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! 

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.

Upcoming Rally for the Norwegian Krone?

Everbank's Chuck Butler highlights the reasons he foresees a possible rally in the Norwegian Krone on the horizon in today's Daily Pfennig:

I had a great lunch yesterday with the Big Boss, Frank Trotter, and we were discussing what we would talk about next week at the Orlando Money Show. I told Frank that I really believe in the prospects of a nice big rally in Norwegian krone... Let me tell you why... First and foremost, it remains a Surplus country... A positive balance of payments... And that surplus has allowed Norway to weather the storm that's hit just about every other country in the world... See, why I believe the Surplus countries should always be considered when buying currencies? Anyway... The main reason it lost ground from last July's levels is the drop in Oil prices... They like the other types of Commodity driven currencies like Aussie, Canada, Brazil, New Zealand, South Africa, just got hammered due to the selling in Commodities... But... You know my outlook for the inflation in this country, and that will be driving Commodity prices higher by year-end... But the leader in the forefront of all this move will, in my opinion, be Oil prices... And IF Oil prices rebound like I suspect they will, that will be a very nice underpin for Norwegian krone...

Chuck's currency insights are often quite prescient, and he doesn't always come out flatly and say what he likes to rally soon in the Pfennig, so this is worth noting.

If you're looking for a place to make this trade - your not alone - my futures broker doesn't offer this contract either. One good option to consider is a foreign currency account with Everbank.

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...

Why the Yen and Dollar are Rallying

Here's the best explanation I've read yet - courtesy of Everbank's Chris Gaffney - in today's Daily Pfennig:

These investors had to sell some of their higher yielding assets to make up for the losses, and a move toward deleveraging started to emerge. As these first investors sold these assets, their price dropped, forcing still others to sell. The credit crisis, and the lockup of the credit markets was a final straw in the leveraged carry trades. Even investors who wanted to stay in the trades could no longer get the loans to keep these trades alive. They were forced to deleverage, selling their investments to pay back the loans.

So the benefactors of this deleveraging of the financial system? The Japanese yen and the US$, currencies which were used to funds these carry trades. The US and Japan have some of the worlds largest banks, and extremely low interest rates making them the perfect funding currencies for the carry trades. As the deleveraging has occurred, investors have purchased back these currencies to pay back loans.

Read the rest of Chris' excellent explanation here.

Daily Pfennig: Dollar Slide to Continue, Interest Rates to Rise

Chris Gaffney of the Daily Pfennig writes this morning:

"The situation here is bad and seems to be getting worse. The major question remains: Who will be standing in line to purchase all of this debt? And what happens to the dollar if/when foreign investors decide they have enough IOUs from the US Treasury and need to be enticed to purchase more. The result will be higher rates here in the US as fewer buyers will demand higher interest to encourage them to purchase the new debt. Another way for the US to entice foreign investors is to lower the value of the US$ in order to make these new Treasury securities cheaper to purchase. I believe we will likely see a combination of the two, higher rates along with a falling US$."

Chris and Chuck at the Daily Pfennig are about as sharp as they come - I follow these guys closely, they are usually right on the mark. Sometimes early into a trend, but usually on the correct side.

China Discovers Credit Cards

Oh man - if you thought the US could create a credit bubble, you ain't seen nothing yet.

The always entertaining Mogambo Guru of the Daily Reckoning comments that an increase in Chinese citizen credit card usage "is also in line with government goals."

This is a country that saves a huge percentage of their income, and has very little debt, so there is no shortage of dry powder raring to go. These people are not going to give up the amazing progress they've achieved over the past 5-10 years.

No matter what fate awaits the US, the commodity bull market is alive and well.

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.

A (Short Term) Bubble in Oil?

Let's look at a few opinions I've heard over the last couple of days:

• Chuck Butler at the Daily Pfennig believes at least 20% of the current price is speculation driven

• Jeff Clark at The Growth Stock Wire thinks it's time to sell oil stocks now

• T. Boone Pickens (video posted yesterday) says demand is 87 million barrels per day, while the world can only produce 85 million of barrels per day - something has to give, and that's the price, he says

What does everyone think? Does anyone have the onions to short oil right now? Or is that like shorting Yahoo in 1998?

Futures traders going long US Dollar

Chuck Butler mentioned yesterday in the Daily Pfennig that, for the first time since 2005, Futures Traders are going long the US Dollar. 2005, you'll remember, was the year of the dollar's counter rally in this downtrend.

Nothing goes straight up or down, so we'll see if this is the start of some sort of dead cat bounce for the US dollar. Be careful and consider this when making your trades.

I should follow some of my own advice - I snuck back into the Japanese Yen Sunday night, and snuck back out Monday morning, taking my usual haircut on the Yen. It's getting to be a bit of a joke, even around here, as I was walking around the house cursing the Yen - even my wife yelled at me "Stop trading the Yen, all you do is lose money! Stick to commodities!"

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...

Daily Pfennig: Blue Light Specials on Yen, Swiss Franc

Currency guru Chuck Butler at the Daily Pfennig has been waiving the flag for the Swissie and Yen for some time, long before their recent moves up.

He loves them at today's prices:

Swiss francs are back to parity with the dollar, and even beyond! Japanese yen is flirting with a sub-100 figure too! I believe the term, "blue light specials" was used by someone (me!) a couple of weeks ago describing the cheaper levels to buy these currencies... I love it when a plan comes together!

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!