Currencies Recover from Friday Sell Off

The Daily Reckoning

Front and center on the currencies this morning, we have the fears of a default in Dubai, fading, and that brings the risk takers back out… So, we had one day of bloodletting on Friday, and come Monday, the tourniquet had been applied, and things are back on track. The Big Dog, euro (EUR) is off the porch, chasing the dollar down the street once again, and is trading at 1.5050, as I begin to write this morning.

I had a long time customer send me a note on Friday, asking me about the selling going on in the currencies and commodities because of the news that Dubai World was asking for help with their loans… I replied that the research I had read led me to believe that this would fade, in that the ruling families of Dubai and Abu Dhabi have bloodlines, and even though they had feuded in the past, blood would run thick, and the country would step in to help with the loans, which would mean a return to dollar selling once it all got straightened out… WOW!

This morning, there is news that the UAE will back the banks and the loans, so… It’s a “risk on” day once again!

After the Treasury auctions of last week, and a supposed “good covering,” the end result is that we have this pile of debt, and Treasury yields very reminiscent of something right out of the time warp of Eisenhower! But! Here’s the thing that US Treasury Secretary Geithner is hanging is hat on… These low yields reduce the interest expense for the US. Yes, Timothy, that my be true… But when you are issuing the amount of debt that’s on your plate to issue, then the “net” reduction to interest expense is a fallacy. Go ahead, do the math, Timothy… I dare you!

Can you believe that tomorrow is December 1st? WOW! Let the Holidays begin! But what comes to us on December 1st? That’s right, it’s the Reserve Bank of Australia (RBA) meeting. I’ve pinned my colors to the mast of another rate hike by the RBA tomorrow, and by the looks of it, Traders are beginning to pin their colors to that same mast! The reason I say that is the performance of the Aussie dollar (AUD) overnight. The Aussie dollar has a 91-cent handle this morning, which is far better than that 0.8998 figure that Mike reported on Friday morning!

Before I headed home on Wednesday last week, gold had pushed to a $25 gain in one day! WOW! I thought, “Can’t wait to see what the price looks like on Monday when I return!” But the Dubai loan problems took the wind out of gold’s sails, and the shiny metal lost $25 on Friday! UGH! Oh well, it gives buyers the opportunity to buy more at a cheaper level, I thought to myself… Then I thought… You should go check out what your good friend Addison Wiggin has to say about gold… So I did!

Addison Wiggin in the Friday issue of The Daily Reckoning wrote, “Gold is on track for its best monthly performance in a decade. The money metal reached $1,180 earlier this week, another all-time high.

“There’s buzz that India, which bought 200 metric tons of gold from the International Monetary Fund earlier this month, might well buy the rest of the 203.3 metric tons the IMF has put up for sale.”

Then we had gold aficionado, James Turk, talking about gold… “Don’t be misled by what you may hear or read in the mainstream media, and even much of the alternative media.

“After all, how many commentators have correctly identified gold’s bull market, now a decade old?” Or for that matter, how many correctly identified the tech bubble in the ’90s or the housing bubble this decade?

“Gold has moved from apathy and neglect – stage-one characteristics – to growing attention. But importantly, instead of embracing gold and analyzing it to determine relative value, today’s attention is one of widespread disbelief and skepticism that gold can climb higher. These are exactly the responses one should expect to emanate from stage two.”

Great stuff from Addison Wiggin and James Turk, eh? I mean, gold continues to be in strong demand… And why not?

I was sent a note by a reader last week regarding Brazil and the real (BRL)… The sender asked me if the government’s plans to keep the real above 1.70 would hurt the real’s chances of getting stronger versus the dollar? Well… I guess it depends on how badly the government wants to fight to keep the real above 1.70… I mean it wasn’t that long ago, that the government and central bank said that they would do everything they could to keep the real above 2! (Real is a European style currency which means as the number gets smaller, the stronger the currency gets versus the dollar.)

So… Given the government’s and central bank’s performance in their failed attempt to keep the real above 2… One would have to think that this announcement would only be good for a few days, and when nothing comes of it (like intervention), traders will get back to the business at hand, which is marking the real stronger versus the dollar! Now… That’s my opinion, but it’s based on facts of the previous statement by the government and central bank!

The Brazilian government did try a 2% tax on capital flows… But, that did little to stop the real’s rise versus the dollar… So now we wait-n-see what the government has in store for the markets and traders next…

So… I hear that European Central Bankers, Trichet and Junker, tried their best to persuade Chinese officials to allow greater flexibility in their currency, the renminbi (CNY)… But… Their efforts fell on deaf ears, much like the efforts of US lawmakers, Treasury Secretaries, and the President. These guys must like to travel to China, because they never get anywhere with their efforts to get the renminbi to float.

I saw/read a story on the Bloomie this morning regarding Swiss francs (CHF) following the lead of the Aussie dollar and outperforming the rest of G-10 currencies. Francs this morning are so close to parity they can tell parity what flavor gum they are chewing! HA!

For years, when people thought of safe havens, they thought of Swiss francs. Through the years, especially since the euro came to be, the franc’s safe haven status has faded… But apparently not by much! For instance, Iran announced this past weekend that they would start 10 new uranium enrichment locations. (Which is sort of like them rubbing the global community’s nose in it, right?) And… The franc bumps up higher versus the dollar… So… Apparently, francs haven’t lost all of their power of providing a safe haven, when things in the world look scary.

Gold is also a “safe haven” destination for many investors… And as I tell people when I’m out on the road… With all the nutcakes out there, shooting missiles, ramping up nuclear capabilities, attacking ships, running up deficits, and so on, there hasn’t been a better time to seek a safe haven, like gold…

Well… The Bloomie is reporting this morning, that while there were tons of “shoppers” out in force this past weekend to start the Christmas shopping season, there wasn’t a lot of “sales”… Hmmm… That doesn’t bode well for retailers, but, hey! They’ve still got time to cut prices even more!

OK… The data cupboard gets restocked to the brim this week, and among the data prints we’ll see the ISM (Manufacturing Index), Pending Home Sales, The Fed Beige Book, and others… But the real meat in this burger comes to us on Friday, when not only will we be moving our offices to our new digs next door, but… It will be a Jobs Jamboree Friday, when we get a look at the latest sex, lies and videotape by the Bureau of Labor Statistics (BLS)!

Canada will print their third quarter GDP this morning… And while there are boatloads of naysayers about Canada’s ability to exit their recession, I’m not one of them. I believe that Canada will join the club of countries that have exited their respective recessions…

To recap… The Dubai loan problems of Friday have not gone away, but seem to have been more of an “overreaction” by the markets, due to the UAE’s Central Bank announcing that they would provide liquidity at 50bp above the local three-month benchmark rate and that it “stands behind” local and foreign banks. Let’s hope that’s the case, eh? And the non-dollar currencies have rebounded from Friday’s sell off.

Currencies Recover from Friday Sell Off originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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