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All 96 Cent Currencies go to a Dollar
Looking at the FX screen today you have to conclude: The dollar is weak. Oh the pain. How many big names have stuck their heads out and said that the strong dollar bet was the trade of the year.
It is tempting to look at this and conclude:
“The market got way ahead of itself back in June when the
EURDLR broke 1.20. What we are seeing today is slo-mo reversal of all of
those long dollar positions that were put on in the first half of the
year. On a pure comparison basis it is hard to get excited about buying
Euros, it is even less exciting to get long the Yen at these historic
levels. Each area has its own set of problems. Anyone who thinks that
the EU’s problems are behind it is just wrong. We are just having a
pause in the action.”
Alternatively it is quite possible that the issues facing the US will
overwhelm sentiment and position taking. That would be my best guess for
the month of August. Being short Euros might look compelling, but it is
a risky trade.The market is not positioned for that reality
What might the factors be that influence the outcome?
There is not going to be a crisis in the EU for the next 2-3 months.
They have a lid on things. A crisis could evolve in Europe if the bond
markets unravel (again). If spreads widen and CDS is again a topic in
the papers then the dollar would be in demand. But that is unlikely to
happen with the EU defense mechanisms in place. They have mega billions
available to buy bonds. They have been able to contain the crisis with a
modest amount of intervention. Shorting Spanish bonds is no longer a
sure winner. There is a big carry cost to being short. There is two-way
risk. The world is “short” yield today. There seems to be a limitless
demand for fixed income paper. This will pass at some point. But not for
the foreseeable future.
There is a slow motion crisis evolving for the dollar in my view. There
is a lack of viable options for the US. There are a number of possible
outcomes:
A) The Fed and The Administration continue to pour on the gas. (QE-2
from Ben and a hefty $500b spending package AKA “the Krugman” option)
B) We could go to December 1st when the fiscal commission confirms what
we already know (we are about 4-5 years away from an explosion) and a
credible plan is put forward to increase taxes and reduce expenses.
C) We do essentially nothing on monetary or fiscal policy.
If we get A it will surely be bad for the dollar across the board. It
would imply that there would be a financial penalty for owning dollars;
our deficit would rise to over 10% of GDP. Where’s the beef for owning
the buck in that scenario?
If we get B it will be in the form of, “We are going to tighten
our belts, but not now. It would aggravate unemployment so we are going
to get serious about our budget, but not until 2013.” Kiss of death for the dollar.
Some form of C is most likely. We continue with ZIRP as we now know it
(with minor tweakage). No major new fiscal approaches are undertaken.
The benefits of the 09 ARRA stimulus will fade. Some taxes will be
raised. Dividends, capital gains and incomes over $250,000 will be taxed
at higher levels. On paper the deficits will look smaller as a result
(6-7% at best). But this will kill the economy. In this scenario
long-term growth will fall to sub 1%. As that happens the deficits will
explode on their own. Who wants dollars if this happens?
The FX markets rule the roost. Central banks can only watch and hope
that things turn out as they wish. The Japanese and Swiss CBs tried to
contain the fx market. They failed. In the midst of the EU chaos the ECB
did not intervene. They knew their presence would just have attracted
more sellers. It has been quite a few years now that the Fed has stuck
its toes in the intervention waters. But that does not mean we should
ignore what the CBs and Treasury types are signaling. I see evidence
that the major European countries are moving in a direction that would
be friendly to their currencies. The US is going down a decidedly
different path. According to the WSJ’s Jon Hilsenrath, QE-2 (Lite) will
be announced next week. He gets his thoughts straight from Ben B., so
the cards are being dealt.
Bernanke has a Bloomberg. He knows exactly where the EURDLR is trading.
He is whooping for joy today. He wants a weak dollar more than anyone in
the world. He is praying for inflation at this point. A weaker dollar
is very helpful in achieving that. So when you weigh the sides of this,
and if you’re looking to place a bet, always keep in mind that there is
no one who has a hand on the levers that wants a strong dollar. They all
want it weak.
We are seeing this play out already. Look at crude. Why is it breaking
out? I think the dollar is driving it. I ask the question, What possible benefit could this bring to the US economy?
Inventory profits for big oil is a good plan? Lining the pockets of
those we import oil from helps America? But it will make inflation go
up, and headline inflation is what the Fed wants to see. We’ll just be
poorer as a result.
The line “All 96 cent currencies go to par” was a
reference to the Swiss Franc. It is currently worth 96.25 cents
(1.0389). In my many years of watching this silliness I have observed
that most things that get to 96 do go to 100. We shall see.
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I think a nice, big Yen melt-up is in the cards:
Yen/Dollar (stockcharts.com may require membership)
http://stockcharts.com/h-sc/ui?s=$XJY:$USD&p=M&st=1980-01-01&en=(today)&id=p26579836264&a=181133547&listNum=2
Why would europe want a strong euro? Look at german and european manufacturing PMI now, compared to say in 2007 when the euro was at 1.6. The Europeans only had 6 months of weak currency and the market is ready to overlook the cooking of national accounts in Greece and Portugal, forget all the doom's day talk about Euro's breakup etc etc. This is proof that weak euro is good for europe (and bad for US net exports). I would think the 2 central banks have an agreement to play ping pong to divert attention from a synchronous global loss of confidence in fiat, rather than Europeans wanting a strong euro and americans wanting a weak dollar. In six months time, I bet we will have another article talking about a weak euro here, maybe from same author.
I don't know Bruce, after that seriously useles batch of statistics the dollar started to move, AUD, EUR etc got pretty severely hit before the plunge bots stepped in. I'm not sure the risk on/risk off trade is dead.
All $1200/ounce metals go to $2000.
Au bitchez
Another stimulating article, Bruce. You really pack the content into as few words as possible! I'm wondering if the idea of trying to get inflation by having oil rise won't just cause more deflation. I read for instance that an oil rise to $100 would break the back of the economy. Result of an increase in the price of oil would simply cause more businesses to close, more would-be consumers to lose their jobs and thus more depression. Bernanke et al must be getting desperate but they can't win, no matter what. I think Europe is doing better because the Germans are showing leadership, saying no to naked shorting, etc. They are trying to deal with accounting shenanigans and financial abuses, whereas the US continues to believe that deception works best.
Things also seem about ready to explode in the ME, so geopolitics may render the three choices moot in the near future. JMHO Mind you I don't have a PhD in ponzinomics.
I believe that is the point guys, buy as much stuff as you can, currensea, gold, real estate, and make as much as you can. Just dont get caught holding the bag EVER in anything, so no its not boring, just informative and not spun.
global real debt= 100 trillion [no casino derivatives]
present amount in cash= 6 trillion
Annual average increase 10%
If there is sudden deleveraging there will be a scramble for cash aka 2008-09
Extend and pretend - No surprises is the game
everything will be in a seesaw range for years to come!
Zero hedgers should start doing something else coz this is getting really boring now!
Mish and Prechter say strong dollar, Schiff says dollar in the tank.
I say it's just a trading vehicle Dude. Buy it, sell it, who cares. Just jump in and out, make a few pips, and go home.
I like your view.
Am doing just that. GBP did well for me last week.
Bruce,
I don't think the US belt will ever be tightened. A globalized economy needs liquidity, and the USD must provide it. This is just a hunch: Gold buys currencies the way dollars buy groceries, and like all money it wants the most of the thing it can get.
Bernanke wants inflation? He'll get it in spades when the oil price rockets up to $200/bbl. Don't think it will happen? Then I suggest that you pull your head out of the sand, or crawl out from under the rock you are living under.
Canuck buck hits .98 to the USD, market falls down. Am I the only one watching this?
It seems like it to me, too.
No offense to Bruce and his opinion, it just feels like no one here bothers to look at a H4 chart, much less a W1. Ebbs and tides and flows and that...it's all there.
The USD is basing for a massive ramp against the JPY, while the EUR and GBP skyrocket on the fumes coming off the rotting corpses of their real estate banks. The Ozzie Dollar is just now stepping on the lift- only a "lift" is a misnomer in this case.
When you scratch your head about that situation, it becomes apparent that these machinations in the FX market are being designed and re-aligned on a daily basis by people with some gigantic money.
The dollar index is getting to the bottom of its preferred range, between 79 and 88. It must be flip-flop time! Get ready to get really long USDJPY while the GBPUSD and the EURUSD trade in a range for the next few months (years...). It'll even out the DXY and give the Japanese some breathing room for their export economy. HMC. It's what's for dinner.
Everybody give it up for the Japanese! They really took one for the team this time!
})
USDJPY maybe. A satelite dependent on the sea lanes of the {financially challenged}empire? I think EURUSD may run for a while. They have energy and they export things people want to buy. BMW can not produce fast enough. At some point - 2 years? I believe a 2-tier Euro will appear.
But I don't trade FX.
I thought this thread was about the CADUSD before opening it up. Luckily i suppose the 'all prices go to par' thesis can be applied here as well..
Well done Bruce, well done.
Bennie Ben wants a weak doelarr, yes, so as to pay the creditors back skiddley winks. The name of the game right there folks. And, now that we are descending head long into peak oil production, it will cast a smoke screen as no one will be able to interpret its price. Gold too.
<Ahem>
The Doelarr is dead!
My old friend Mr Lennon
I agree with you about Bruce's writings, always an excellent and worthwhile read.
...
Going to join us in line at the ATMs on Thursday August 12 to pull out $500?
You guys in other countries should join the party and pull dough out of the machines too! Looks like everyone in a "dollar" country will get the same $500!
...
At this point I am near 7% in gold. I just want a little more...
I can't play. Who has money in a bank?
currentseas...
"nothing from nothing leaves nothing, you gotta have something, if ya wanna be with me"
old song, but so true
....in the long or short run, US Currensea will not amount to anything anymore, because it came from something, that no longer exist.
Fx trading is just Central Bank see-sawing. One fiat is in trouble......see saw another fiat to keep things cool and keep the lie going. The EU problems will return when the dollar is hammered to the point of society torching banks. It is the only way to extend and pretend.
True that.
The dollar is simply tracing out a fractal equivalent drop of what happened in summer 2008. Don't discount the number of bad debts still priced in dollars and held by European banks and the ECB. It will take a lot more than QE lite to counteract this.
I see the dollar going vertical here shortly.
it is oversold in my view......wave 3 up for the dollar ready to commence. i'll agree with you that the dollar is going vertical.....it might even rocket.
Hey, whats good boss? Don't post that much any more, right?
And all dollars go to par. Currently CAD=97.7, AUD=91.4, SGD=74.1, NZD=73.5. Tick tick tick.
The rising euro is more rope for the EU economy neck..
Why is it that everyone assumes that if taxes on the rich go up it'll kill the economy? This really mystifies me.
The Bush tax cuts preceded the biggest crash in everything since the great depression. Maybe we SHOULD try to do the opposite and increase top marginal taxes.
Do higher marginal tax rates stifle the economy? Well, let's see . . . income tax was raised on the rich in the early '90s. The tech boom that followed isn't great evidence that the rich or anybody else was stifled. Taxes on the rich were then lowered by Bush in the early 2000's and economic chaos followed.
Looking back further, in the '80s, supposedly the decade of greed, when the rich were making oodles, the maximum income tax rate was 50 percent. Then in 1988 congress lowered the max rate to 28 percent . . . within two years we were in the recession of 90-92. The max rate went up to 39 percent in 93 and you know what happened . . .
So what about the '50s, that spectacular bull market. Taxes must have been lower then, right? No . . . the top marginal tax rate in 1950 was 91 percent for income of over $200k!
Interestingly, during the late '60s and the '70s, when the bears were out, marginal tax rates on the rich were lower than the 50s -- although the top rate was still 70%.
So where to folks get the idea that raising taxes on the rich will hurt the economy? Well, maybe they're thinking of the last time top marginal tax rates on the rich were as low as 25%. That would be 1929-1931 :-P
I get my stats from here: http://www.taxfoundation.org/publications/show/151.html
Let me get this straight: By increasing taxes on the rich the $1.5 trillion deficit can be substantially reduced? Somehow I have a hard time believing that. I do think, however, that Panama and Guatamala would be very much obliged.
Wow, nothing has changed since then, its all the same, go back to where ever you are getting paid to post here and stfu.
"So where to folks get the idea that raising taxes on the rich will hurt the economy?"
ROTFL...define rich. Give me a dollar figure.
"From each according to his ability, to each according to his need."
Communism is discriminatory at it's very soul isn't it?
It would be cool if it applied to opportunity ... and financing.
I find it extraordinary that we now live in a country where a couple filing a joint tax return of 250k can be deemed as rich.
Long gone are the days when a only a millionaire was considered rich.
Why at this rate of lowered expectations, lowered opportunities and lowered IQ's emerging from the behind the walls of our institutions of "higher" education, some pointy headed nerd will say making 50k is rich very soon.
Who is to blame for this lowered bar could be a thread all to it's self.
I can assure you of one thing however. Those making just under any arbitrary definition of rich are watching these events and are planning accordingly.
http://www.mint.com/blog/trends/who-is-paying-taxes/?display=wide
It's not that the $250k mark is set as a high-water mark for the rich. It's that there's no marginal increase above that.
In the 1950s, 200k was the highest bracket, and was taxed at 91 percent. Inflation adjusted, that would be around $3 million per year. Is that enough money to be considered "rich"?
But no more -- the tax man now treats the rich way better than the middle class. No additional payroll tax, minimal capital gains tax, and tons of sweet exemptions.
So my link went right over your head huh? Not surprised.
Almost half of Americans pay zero taxes...as in zilch. I would further postulate that that percentage of Americans consumes more governmental services than the top & middle without paying in a dime.
So what happens when the middle & "rich" do a laydown on their sorry asses? We're about to find out.
Because when the government gets money they waste it. They pay double for half as much. They use it for bribes/payoffs/pork. When wealthy (if you call $250,000 wealthy) spend it theirselves they purchase things they want from people who are competing for the business. Ingenuity and good service is rewarded instead of back-rubbing.
*Yay thanks for the easy captcha, I didn't even need a calculator this time!
No, they are assuming that, per Laffer's article in the WSJ, higher taxes on the rich yield less than nothing in revenue but hamper real investment and GDP growth. During the 1930s, real investment was negative virtually every year. Why would someone intelligent invest scarce capital in a country where most of the profits, if any, would go to the government(s)?
Because the marginal profit goes to the investors and there are no better choices. But, that is simply stating the obvious.
"Why would someone intelligent invest scarce capital in a country where most of the profits, if any, would go to the government(s)?"
well the fact is that the rich WILL INVEST their money ANYWAY regardless of what the tax rate is (generally speaking). The rich just like to bitch and moan over any extra expense they have to pay...and no problem with that as I AM NO DIFFERENT...but really the raising of taxes just means complaining IMO.
"Why would someone intelligent invest scarce capital in a country where most of the profits, if any, would go to the government(s)?"
a) I never assume intelligence when discussing human behavior and b) Europe somehow manages.
Just playing devil's advocate here.
I believe Cheeky Bastard called the Euro reversal months ago. If memory serves, he claimed he would never post here again if he were wrong (I recall because I forwarded his comment on to a few buddies as I thought it uncannily insightful). Kudos CB, well played.
RR
shut up
would believe in weak dollar talk when I see a weak dollar accompany tanking global markets. until then its a haven currency. but when this really happens because that will be the true moment of reckoning for US economy.
I don't think that a weak dollar will help unless it is weak enough to convince companies that they are better off manufacturing here or it is cheap enough that foreign countries buy more here than we buy from them.
Otherwise all it does is make it more expensive to live here and people will consume less because they can afford less.
Unless the tipping point can be reached, it seems to hurt more than it helps.
Exactly.
If "the economy improves" from a weaker dollar it will simply mean more jobs for Chinese manufacturing.