Australia Caught Sandbagging Their Currency

Nice scoop on the Australian dollar from our favorite currency analyst, Everbank's Chuck Butler:

And under the heading of "dirty float"... The Reserve Bank of Australia (RBA) is reported to have sold the most A$'s in the month of May, since February 2004! Now, go back to May and recall the move in A$'s... The currency gained almost 10% in the month... So, the A$ would have gained even more if the RBA had not sold A$1.4 Billion A$'s in the month! I personally think the RBA was just trying to smooth out the trading the A$, which given this information would have been moving up the charts with a bullet in May!

I don't think the RBA would get involved if the move was a slow, general appreciation of the currency... So, I don't look for future intervention to keep the A$ from gaining the ground I believe it will gain rest of this year, as inflation fears grow stronger and stronger...

Chuck said it - these types of inverventions never last - at the end of the day, fundamentals always win out.

Based on this info, I went long the Aussie dollar once again yesterday morning (I had closed my position on Monday, on fear the US dollar was due to rally).

Those sandbaggin' sons of bitches won't get away with this!

Also let me make a quick plug for Chuck's company - they offer bank accounts and CD's denominated in foreign currencies. So if you're really hot to trot on the Aussie, you could open up a CD denominated in A$, and earn interest to boot, while the A$ appreciates - potentially a sweet dea. Here's the link to learn more.

Related reading: Australia Avoids a Recession...For Now

Australian Dollar Still Kicking Ass

Monday night, we were fortunate enough to initiate a long position in the Australian dollar.  I took a long, hard look at it before entering the position - on one hand, it had already been rallying strong and was afraid may be due for a pullback.  But the fundamentals and technicals looked too good, so I closed my eyes and hit the Buy button.

And now am glad I did, as the Aussie earlier rallied above the 75-cent mark!  Here's the good word on the latest pop from my favorite currency analyst, Everbank's Chuck Butler:

But the Big Winner of yesterday and last night is the Aussie dollar (A$)... It's on a moon shot, since the Reserve Bank of Australia (RBA) left rates unchanged the night before, and issued a balanced statement afterward, with emphasis on waiting to see the affects of the previous rate cuts. The A$ got an additional boost this morning when it was reported that the unemployment rate in Australia fell for the first time in 8 months! The A$ is 75-cents and change this morning, heading to 76-cents... A 7-month high! 

Is Australia Turning Around?

More good news for Australia's economy - and the Australian dollar.

This builds upon our review yesterday of the Australian dollar's attractive prospects. The A$ is up $0.112 as I write, currently sitting at $0.7163.

From Everbank's Chuck Butler:

Down Under... Australia saw Consumer Confidence rebound for the first time this year... Here's the skinny... The Westpac-Melbourne Institute index of consumer sentiment rose 8.3 per cent to 92.7 points, from 85.6 points in March.

However, the index remains below 100 points, signaling pessimists are outweighing optimists, for the 15th month in a row.

Westpac chief economist Bill Evans said the result was "surprisingly strong" and followed a month of more positive economic news and a rise in the Australian dollar exchange rate and the stock market.

Just another brick in the wall... All in all, it's just another, brick in the wall... OK, what am I talking about here? I'm just infusing some Pink Floyd into my recent thoughts that Australia "may" be turning the corner... I also received a note from a reader that was traveling in Australia. The reader mentioned that they are not seeing the financial panic there... So... Some news from a correspondent on the road!

End to Rate Cuts Could Propel Australian Dollar

Is the Australian Dollar poised to climb again?  EverBank's Chuck Butler believes the Reserve Bank of Australia may be done cutting rates, in anticipation of an economic recovery, and underpin a rally in the Aussie $.

In Chuck's own words:

Yesterday, I told you that the Reserve Bank of Australia (RBA) had cut rates 25 BPS, and the A$ was recovering from the blow of a rate cut, but one that wasn't as big as traders thought... Well, there was more news from the RBA, and their Gov. Mr. Stevens, who said that "the recession in Australia is much milder than those in Europe and the U.S." Hmmm, I think he was preparing to leave the rate cut table, don't you? To me, that's Central Bank parlance for "This is it, no more rate cuts!" Which, if it's the case, the A$ should begin to see some real activity...

Furthermore, any economic strength out of China could also help the Aussie $ as well.

The A$ appears to be consolidating, poised for a potential climb.

Editor's note: Everbank offers CD's in foreign currencies, such as their New World Energy Index CD, which is 1/3 Aussie dollar, 1/3 Canadian dollar, and 1/3 Norwegian Krone.

Yen Falls as Japan Posts First Trade Deficit in 13 Years

Today, Bloomberg reported that the Japanese Yen dropped today against the dollar, euro, and Swiss franc as Japan posted its first trade deficit in 13 years.

“The poor Japanese trade-deficit data are giving further fuel to the idea that Japan, or the yen, is no longer the safe haven as the country’s external position deteriorates,” said Adam Cole, London-based head of global currency strategy at the Royal Bank of Canada.

We continue to follow developments in the Yen as we continue to monitor our short position.

Chuck Butler, my favorite currency analyst, also weighed in this morning on the comments from "Mr. Yen":

I mentioned to Chris Gaffney last week, that I had been seeing more yen selling coming across the trading desk than I had seen in a long time. I said that these people, if they had held it long enough, were probably taking profits. And why not? In this day an age with deflationary pricing pushing most assets downward, when you see a profit, you take it!

The guy known as "Mr. Yen", Sakakibara, told the press last night that he believed yen may rise to a record 70 VS the dollar... WOW! He also said that it would range trade between 100 and 70... He believes that the yen will be afforded the same kind of love the dollar has received since the financial crisis began in the U.S. With Japan posting a large economic contraction last week, Mr. Yen, is of the opinion that it will help the currency gain to 70.

Hmmm... I just don't know about all that... For one, I'm not convinced the flight to safety that has underpinned the dollar with buying of Treasuries, will be duplicated in Japan... And two... The only thing I saw pushing the yen stronger in 2008 was the unwinding of the Carry Trade, which I said had come to end about a month ago. So... There you have it... I don't like yen's chances to go to 70, but do agree that it could hold 100... It's darn close to 99 as I type...

Bank of Japans Ready to Intervene Against the Yen's Rise

Sean Hyman from World Currency Watch says watch out, the Bank of Japan is not one to be reckoned with. They are ready to intervene to stop the Yen's rise - and you don't want to test them.

And our pal and trusted currency advisor, Chuck Butler at the Daily Pfennig, agrees with Sean in his letter today:

And... While I don't want to spend the whole letter today on Japan... I must say that I think we should all be very wary of the BOJ and their history of intervening to keep yen weak. This will be a huge battle between the Carry Trade unwinders and Uridashi Bond sellers VS the BOJ... Just don't get caught up in it... If it happens, stay to the sidelines, you don't want to get caught up in an intervention battle...

Quick Thoughts on The (Very) Latest Black Monday

• So is this column a new Monday tradition?

• If you haven't already, please be a good student of history and review my thoughts from the last Black Monday - they are all still relevant.

• Sure looked like the old Plunge Protection Team was out in full force this afternoon - could we have seen a 1000 point plunge for the Dow if not for the PPT?

• The best place to be right now is cash. We're going to have some great buying opportunities someday, but it's not here yet. Please, protect your capital in the meantime.

• A good friend forwarded me a copy of Dennis Gartman's letter today - Gartman is up 4% on the year, and is feeling pretty good about it, since the S&P is down over 30%. Even Gartman is fearful right now, he has no idea how to trade these markets.

• So much for the bailout calming the markets, eh?

• Finally - an early Christmas present for me - I woke up to find the Yen up $.04 overnight! I promptly sold. I was burned once before for not selling the Yen and Swiss Franc after a gap up, and didn't want to make that mistake again. Could the Yen keep going up? Sure, and I think it probably will. But I also think I'll have a chance to buy it back at slightly cheaper prices.

• Yes, the Yen carry trade unwound in a big way - more forcefully than I ever would have imagined. For a couple of background primers on the carry trade, check out Chuck Butler's previous comments, along with some very prescient commentary from the Times Online back in March.

Chuck Butler: Why the Yen is Still Holding Strong

From today's Daily Pfennig:

I'll tell you why I believe this is happening... So many Japanese investors held Aussie and kiwi (the high yielders) VS their base currency (yen)... And when Commodities started their free fall, these Japanese investors began to close out those positions, which meant they sold Aussie and kiwi, and bought yen...

Even the most recent Belle of the Ball, Brazilian real, has gotten caught up in the Commodities free fall... The real is the weakest it has been in several months this morning... And the other runner up Belle of the Ball, Mexican pesos, have gotten the snot knocked out of it by this dollar move...

So... Japanese yen, is the lone wolf bucking the dollar's rally.

Recent Dollar Strength

The dollar rally continues into the weekend, with two main drivers to thank:

1. The belief that the Fed will raise rates later this year to combat inflation.
2. The belief that the US economy will turn up soon, and the world will again look to the US as a place to invest.

I don't think either of these reasons hold much water. Instead, I'll go with the fact that everyone was short the dollar, so it was due for a rally.

Regarding the belief that the Fed will soon raise rates, I think Chuck Butler said it best in his newsletter this morning:

Listen to me now, and hear me later... THE FED ISN'T GOING TO RAISE RATES! The ECB IS, but the Fed ISN'T! At least not for sometime, THE ISN'T GOING TO RAISE RATES! Did you hear me? Oh, just in case you were busy listening to someone on CNBC tell you that everything is beautiful, I said... THE FED ISN'T GOING TO RAISE RATES!

As for when the economy will turn around - that's a bit tougher. I'm a fan of John Mauldin's point of view that we will experience "Muddle Through" growth over the next several years.

Everyone knows the negatives - skyrocketing oil and commodities, indebted consumers, gov't debt, etc. On the positive side though, when this alternative energy does begin to come online, I believe it will most likely be driven by American entrepreneurs.

It's dangerous to short America - though I think that's still the right trade, at least when this dollar rally is over. But it is likely that different parts of the American economy will experience vastly different fortunes over the next 5-10 years. And don't forget the Midwest - the US is a huge grain exporter, and eventually grain prices will get high enough for our farmers to make a lot of $$$.

Bernanke's Recent Dollar Jawboning

Chuck Butler gives a fantastic rant on Bernanke's recent tough talk in his morning column. Not much too add to Chuck's commentary - nicely done Chuck!

From a trading perspective - I'm trying to pare back all position sizes, and I still can't seem to do it fast enough. Meats have taken a turn down this week, erasing many gains from the previous couple of weeks.

Proceed with caution is all I can say - it looks like this commodity correction is not through yet. Remember oil will probably have to come down from the high 120's. Fundamentally there's no reason for it to be there. Long term, yes, it's going higher. But there's plenty of oil right now - this one really was a speculation run-up, I think.

Dollar, Carry Trade Thoughts from Chuck Butler

A couple of good ones from Chuck in today's Daily Pfennig:

Well... How about that U.S. dollar? That's some currency Rudy! Why, look at it rallying against the euro and other currencies as if it's on a mission from God! It looks as if the U.S. has turned things around... The Deficit no longer needs to be financed with over $2 Billion a day in foreign investment... Interest rates are where they need to be to fight this soaring inflation... The Government has stopped spending wildly, and the Budget is balanced... The mortgage lenders have recovered all of their losses... There is no longer a credit crunch... And finally, the war is the Middle East is over...

But Wait! Unless I pulled a Rip Van Winkle and slept through all of that... These things haven't happened, nor do they look as though they might begin to happen any time soon! So, what the heck has the dollar bulls dancing in the streets swinging a mighty hammer?

And on the carry trades:

The U.S. stock market has been on a feeding frenzy since the rate cut on Wednesday... All this euphoria in stocks has the Carry Trade going great guns once again... This is being reflected in the price of yen and Swiss francs... I just don't see how this can continue to go on and on and on... The Carry Trade has longer lasting power than the Energizer Bunny! But one day, it will all come crashing down like a house of cards... At least that's my opinion...

Chuck Butler on the Swiss Franc

Chuck Butler on the Swiss Franc and potential end of the carry trade, from his must-read currency newsletter, the Daily Pfennig:

Swiss inflation is really putting the pressure on the Swiss National Bank (SNB) to raise interest rates... Inflation in Switzerland accelerated faster than expected in March. In fact, it was the fastest monthly pace in 14 years! OK, get ready for this... Because from that introduction, you would think inflation was out of control here, right? Well... Inflation rose to 2.6%... Nonetheless, this is higher than the SNB's target of 2%... So... Hopefully the SNB will not rely strictly on the stronger franc to combat this rise in inflation... A rate hike in Switzerland could all but end the short selling in francs...

Why you ask? Ahhh grasshopper, sit... You, see... When a low yielding currency is used as the funding currency of the Carry Trade, it is sold "short", and the proceeds are used to purchase a higher yielding currency... Since the "short" currency's yields are low, the borrowing costs are low too... (when you sell short, someone has to lend it to you to sell, thus you are borrowing the currency)... But if the borrowing costs begin rise, that causes the trade to lose... And who wants a "losing" trade?

So... Grasshopper... If Switzerland's interest rates would go higher, their borrowing costs would go higher. This would cause the Carry Trades using Swiss francs as a funding currency to unwind, which means the "short" would get covered, and to cover a short... You BUY the currency! Thus driving the price of Swiss francs higher! YAHOO! That's it... That's all there is!