http://www.contrarianprofits.com/articles/maybe-its-time-for-a-change/9145 http://www.contrarianprofits.com/articles/maybe-its-time-for-a-change/9145#comments Wed, 26 Nov 2008 13:59:54 +0000 Chuck Butler http://www.contrarianprofits.com/?p=9145 Currencies continue to rally…  More Stimulus…  Data shows more rot on the vine… And Now… Today’s Pfennig!

Another rally day in the currencies yesterday… One that wasn’t as pronounced as Monday’s 3-cent rally… But a rally just the same, and at one point, the euro was trading above 1.30… Hadn’t seen that level in a while, so welcome back to the 1.30 level, Mr. euro…

Someone sent me a note the other day, and said, why don’t you talk about Australia, Canada, and Swiss more? Hmmmm… Maybe they don’t read the Pfennig “every day”… But those currencies are in my notes most days, and if they are not, they are a part of the overall direction in currencies that are being pushed…

Good day… And a Wonderful Wednesday to you! OK… Are you up on these “pirates” stories going on right now? That’s pretty unbelievable, eh? And… We are all fans of “pirates” here on the Currency Trading Desk, but these guys now are giving “our pirates” a black eye!

The currencies range traded yesterday in a very tight range, as Treasury Sec. Paulson, didn’t give in to the lawmakers and allocate $25 Billion of the TARP (Troubled Asset Relief Program) funds to automakers. King Henry said, “The rescue (read bailout!) package was not intended to be an economic stimulus or an economic recovery package. The $700 Billion TARP was designed to stabilize financial markets and the flow of credit, and it not a panacea for all our economic difficulties.”

Well… For once, I’m not going to take King Henry to the woodshed… The lawmakers were banging on him and Fed Chairman Big Ben to dole out funds to anyone that was in dire straits… But they held their ground… And therefore did not cast any “unknown” shadows over the markets. But U.S. stocks didn’t like it, and sold off after the testimony and questions on Capitol Hill.

The thing to think about with these automakers is the fact that they have become such HUGE finance companies, which is where, I believe I read, they “really make the money”… Shutting them down because they haven’t run their businesses correctly over the years isn’t the issue… It’s what to do with those financing companies… I could be totally wrong here, off base and picked off by a wily veteran lefty, but it’s the way I see it…

OK, well, for the currencies… Like I said above, they were stuck in the mud, in a tight range, with no where to go and no one to see. I was reading a note from well respected and famous analyst, Richard Russell yesterday… Let’s listen in to see what Mr. Russell had to say…

“Please remember, all these billions of dollars that the government is throwing at entities – all this money represents additional DEBT.

How the US dollar will hold up against this building-tower of debt is the question.

Ultimately, the trillions of newly-created dollars could lead to hyper-inflation.”

Yes… But the question that I keep getting asked, and I would ask of anyone that makes a statement like that is “when?” When do the markets wake up and smell the coffee? When do the markets realize that they’re on the wrong side of the road? I keep saying that it will all happen when the credit markets get unlocked… But that certainly doesn’t look like it’s going to happen any time soon… I just getting frustrated by all this… The signs are there for dollar weakness… It’s like they are glowing neon signs in bright colors, pointing to the dollar with exclamations like “should be weak”…

Remember when I used to write about how the debt level in New Zealand would come into focus once the hype over the high interest rates and Carry Trades were history? And for years people would write me and cuss at me about how they sold their kiwi because I said it would be in trouble when the interest rates and Carry Trades were history… But I held my ground, then… And I’ll hold it now… In fact, I’ve got company… By good friends over at Casey Research, including the guy that inspired me to write more and more, David Galland, had this to say yesterday….

“The foreign debt of New Zealand, which includes private debt, is a serious problem for them and is why their currency has fallen from NZD 0.80 to NZD 0.60 to the USD.

What will happen when the world finally realizes that the U.S. government debt (that is not even accounting for private debt) is already in excess of $10 trillion and well on its way to exceed $12 trillion in 2009? This is at a time when our $13 trillion GDP is sure to contract by a couple trillion. I am afraid the U.S. chart next year will not be that different, which bodes well for gold as the only real substitute to the fiat currency that will be created to cover the deficits.”

OK… Let’s talk about what’s going on in the markets right now… Not the future, which is unknown to all of us… We can only speculate about the future based on the data we have now, and the knowledge of history… What’s going on, as Marvin Gaye used to sing, is simply that the sentiment in the markets right now is so terrible and fragile, which is keeping the risk takers on the sidelines and investments centered around risk aversion on the burners. Any time the risk takers go out on the limb, another deep, dark, dangerous piece of data prints, or our “leaders” (read Paulson and Bernanke) make some stupid comment, which leads to a dollar rally, and the risk takers get squeezed.

Speaking of deep, dark, dangerous data prints… How about the news that Citigroup is liquidating its CSO hedge fund after it lost 53% of its value last month? This news won’t be looked at as anything but deep, dark and dangerous!

Speaking of data… Today, we’ll see the stupid CPI (consumer inflation), some Housing data, and the last FOMC meeting minutes… I would think the Fed Heads wouldn’t have any surprises in their minutes, like the Bank of England (BOE) did in theirs… The BOE’s minutes showed that the 150 BPS rate cut that was delivered earlier this month (which also begs the question as to why the BOE can issue their minutes within two weeks, while it takes the Fed over a month?) Anyway, the BOE minutes showed the 150 BPS rate cut was unanimous… Plus… There were quite a few calls to go to 200 BPS! WOW!

So… Ok, the stupid CPI, I’ve beaten this horse to death (no animals were hurt!) here with why I feel that CPI is stupid… And when those that have payments tied to CPI see today’s print they will fully agree with me. CPI is expected to have fallen .9% YOY… To 4%… Of course you and I, and those on the payments ties to CPI believe that inflation is really around 10% or more!

The Housing data today is the October Housing Starts, and Building Permits, of which both are expected to be weaker than September’s data…

I met Dan Ferris a year or so ago… A quiet, soft spoken guy, that when you look at him you just know he’s got a lot of brain matter… Real intelligent! I follow his writing from time to time, and Ty Keough sent me a note from Dan… This was in the Stansberry Research letter… “The money we use every day in the U.S. is debt. It is lent into existence. This record level of Treasury borrowing is the inflation engine itself, tank filled with gas, hood popped up, revving into the red zone right before your eyes.”

OK… I just saw / read a story that came across the Bloomie, that Bank of America (BOA) and Barclays Capital, are calling for a Aussie dollar rally next year, as they believe Australia will skirt a recession, that Europe, Japan and the U.S. are mired in. They even called for a rise to 70-cents in the next 6 months. Hmmm… I guess they’re of the opinion that the Carry Trade unwinding is coming to an end.

I, on the other hand, don’t believe that the Carry Trade is anywhere near an end… So, do with this information in your individualistic manner!

The data yesterday, saw PPI fall -2.8% in October… Which was mainly made up by the fall in oil prices… The TIC Flows showed the improvement I said we would see in this data, as the October flows showed an positive balance of $66 Billion, VS the $21 Billion in Sept. This still does not cover what’s needed to finance the Current Account Deficit, and Federal Direct Investment. And should have been expected to be so robust, given the flight to safe haven Treasuries…

Currencies today 11/19/08: A$ .6480, kiwi .5495, C$ .8115, euro 1.2650, sterling 1.5080, Swiss .83, ISK 182, rand 10.38, krone 7, SEK 8.02, forint 214.75, zloty 3.0425, koruna 20.3390, yen 96.80, baht 35, sing 1.5280, HKD 7.75, INR 49.99, China 6.83, pesos 13.19, BRL 2.3590, dollar index 86.98, Silver $9.45, and Gold… $738.30

That’s it for today… Well… Anheuser Busch is no longer, as the InBev deal closed yesterday… I was so focused on getting the Pfennig out yesterday that I totally forgot to send some love and congratulations toward Albert Pujols, the National League MVP for 2008! Way to go Albert! And… Hey! This IS HUGE NEWS! The good folks at Agora sent me the news yesterday that the movie I.O.U.S.A. has made the cut from 94 Documentaries to the final 15 that will be voted on for an Oscar! WOW! And to think I was interviewed for that movie, but was left on the cutting room floor! Congratulations to my good friend Addison Wiggin, and the other folks at Agora that had the idea to put this together in the first place! No improvement in the eye yet, still some pain to deal with, but I have to believe it will get better! Thanks so much, once again, to all of you dear readers that sent along good wishes and prayers for me. I feel bad that I have to keep announcing this stuff, but it is what it is, and life goes on. God willing… OK… Time to go… I hope your Wednesday is Wonderful!

Chuck Butler

Source: King Henry Keeps His Cash!

HA! Had you there for a minute! The dollar rallied once again, when the deep, dark, dangerous clouds returned, and the risk takers that had come out of the woodwork on Friday, disappeared, which left the currencies hung out on the line. Gold rallied $10, which is really counter-intuitive to the risk takers disappearing and the dollar rallying… But it did, and I’m not here to argue about that!

As I said yesterday, the data cupboard was bare with no data to report Monday… With today being a holiday, we won’t get our next glimpse of the awful fundamentals data until Wednesday. In the overseas version of a data cupboard, the German Investor Confidence, as measured by the think tank, ZEW, surprised on the good side, with the index rising in October… This index had been on the slippery slope for the past few months. The news is that the index rose because the European Central Bank (ECB) stepped to the plate a couple of weekends ago, and made good contact with the financial meltdown in Europe.

Again… Let me say this loud and clear, folks… There’s a HUGE difference in Central Banks that provide liquidity… One does so from a position of strength like the ECB and China… and the other does so from a position of weakness (the Fed)…

But the good report isn’t doing anything to help the euro this morning, as the overnight stock markets didn’t fare too well, which has led to U.S. index futures being off… And all that means a rotten trading day, thus keeping the risk takers on the sidelines, and the dollar being the king of the hill…

And… All this means the Japanese yen is back on the rally tracks! I see this morning where BNP Paribas says that their Elliott Wave chartists believe yen will trade to 96.85 in the next week… Of course you know me folks… Trends are what move currencies… Charts merely tell you or give you an excuse as to why a currency moved in that trend. In this case… We all know that while the deleveraging is going on during the credit market squeeze, that dollars and yen are the only two currencies to gain (Chinese renminbi goes back and forth)…

Back here in the Good Old U.S.A…. The accountants over at Fannie Mae announced that the $100 Billion pledge to them “may not be enough”… This announcement came after Fannie posted a record $29 Billion loss and confronting more difficulty in issuing and refinancing debt. I guess the folks at Fannie thought, Shoot Rudy, if AIG can go back for second helpings of bailout funds, then we can too! I think we should all get used to this, as I said when all the original plans to bail out these firms were announced… These bailout funds are going to be like cocaine to these needing bailouts, and they are going to need more and more…

And the Wall Street Journal reported this last night that… “The Federal Reserve said Monday it will allow American Express to become a bank-holding company, saying “unusual and exigent circumstances affecting financial markets” justified a fast approval of the company’s application. The surprise move would give American Express access to new low-cost financing from the Federal Reserve.”

Before it’s all said and done, we’ll all be one big happy family, no make that dysfunctional family of “bankers”… Shoot, they may as well bring the automakers into the fold too, they need some of the low-cost financing from the Fed too! I could really go off on a tangent here… But, I’ll keep it on a even keel, as it’s not like there’s anything I can do about all this, so why get to upset with all these dolts!

So… The bad fundamentals, no make that awful fundamentals, continue to mount for the U.S. to deal with… But before we can deal with the awful fundamentals, we have to deal with the credit markets squeeze… No ifs, ands or buts… If we can get the lending going again, and I’m not talking about to individuals, I’m talking about between banks, and with Corporations, then the focus will return to the fundamentals… That’s my story and I’m sticking to it!

You know… One thing that I talked about last summer, and was even quoted in the Wall Street Journal talking about, was the fact that with the low interest rates in the U.S. the dollar had replaced the Swiss franc as a funding currency in the carry trade… And since then, the borrowing rates in the U.S. have gone even lower… But Carry Trades are not too popular at the moment, with risk taking on the sidelines… So the affect on the dollar at this point is mute. But, this explanation helps with the “reason the dollar is rallying”… I’ve explained more times than I care to that with Carry Trades unwinding, the “funding currency” which was sold short, gets bought to cover the short position, and so, just like Japanese yen, the dollar rallies…

And while I’m on the weird things going on in the U.S. I thought I would give you a snippet of a letter that Ted Butler (no relation, that I’m aware of) sent out regarding what he feels is manipulation of Silver. Here’s the other “Mr. Butler”…

“This week, I received a copy of a letter, dated October 8, sent from the CFTC to a California Congressman, Gary G. Miller. It discussed allegations of a silver market manipulation because of the data in the monthly Bank Participation Report. The data in that report for August showed that one or two U.S. banks held a massive short position in COMEX silver futures of 33,805 contracts, or more than 169 million ounces. This is equal to 25% of annual world mine production, and was up more than five-fold from the prior month’s report. After this position was established, silver prices fell more than 50%, in spite of a widespread shortage in retail forms of investment silver.”

So, there you go! Ted Butler believes he has the proof of manipulation in Silver, but what’s the Gov’t going to do about it… Ahhh… As one of my all time faves, Edwin Starr, sings… Nothing, absolutely nothing, say it again!

There was an article posted on CNBC’s website yesterday that listed Companies here in the U.S. that are announcing layoffs… This was not a pretty scene folks… But if you want to check it out, click here… http://www.cnbc.com/id/27645929

Yesterday, I told you the “news of the weird” with the announcement by the Fed that the guy who was responsible for risk management at Bear Stearns, the now defunct Bear Stearns I might add, was hired to head the group that overseas the purchase of the toxic waste bonds by the Fed… This to me is akin to putting the fox in control of the hen house! Any way… A long time reader sent me a note regarding this announcement… “I read somewhere about this appointment in several places last week on the web. One “source” actually suggested perhaps he was hired just to keep his mouth shut as who would better know how really toxic the traded paper is and what really lies out there?”

OK… You know me, I’m not one to put speculation in the Pfennig, especially when it appears on a website… But, this really struck a chord with me (probably cmaj7 my fave chord!)… And it appeals to my conspiracy theory blood… Let’s just hope it’s not even close to the truth!

I hear that the major oil companies that are attempting to get Oil out of the oil-sands in Canada, have decided to halt the spending there. For those of you not familiar with these oil-sands in Canada… These are the world’s biggest energy reserves outside Saudi Arabia. Getting the oil out of the ground here is a real problem and costly, and with the price of Oil dropping since July, the oil companies drilling here, have decided to cut back on the costs… I don’t understand this decision, as this IS the time to drill!

Currencies today 11/11/08: A$ .6685, kiwi .5830, C$ .8385, euro 1.2740, sterling 1.5575, Swiss .85, ISK 182, rand 10.1825, krone 6.90, SEK 7.875, forint 210.50, zloty 2.2050, koruna 19.89, yen 97.75, baht 34.94, sing 1.4980, HKD 7.75, INR 48.10, China 6.8250, pesos 12.88, BRL 2.2050, dollar index 86.02, Oil $60.30, Silver $9.97, and Gold… $739.15

Well, I would just like to say Thank You to anyone that reads this letter that is or was in the service for this country… And Thank You to those that are no longer with us to read the Pfennig. Sure hope your Tuesday is Terrific…

Source: Veteran’s Day

The “that” is simply the national debt, and how we’ll deal with it as the baby boomers begin to draw on their entitlement programs… I think people now like to “live for today, and not worry about tomorrow” and that’s a real shame. As I said a month or so ago… I’m going to have to sit down and write a letter to my sweetheart granddaughter, Delaney Grace, and apologize to her for leaving her generation with a debt load that requires a huge tax burden that her grand father didn’t have, and a loss of freedoms, and life style, that her grand father had…

OK… Man that was a real somber way to get things rolling this morning, eh? Well, it’s things that have to be said, even if the people running our country won’t say them!

Alrighty then, let’s get the beat going here, and start to rock and roll! The currencies really put on a display yesterday pounding out gains VS the dollar all day long. The euro actually traded up and through the 1.30 handle at one point in the day. But profit taking took hold later in the day, and carried over to the overnight markets of Asia and Europe. But still, as I turn on the screens this morning, the euro is managing to hang around 1.2875…

Euros weren’t the only currency to see some lovin’ yesterday, as the Aussie dollar (A$) added to its early morning gains after the rate cut by the Reserve Bank of Australia (RBA), and saw 70-cents at one point in the day! But as I said above, the profit taking set in as the day and night came, and it looked like the exit polls were pointing to an Obama win. These knuckleheads are thinking that an Obama win will speed an economic recovery… Ahhh grasshopper, if it were all so easy as changing the President!

U.S. stocks rallied all day, leading the “risk takers” back to the trading tables… That meant the yen and dollar were sold, and A$’s and kiwi were bought… That’s the Carry Trade in a nutshell for you there folks. Yen traded above 100 for the first time in a couple of weeks, but has settled back below the figure in overnight trading, as the profit taking took hold.

Oil prices also surged yesterday by over $6, and Gold had a strong performance… But the commodities are going through the same thing the currencies are going through this morning… Profit taking…

Factory Orders for September printed yesterday and were weaker than expected. Posting a 2nd consecutive month of weakness, Factory Orders decreased by over $11 Billion, or 2.5%. Notice something here folks… Going back to yesterday’s report on the ISM (manufacturing index) and now this Factory Orders, which is simply new orders for manufactured goods, and you have some real rot on manufacturing’s vine… While there was rot before August, the real nasty stuff has been exposed since the end of July… And guess what else has gone on since the end of July? Come on, you don’t have to be a Sherlock Holmes to figure this one out… It’s the dollar rally! The dollar has rallied strongly since the end of July, and has pushed Manufacturing to the edge of the cliff… And from the looks of the ISM the other day, (recall it fell to 38.5 from 53) Manufacturing is teetering over the edge…

Some good news on the LIBOR borrowing rate… It narrowed 21 BPS overnight… It’s still out of whack with what the markets believe it should be, but this is a good sign. Let’s hope it’s not a false dawn. If we can get borrowing costs lowered, to stop the currency swaps going on, and to apply some W-4 to the locked credit markets, then maybe, just maybe, you never know, we could get back to fundamentals! And those fundamentals have not been good lately… Speaking of fundamentals, there’s none bigger than jobs…

Friday, is a Jobs Jamboree Friday, and right now, it doesn’t look good for the U.S. employment picture as I think that it could show another loss of jobs and this time to the tune of at least 200K… We’ll get a “sneak peek” at the report this morning, as the ADP Employment Change for October will print… As I’ve explained before, this ADP report gives an indication of the direction of what the Jobs Jamboree will print… ADP is forecast to show -100K, which would not be a good sign for the Jobs Jamboree…

Some readers questioned my thought yesterday that deflation was winning the battle VS inflation, and one person even thought that my call was completely off base… I know it had been some time since I took those economics classes in college so I looked up deflation just so I get it exactly right… Webster’s says that Deflation is a contraction in the volume of money and credit relative to available goods.

Hmmm… Maybe the jury’s still completely out on this, but in my mind this is a deflationary period we’re experiencing right now, but still feel that soaring inflation is on the other side of this record… Yes, the “B” side has inflation in store for us… But then, that’s just my view from the cheap seats!

But! If I’m right, and Lord knows I can be just as wrong as the next guy writing a letter every day for 16 years at 5 in the morning, then the precious metals, like Gold, will be big winners… And non-dollar investors will also wear smiles like a Cheshire Cat! And this dollar rally will have been proven to be the fraud it is… A bear market rally… But… If I’m wrong… Well, I think I’ll just retire and ride off into the sunset… OK, I can’t do that, I have a 13-year old that still needs to go to college in 5 years! But If I’m wrong, then I’ll take my lumps and admit it like a big boy…

Thought I would pass along some news from beleaguered Iceland… We were able to get our maturing CD’s this week, traded at a much better level this week, and the news is full of hope that this will continue. I was told that there is a semblance of a spot market taking shape for maturing forwards. There’s still no deliverability or forward markets, as the largest banks in Iceland are still trying to deal with being taken over by the Gov’t. I know that there is a lot of confusion with the price that’s being reported on the internet for Icelandic krona. But believe me now and hear me later, that is NOT THE MARKET PRICE FOR KRONA! And if you think it is, call up the provider of the price and tell them you want to sell them krona at that price! OK… I’m getting a little upset right now, so I’ll stop there… Just wanted to give an update…

Well… As I opined here, the euro got back on the rally tracks, and is back above the 1.29 handle… I guess the profit taking has ended for now, eh?

With the major news circling around the Presidential Election results there’s not much left for those of us that are trying to deal with the Financial Crisis going on… So… With that void, for today at least, I’ll head to the Big Finish!

Currencies today 11/5/08: A$ .6970, kiwi .6065, C$ .8675, euro 1.2955, sterling 1.5995, Swiss .8610, ISK (no quote), rand 9.5875, krone 6.6950, SEK 7.6825, forint 199, zloty 2.69, koruna 18.75, yen 99.10, baht 34.92, sing 1.4775, HKD 7.75, INR 47.44, China 6.8280, pesos 12.61, BRL 2.1120, dollar index 84.67, Oil $68.70, Silver $10.27, and Gold… $759.78

Source: The Day After

This will be the end of another of the things that’s keeping the fundamentals in the back of the classroom. All we’ll have left is the credit squeeze… Unfortunately though I feel like we’re going to have to live with that one for some time to come! There are signs that things are loosening up, but it’s a far cry from what should be considered as “normal” in the lending arena! As long as the credit squeeze remains in place and on the minds of traders & investors everywhere, we’re stuck with the Trading Theme of 2008… Well, let’s see, it didn’t come into play until late July, so it should be called the Trading Theme of late 2008 and 2009.

That’s right folks… When I first saw this all unfolding in July and August, I told you in this letter that this dollar strength could very well last through the elections and through to year-end… That was before the rot on the vine was exposed in September and October… Now, I fear that this will be the Trading Theme for most of 2009 too… As the Credit squeeze continues to hang over the markets like the Sword of Damocles. And… Someone told me that in 6 out of the last 7 elections, regardless of whether the Democrats or Republicans won, the dollar rallied in the 6 months following the election. So…. That takes us into 2009, with the Trading Theme and credit market squeeze… It all adds up…

And as long as I’m going down this road of bad news… I have come to a conclusion that the deflation wolf has won… For months I wrote about how inflation was winning but the deflation wolf was always at the door… Well… After viewing the landscape of falling stock prices, falling commodity prices, and falling home prices, I have to think that inflation is no longer the king of the hill… Deflation is all around us folks… The only things you don’t see falling are Consumer prices and bond prices… But those bond prices are sure to fall given the glut of Treasury issuance coming down the pipeline… And Consumer prices? Well, if Consumer Spending keeps falling off the cliff, then you can expect Consumer Prices to fall too…

But inflation isn’t going away… And in my opinion, it will hide out on the other side of this deflationary period… And at first it will look much like 1976 all over… 1976 was a great year, right Christine? But it wasn’t a great year for stagflation…

So… What does this mean for the currencies and precious metals? I don’t think it spells a Happy Days while the deflation is going on… But… On the other side of the deflation, it could very well spell rallies in currencies and metals that will be huge! You see, the Trading Theme remains in place for most of 2009, as we work through the deflation… And then as the Trading Theme is removed slowly, inch by inch, step by step, there will be an unwinding of “Safe Haven” trades (read U.S. Treasuries) and the race to the bottom for the dollar will be on…

That’s how I see it from my seat here on the Trading Desk in St. Louis Mo. Home of the 10-time World Champion St. Louis Cardinals! It’s not a pretty picture, near term, that I’m painting this morning, but even an artist paints some ugly pictures now and then… I know of one, no never mind, no need to go into that.

OK… You’ve been very patient, waiting for the update in currencies… So, here we go!

The currencies played the Trading Theme to a “T” once again yesterday… When I left you yesterday morning, the euro was trading 1.2845… But then, more deep, dark, dangerous data printed for the U.S. and the dollar slapped down the single unit and every other currency that got in its path. The data came in the form of the latest reading of Manufacturing in the U.S. The ISM Index fell from 43.5 to 38.9, a low since September 1982! OMG! For the new kids to class, the ISM Index draws a line in the sand at a 50 level… Any number above 50 equals expansion… Any number below 50 equals contraction… We haven’t seen manufacturing contract at this level since September 1982… And the NBER still hasn’t put the “recession sign” on the economy’s door? Geez Louise, what do these guys need to prove to them that we’re so deep in recession right now?

So… With that bad data in the books… The dollar rallied and pushed the single unit to below 1.27 for most of the day… We’re seeing some recovery this morning, and the euro has popped back up above 1.27… This morning, they are reporting from Europe that borrowing costs (LIBOR) have fallen a bit, thus loosening the purse strings… Recall, this was another of the things knocking the stuffing out of the euro and other currencies, as Financial Institutions in Europe stopped borrowing in LIBOR because the rate had gotten totally out of control on the high side. Instead, the Financial Institutions used the currency swaps market, selling their reserve currency (read euro) to raise the capital needed as reserves against the toxic waste they had on their books…

It was my assumption when hearing about this change to currency swaps to generate cash, that this would come crumbling down once LIBOR got back to what would be considered a “fair rate” for borrowing, and the swaps would get unwound, meaning the currency sold in the swap would be re-purchased. It will be interesting to see if this plays out, even with the Trading Theme in place.

The Reserve Bank of Australia (RBA) cut interest rates last night by a larger margin than I expected… I had thought the RBA would cut 50 BPS… Instead, the RBA followed up last month’s 100 BPS cut, with a 75 BPS cut! WOW! They aren’t messing around, eh? Before you skip down to the Currency roundup to see what the A$ is doing after a 75-BPS rate cut, no need… The A$ has rallied since the rate cut news! Talk about perverse! Currencies these days are just strange… Well, I guess it’s not the “currency” but the Currency Trader! But, who am I to look a gift horse in the mouth? The A$ is rallied…

The Canadian dollar / loonie rallied last night too… Hmmm… I’m sitting here thinking about these rallies and started humming the great song by the Who… Won’t Get Fooled Again! For I know that the Trading Theme is in play… Yes, it’s the Same Old Song… Ahhh the Four Tops too!

So, one down, two more to go… That is Central Bank rate cuts this week… Still to come… The Bank of England (BOE) and the European Central Bank (ECB)… The performance of the A$ after the rate cut is promising for these two currencies; pound sterling and euros respectively… But remember the Who!

Recall last week, when I was talking about having the fear that the Bank of Japan’s (BOJ) Ministry of Finance would intervene to stem the yen’s rise… Well, unless they’re lying… And we have no reason to believe they are… The BOJ announced last night that there was no currency intervention last week… Hmmm… Just wondering why then, did yen fall from 92 to 99? I doubt the rate cut on Friday had anything to do with it… Must have been all the jawboning…

Well, that, and… The fact that as things in the credit markets loosen up a bit, those cocky Carry Traders get back on their feet… And we all know that Carry Trades to yen are like kryptonite to Superman!

The data cupboard is pretty bare today, with only September Factory Orders on the docket, which are expected to drop -.8%… And Fed Head Fisher, will be speaking in Texas on economic challenges in Texas… Fed Head Fisher is always good for a quote… But this is election day, and most likely he will be a forgotten man today.

I’ll finish up today and head to the Big Finish right after I tell you about this little ditty that the Wall Street Journal reported this morning… “The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric’s GE Capital unit, CIT Group and others.”

Hmmm… Is it not bad enough that now these finance companies are going to get bail out money too? But… What’s with the “others”? I sure hope they mean “other” finance companies, and not just “others” that need a bail out… Like, say, Joe’s Bar and Grill! YIKES! The Treasury Dept is out of control folks, and there’s no reining them in now… We’ve given them too much rope! UGH!

Currencies today 11/4/08: A$ .6875, kiwi .60, C$ .8525, euro 1.2785, sterling 1.5865, Swiss .8565, ISK (no live quote), rand 9.8910, krone 6.6950, SEK 7.73, forint 202.90, zloty 2.77, koruna 18.915, yen 99.50, baht 34.90, sing 1.4740, HKD 7.75, INR 47.72, China 6.8360, pesos 12.70, BRL 2.1410, dollar index 85.77, Oil $63.85, Silver $10, and Gold… $737.40

Source: Election Day!

So, keeping the trading theme in mind… Stocks around the world are getting sold in the overnight markets, and that has the U.S. stock market on the teeter totter again this morning… Things are looking darker, LIBOR is inching back up, and the Carry Trade gets unwound… That means the dollar is rallying once again, and the Japanese yen is too.

G-7 made an unscheduled statement after a request from Japan’s Finance Minister, regarding the yen… Apparently, the strength of the yen is bothering Japanese officials. G-7 tried to stem the move higher by yen, but the strength of unwinding Carry Trades is just too much for such a watered down communiqué’ that simply said that G-7 was concerned with the “excessive volatility” …

So, one has to sit down and attempt to figure out the depth of the Carry Trades… In other words, How many more of those buggers are there?! Well… I asked around on Friday (yes, I was at home, but still working, with two interviews, one radio and one Wall Street Journal, a long conference call, and this work on the Carry Trade!) and found that most traders that follow Japan seem to believe that this unwinding has much more to go, which means the yen should have more to go, right?

Well… Who knows these days? But in keeping with the trading theme, I would say that one should look to additional yen strength if Carry Trades have more unwinding to go. You have to think further into this too… It’s not just plain old vanilla Carry Trades unwinding, it’s years and years of Uridashi Bonds getting sold. For the new kids to class… The Uridashi Bonds are Japanese Corp bonds that are issued in New Zealand dollars, which gives them a huge yield advantage over Japanese denominated bonds… And Uridashi Bonds have been issued for years, which was a huge reason for the gains in New Zealand dollars. (this was chronicled in this letter several times over the years, going back to the 90’s!)

There was a report by the Minister of Finance in Japan last week that showed the Japanese investors was unloading the Uridashi Bonds for the first time in years! And all this risk in the markets that has the Carry Trades unwinding is causing Japanese investors to stop their constant looking elsewhere but home to invest… So, no selling of yen, etc. Tutor Turtle learned there’s no place like home… Dorothy learned there was no place like home… And Scarlet O’Hara did too! So, it’s about time the Japanese did! So… Unless the Bank of Japan (BOJ) is willing to intervene, and trust me it’s not beyond them to do so, and you should also believe me that they have a war chest the size of Rhode Island of yen reserves to sell, then we should continue to see yen strength… But there’s always that BOJ with their war chest of yen reserves hanging out that should put a governor on yen…. In other words… Yen can gain, but if the gain becomes too excessive, we could see the BOJ intervene…

With the Uridashi Bonds getting sold… The weakness in New Zealand dollars is magnified… I know that I didn’t see the current Trading Theme coming, causing weakness in euros, etc. but I know that I must have sounded like the Boy Who Cried Wolf over the years, warning about an unwinding of Carry Trades and what it might do to the high yielders…

Just what should one do here with the U.S. economy sinking further and further into the abyss, causing dollar strength… Hold tight and believe that the fundamentals will come back to the front of the class on the other side of all this bad stuff going on in the markets? Sell into this weakness? I heard from Jen last week that she had a record number of CD breaks for one day… Apparently, selling into the weakness was in vogue that day! I have to say that selling now is a lot like try to catch a falling knife… But… I truly understand, as this has gotten completely out of hand. Me? I’m a fundamentals guy, with my investments too… So, I’ll hold, and wait to see what happens on the other side of all this… Take me to the other side… Please, and soon!

I don’t wish for us to get to the other side of all this just because of the currencies… I want to see the U.S. get through this credit crunch before we begin to spiral down into a deep dark recession, that could become a depression… I don’t want to see that… But, as you all know, these are the things I’ve written about that could happen should we not correct the course we were, as a country, headed down.

And it all starts with the deficits… But I’m not going to go through all of the history and what’s brought us to this edge of the cliff… Someone sent me a note and told me that I wasn’t worth a damn because all I did was point out things that didn’t work or wouldn’t work, and not submit a solution… Well… I take exception to that, because I have submitted solutions, but does any one in the Government listen to my solutions? Crazy… Absolutely Crazy!

OK… Crude Oil continues to weigh heavily on the Canadian dollar / loonie… I have to admit that I did not see Oil prices collapsing like they have done… Weakening from $145, yes… Weakening to the current level of $62.66? Never! Shoot Rudy, we didn’t even see Oil prices rise after our friends (NOT!) over at OPEC announced a daily production cut of 1.5 Million barrels of Oil! Now, that makes no sense whatsoever! But that’s the markets these days… Gas for our cars is now an average of less than $2.80 per gallon! WOW! I have to say that I love the sound of that! But… As I said above, oil’s plunge has been a shot to the heart, and Oil’s to blame for the loonie…

I see where it has been reported that the Reserve Bank of Australia (RBA) intervened on Friday, buying A$’s to stem the slide in the currency… Of course had they done this when it was in the 90-cent range it might have stopped some of the selling then… I would have to put this down as too little, too late… But they did buy A$’s on Friday, and that did keep the A$ above 60-cents in the overnight markets.

Gold staged a nice rally on Friday, only to see that fade into selling this morning… No adding on to the one day rally for Gold! I got asked at every stop on the Currency Tour about why Gold wasn’t higher in price? Well… 2 things… 1. Gold has gotten caught up in the “sell everything to come back to dollars” mentality that’s going on in the markets these days… And 2. there’s an invisible hand manipulating this metal… But then, as I got home and began to think about that, I have to say it’s 90% #1… And just a small piece of #2… You know…. That with the dollar’s rally and the currencies’ decline, that Gold is really high when priced in Aussie, kiwi, euros, etc. Hmmm…

The Emerging markets have seen all this melting down in the currencies and have not been able to avoid melting themselves. In fact, the Emerging Markets are usually at the head of the class when it comes to selling. I tell you this, because we could very well be seeing something in Hungary that would remind many of what happened to the British pound sterling in 1992. And once again, I’ll mention something that I said to everyone a good time ago, that has come to fruition… It just took a couple of years, and that is, that once the Euro Wanna Be countries of Hungary, Poland and Czech Republic got closer to the ERM (exchange rate mechanism), the precursor to converting to the euro, they would face speculation… Well… Speculators have gone after Hungarian forints, and smell blood…

And finally… The Wall Street Journal reported on Friday that: “The Treasury Department has decided to let banks individually announce that the government will invest in each firm, scrapping an earlier plan to release the names of multiple banks receiving federal money all at once. The decision came after concerns that banks left off any group list would appear too weak for government assistance, spooking investors and depositors and potentially making troubled banks’ situations more dire.”

And… The Treasury’s funds that are being placed into the Big Banks, are already being used to purchase the smaller banks… PNC announced that they would purchase National City Bank.

OH… And one more thing… U.S. Existing Home Sales rose in September… Is that a sign of good things to come? Unfortunately, remember that I previously researched that these sales include foreclosures… And then there also this… The median home price has fallen 9% from a year ago, and is now the lowest prices since April 2004…

Currencies today 10/27/08: A$ .6075, kiwi .5415, C$ .7785, euro 1.2465, sterling 1.5444, Swiss .8650, ISK (no quote), rand 11.12, krone 7.0825, SEK 8.0920, forint 217.68, zloty 3.0620, koruna 19.6850, yen 92.80, baht 34.75, sing 1.51, HKD 7.7505, INR 49.87, China 6.8520, pesos 13.33, BRL 2.2975, dollar index 87.28, Oil $62.66, Silver $9.03, and Gold… $729.45

Source: The Trading Theme Remains In Place

The yen fell over the weekend as investors began moving funds back into the higher yielding currencies of Brazil, Mexico, New Zealand and Australia. I won’t go into the whole explanation of the carry trade again, but suffice it to say that these moves haven’t proven to have much staying power. But I do like the news that the credit markets may be calming down a bit after the government moves to shore up the big international banks.

European Central Bank President Jean-Claude Trichet urged banks to start lending again after policy makers put them “on the path” to recovery. Trichet said in an interview yesterday that the banking system is “on the path to normalization” after governments pumped record amounts of cash into money markets. The three month Libor rate for dollars fell every day last week and this morning we saw another drop in the rate, an indication that the credit markets are continuing to thaw out. “We’re facing a very important market correction which is lasting,” Trichet said, hinting that the credit crisis may be coming to an end.

Today I expect the international markets to focus on Fed Chairman Bernanke’s testimony to the House Budget Committee. While I don’t expect Big Ben to come totally clean on the dire economic situation facing the US, I would expect him to warn Congress that a rebound in US growth won’t happen right away and that losses on mortgage derivatives will continue to impact the credit markets. His pessimistic comments on the economy will likely move the dollar even lower vs. the major currencies as the focus moves back to the US where we are most certainly in a recession.

Chuck was busy this weekend on the road with FXU, but took some time to send me these thoughts to share with all of you:

“A Marvelous Monday to you! I gave a speech on Saturday in Fort Lauderdale, and tried very hard to get people to listen carefully about what I was telling them. And what I was telling them was that the U.S. debt generation is out of control… Then I saw this info that a reader sent along, that played well with my speech from the pulpit…

“From September 30, 2007 to the end of this past fiscal year on September 30, 2008, total federal debt grew by $1.0 trillion, from 9,007,653,372,262.48 to $10,024,724,896,912.49, which is an 11.3% annual rate of growth. The federal debt as of October 16, 2008 is now $10,331,139,000,845.92. So in just 16 days since the end of the last fiscal year, the federal debt has grown by an astounding $331.1 billion, which is a 75.5% annual rate of growth. It has taken just 16 days to borrow one-third of what the government borrowed in all of last year.”

So… The National Debt clock needs to be replaced, because it doesn’t have enough digits to deal with $10 Trillion dollars of debt! So… I thought I would give you two thoughts that I read out loud to the audience in Fort Lauderdale. These come from the book, I.O.U.S.A. by my friends, Addison Wiggin and Kate Incontrerra. The first piece is from Ron Paul… The second from Warren Buffett regarding debt….

Ron Paul: “We can’t afford to pay all these bills, and if we just pay for these bills by printing money, it will destroy the currency – and that will be a much, much more painful reaction than us just tightening our belts and living within our means.”

Warren Buffett: “I do think that piling up more and more and more external debt and having the rest of the world own more and more of the United States may create real political instability down the line and increase the possibility that demagogues come along and do some very foolish things.”

>>>> Now folks, you know me… I have always railed on the U.S. for building up these debts… Budget, National, etc. but after reading the book, and seeing the movie I.O.U.S.A. I have to tell you that what I’ve been fearful of was chickenfeed compared to the information the book and the movie have regarding debt! Put away the sharp objects folks… This stuff is scary… But Real!

So… We can go along now, and the repatriation and LIBOR currency swaps can build up the dollar… But, the way we’re headed, we have no other choice as a country than to allow our currency to devalue so that these debts, and interest on these debts be paid in the future with cheaper dollars!

I just saw that South Korea announced a plan to put $100 Billion toward a guarantee to foreign currency debt and a $30 Billion injection (from FX reserves) (see how nice it is to have reserves?) to the banking sector.

This lit the light bulb over my head! Could this be the key that unlocks the intense demand for dollar funding, which has fueled the dollar rally? (recall, when I told you about this dollar funding on currency swaps because of the out of whack LIBOR?) Well, this is what I’m talking about here… Another good sign last week was the drop, albeit baby step drop, of LIBOR last week… If this can continue, and the banking sector no longer has to go the currency swap market for funding, we could see the dollar lose some of its steam…”

New Zealand officials are working on a plan to guarantee wholesale deposits at the nation’s banks, according to Finance Minister Micheal Cullen. New Zealand last week guaranteed retail deposits to bolster confidence in their financial institutions. These moves by South Korea and NZD follow similar moves by countries across the globe. These guarantees look like they are working, as credit markets have eased a bit and money is moving back into the higher yielding currencies. As risk aversion eases, the currencies of NZD, AUD, BRL, and Mexico will likely benefit. All four of these currencies are up nearly 1% vs. the US$ as a result of these moves.

Producer prices in Australia rose in the third quarter twice as fast as economists expected, which may stoke speculation central bank Governor Glenn Stevens won’t repeat this month’s decision to cut benchmark interest rates. The producer price index advanced 2 percent after rising 1 percent in the second quarter, the Bureau of Statistics said in Sydney today. Traders are still betting on another interest rate cut at the next meeting on Nov. 4, but the size of the cut is now expected to be just 50 basis points compared to the last cut of 100 basis points. The prospects for further aggressive cuts by the central bank has been reduced by the jump in producer inflation. Hopefully the Aussie dollar will continue to climb back up, as we are seeing a lot of support around the .69 level. A further rally in Gold and other commodities would also help the Australian currency.

India’s central bank unexpectedly lowered its key repurchase rate for the first time since 2004 in response to the global credit market turmoil. The Reserve Bank of India cut its overnight lending rate to 8 percent from 9 percent today. The move signals Governor Subbarao sees weaker growth a bigger threat than inflation in Asia’s third largest economy. China’s economic growth slumped to a five year low last quarter and growth in India has been declining also. The Indian rupee is Asia’s third worst performing currency this year, and may fall to a record low of 50 per dollar by year end according to currency strategists at France’s Credit Agricole. A research report predicted the currency, headed for its biggest annual loss in 17 years, is one of the most vulnerable in the region to the falling appetite for risky investments. The currency has continued to fall as investors have pulled out nearly two-thirds of the $17.4 billion they invested in Indian stocks last year.

As mentioned above, China’s economy expanded at the slowest pace in five years as the financial crisis cut demand for exports. But before everyone gets too worried about the shutdown of the Chinese economy, gross domestic product rose 9 percent in the third quarter from a year earlier. Nine percent doesn’t sound like too much of a slowdown to me! And China will continue to cut internal interest rates to keep growth near the current levels. Predictions of an even greater drop in Chinese growth has helped push commodity prices down. If China can continue to grow at near double digit rates, demand for iron ore, copper, and oil will remain strong. Currencies such as the Australian dollar, which depend on commodity exports, will rebound with a rebound in these commodity prices.

Currencies today 10/20/08: A$ .6935, kiwi .6129, C$ .8446, euro 1.3403, sterling 1.7390, Swiss .8781, ISK 260.0, rand 10.10, krone 6.5672, SEK 7.3810, forint 199.61, zloty 2.668, koruna 18.63, yen 101.75, baht 34.28, sing 1.4792, HKD 7.7563, INR 49.01, China 6.8299, pesos 12.8049, BRL 2.106, dollar index 82.52, Oil $73.81, Silver $9.763, and Gold… $798.32

Chris Gaffney

Source: Credit fears ease…

I guess the stock jockeys figured they weren’t going to get any bad news out of the credit markets, which were closed, so no news is good news!! The rally was certainly welcomed, and hopefully some of the gains will stick today as we return to a normal trading environment.

And I guess some of the credit for the stock rally has to go to finance ministers around the globe who finally agreed on a plan which seems to be able to work. The leaders of a majority of the worlds largest economies borrowed a page from Warren Buffet’s playbook and decided to invest directly into some of their largest financial institutions. The Bush administration announced it would invest $125 billion in nine of the biggest US banks. The US move came after France, Germany, Spain, the Netherlands, and Austria committed $1.8 trillion to guarantee interbank loans and take equity stakes in European banks.

The investment represents a new approach for US Treasury Secretary Henry Paulson, who first promoted a bailout targeted at buying up illiquid mortgage-related assets. The government will obtain its stakes by purchasing preferred shares with warrants similar to investments that Berkshire Hathaway Inc. made recently in Goldman Sachs and General Electric. The move could be just what was needed to ‘unfreeze’ the credit markets and restore some liquidity in the markets.

I really think the new president should do all he can to try and convince Warren Buffet to at least take an advisory position in the new administration. Now that we have followed his lead on the $125 billion we should see what he suggests for the rest of the $700 billion ‘rescue’ package. Just think, with his guidance maybe the US taxpayers can come out of this whole episode with a bit of a profit!

The move got the backing of former Federal Reserve Chairman Paul Volcker who said the inevitable recession in the US would be made ‘more manageable’ by the new government plans to invest directly into American banks. The bailout measures were ‘distasteful’ and ‘not consistent with a capitalistic system,’ Volcker said at a lecture in Singapore today. ‘But however distasteful, they are necessary to restore stability to the financial system.’ But Volcker also warned that the global financial system is in ‘intensive care’ and will remain there for a considerable time before things return to normal.

The largest mover in the currency markets yesterday was the Australian dollar which has surged up 12% vs. the US$ since late last week; the biggest two day gain since it began trading freely in 1983. The Australian dollar gained as investor’s confidence was restored and stock markets rallied. Australian Prime minister Kevin Rudd announced a A$10.4 billion spending package aimed at bolstering Australia’s economy, adding to his Oct. 12 pledge to shore up the nation’s banks. These moves by the Prime Minister should provide some support under the Australian dollar which had been falling fast. But the Aussie dollar will likely still be subject to some volatile swings, as investors continue to buy the Aussie dollar on carry trade investments, which have proven to be very erratic.

With investors moving back into carry trades, and some confidence returning to the equity markets, the Japanese yen fell against the higher yeilders. The yen headed for a record decline vs. the Australian dollar, but fell less against the US$. Japan’s currency has become an excellent gauge of risk appetite in the markets, and the currency has risen as investors exited highly leveraged ‘carry trades’ over the past few months. But risk appetite has returned as we have exited the ‘panic mode’ and investors have started to move money back into these leveraged trades.

The Bank of Japan said it will hold an unscheduled monetary policy meeting today to discuss ways to make it easier to add funds to money markets. The bank said yesterday it’s considering offering an unlimited amount of dollars to financial institutions, following a move by European counterparts to provide lenders with as much of the currency as they want to reduce short-term borrowing costs.

This recent flood of US$ into the markets has seemed to stabilize them, but what will it do to inflation in the US? One of the first lessons in Economics is that increasing money supply causes an increase in inflation. The billions or trillions (I can’t keep up with all of the ‘rescue’ packages they keep announcing) of US$ which have been placed into the markets will eventually create a big up tick in inflation. And the huge amount of dollars which are being printed and pumped into the credit system will undoubtedly lead to an erosion of the value of the dollar. Simple supply and demand tells you that if we continue to throw unlimited supplies of US$ into the market, the value of these dollars will decrease in value.

And who is holding most of these dollars? China! China’s foreign-exchange reserves rose to a world record $1.906 trillion at the end of September. Currency holdings rose 32.9% from a year earlier, the People’s Bank of China said on its website yesterday. These reserves have helped to strengthen China’s finances as the credit crisis threatens to trigger a global economic slump. The world’s fourth biggest economy can still expand 10 percent this year and 9 percent in 2009 according to the central bank. Close to $2 trillion in foreign reserves provides China with a strong foundation and more room to adjust policies to enable it to maintain relatively fast growth. The worlds economic engine will continue to purr despite the slowdown in the US and Europe. Internal demand among these fast growing Asian economies will take the place of some of the exports which will undoubtedly slow. I look for the Chinese currency to continue to be a rock solid performer, with no big movements either way.

In an all out effort to ease the credit freeze, the Federal Reserve recruited help from the ECB, Bank of England, and the Swiss central bank to flood the market with US$. These central banks will auction unlimited dollar funds with maturities of seven days, 28 days, and 84 days at a fixed interest rate. This move is unprecedented, as all previous dollar swaps were capped at a maximum amount while these auctions will be for unlimited funds.

Chuck spoke about these dollar swaps a few weeks ago, explaining that these trades partially account for the huge rally in the US$. Central banks around the world are purchasing US$ to lend out to the markets, at the request of the Federal Reserve.

Policy makers from the G-7 pledged this weekend to take “all necessary steps” to stem the markets’ dramatic slide. European leaders agreed to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat after the worst rout in European’s stock markets in two decades. But they didn’t come up with any coordinated measures, other than saying they need to attach the crisis on a unilateral basis.

Chuck had this to say about the G-7 and G-20 weekend meetings:

“The G-7, G-20 meetings didn’t leave the markets much to go on… They issued a communiqué that said, “The will take the necessary steps to stem Global Financial Crisis” I would think that the markets were looking for something with a little more meat to it, don’t you? I doubt the credit markets are going to magically unlock on that communiqué… And so the beat goes on… ”

The Euro rose the most in three weeks against the dollar in early European trading, moving up over 3 cents from Friday’s low of 1.3259. The British pound also advanced against the dollar on speculation the government’s bailout plan will avert a banking collapse. In the near term, the plans give investors confidence that there won’t be further banking failures. In today’s world, everyone is constantly looking for where the next big financial failure will occur, so the European plan to shore up their banks has led to a pretty good rally in the Euro and Pound Sterling.

The Japanese yen, which has been the best currency year to date traded in a rather tight range right around 100 yen per dollar. Some currency research departments are now suggesting that the yen will rally all the way to 95 as investors reverse carry trades. With the global slump in equities, Japanese investors have started selling some of their more than $1.3 trillion in overseas assets to bring money home. Chuck mentioned that he has seen this before, and wanted me to share the following with readers this morning:

“It has been a very tumultuous week, and I just want to make certain that you are aware of this trading pattern that is existing these days… It is Japan circa 1995-1998, when the Japanese stimulus packages and budget junk didn’t work, and the economy was circling the bowl. But… The yen was rallying to 85! It was a repatriation of the offshore investments to bring home to squirrel away and have “under the mattress” in case things get even more bleak…

Sound familiar? That’s what’s going on right now with the dollar… It’s a “the worse things get in the U.S. buy the dollar, and if it looks like Armageddon won’t happen in the U.S. sell the dollar trend… Nothing more, nothing less…”

Two of the biggest movers over the weekend were the high yielding currencies of Brazil, New Zealand, and South African rand. The Brazilian real was the biggest mover, up over 5% vs. the US$ in the past 24 hours. The rebound in stock market overseas has made investors more comfortable with moving money back into the emerging markets. But this rally could be short lived, as the reality of a global recession sinks in and investors continue to de-leverage their positions. At this point I think it is best to take advantage of rallies in the high yielders to exit and reallocate funds into more ’stable’ currencies.

Two which would fit this description are the Norwegian and Swedish currencies which rose against the euro and the dollar on this weekend’s news. But these gains could again prove short lived, as Norway’s central bank is expected to lower interest rates later this week. Norske Bank pushed forward its regular interest-rate meeting from Oct. 29 to Oct. 15. The bank kept borrowing costs on hold last week while Sweden’s Riksbank cut its main rate a half point as part of a coordinated effort by central banks, including the ECB, to revive interbank lending.