at around 81.80. But they were a no show and we closed NY much lower at
81.40. In hindsight I missed a big factor in the equation. The talk of
currency wars has elevated in every capital. The IMF is urging
restraint. With that as a backdrop, if the BoJ were to have supported
the flagging dollar, it would have meant more global bad press for
Japan. So they sucked it up and did nothing.
Japan is getting hit from both sides. The weak dollar scares them to
death but China's dollar peg will kill them. It amazes me to see how the
economic fate of nations is being played out in the currency market. It
is even more amazing that all of the key players are attempting to rig
the game.
There are so many cross currents that I am not sure what comes next.
Taken by itself the absence of the BoJ this week says USDJPY has to go
lower. If I had to guess what’s in store I would say volatility is going
up. The mark to market loss from the 9/15 $25b of intervention is now
over $800mm. Of course that is chump change. The number to look at is
the whole dollar book of 800b. They are down $66b on that just since
August. They gave up 8.4%, or about four years worth of interest in less
than three months. I wonder if anyone even notices?
The rest of the action was not of significance to me. It does not
surprise me that the Euro traded over 1.40 and Sterling north of 1.60
for a good part of the week. After all, that’s what Uncle Ben wants. It
also does not surprise me that they closed below those levels in NY.
They both look a bit peaked.
The winner of the week was Aussie. The market conclusion, “The dollar
stinks, the Euro is a trap over 1.40 and then Yen is setting up as a
colossal short in a few big figures, so I want to own the AUD.” Completely logical in an illogical world.
The EURCHF is hiding in the woods. At 1.3400 it looks like a better
short than a long. The problem is the number of the big positions and
how they move. When the Euro is strong against the dollar the EURCHF
will also have a steady bid. The Swiss don’t really care where the
dollar rate is. But looking at the NY close of USDCHF .9590 you have to
wonder how many folks from the US are going to St. Moritz this winter.
The China story will drive FX markets for a bit longer. There are only three possible outcomes:
#1- China continues what it has been doing. Fractionally increasing the CNY against the dollar and telling the world to, "drop dead".
#2 - China signals that it is willing to accelerate the process of CNY
revaluation. The new “assumed rate of appreciation” is satisfactory to
the US, Japan and the EU.
#3 - China does a one shot revaluation of the CNY by 7%. After doing so it tells the rest of the world, “Okay, we did our part, now drop dead”.
#1 means that the “currency war” talk stays in the headline. By itself I
see that as a weak dollar environment. Pure economics says that an
overvalued CNY puts pressure on the US current A/C. So that is a logical
reason to be $ bearish. I don’t think economics has much to do with it
in the short run. Market sentiment is more important. To me the China
story is just uncertainty that weighs on the dollar. The US is
beating on its largest foreign creditor with a very big stick. And they
don’t like it. It’s not hard to think of scenarios where this could end
badly.
#2 is a possible outcome. It is a middle of the road approach. It would ease the tensions for awhile. But they will resurface.
#3 would seem a long shot. It is the opposite of what China Inc. has
been saying. Yet it has some appeal. It would shut down the opposition
from Japan, US and EU for at least 18 months. The IMF would hail China.
For its part China will have locked in a very favorable exchange rate
for the next few years. In addition, everyone in China becomes a little
“richer” overnight, and that would not be so bad either.
I would see #2 as being dollar neutral to slightly positive. I see #3 as
being dollar bullish. I don’t think #3 is the long shot that it is
perceived to be. It might be the preferred option given that one result
would be China’s ability to say once and for all, “Now drop dead”.
An interesting story during the week that maybe China might be buying up
some gold with their bountiful reserves. The story made sense and was
good for $20+ on the gold price. China is getting next to no interest on
its reserves and the policy makers behind all those reserves are doing
their level best to reduce the purchasing power of what China is
holding. One can’t blame China for wanting to own something that was not
so hostile.
The numbers don’t add up for me however. China is sitting on $2.65T
(worth) of financial assets. They can’t buy gold for any reasonable
percentage of that big number. The biggest holder of gold is still the
USA with 8,000+ tones. That comes to $400b. That is still only 1/8th of
the Chinese cash hoard. I make this comparison to show that China can’t
diversify any meaningful amount of its reserves into gold. They would
overwhelm supply with even a modest effort to diversify. The price
action in gold would undermine the dollar and that would not be in
China’s interest. But, on the other hand, if your really wanted to say, “Drop dead” this would be a good way to say it.
No it wasn't and in spite of all those here who are giving you a pass, how many will believe your next call?
When i look at all the predictions on this and other boards, I realize that I am no better off than I am betting on red or black at the roulette table.
For each of us finding a guru or the Buddha is a personal journey and in the end after all the brain power applied to analysis, it is only as ephemeral as tossing a coin to choose whether to buy or sell.
Give me a fucking break. I have been calling this market right for weeks. If you followed my advice you would be on the way to Disney Land.
Never mind the "nattering nabobs of negativism"! Yes, by and large you have been pretty close, considering the manipulated, correlated apologies for markets you're working with.
OT, I really do think late last week & early this week have signs of being a turning point. Today should prove it out.
I'm also being taught a valuable and painful lesson courtesy of the USD/JPY pair.
There have been a lot words but no action from the BOJ and the Japanese government over the last couple of weeks.
'We are watching the FX markets closely'
'We will take decisive action if necessary' etc..
They have either given up intervention as a bad job or they are waiting for speculator max pain before they put the smackdown.
Dollar has been bottoming and rising slowly since about Friday. Yen is expensive & heavily overbought. The concern over QE2 is overdone and should die down - assuming no more public Fed or other central printer announcements. Banks & CRE sold off late last week and long bond yields actually ROSE.
Let's try shorting the Yen for a time starting today. It's a good bet to work for a couple hundred $ in a day, maybe two, and if the trend runs away it could be the trade of the week, or two...
Foreign currency reserves do not exist in a vacuum. It helps to figure out where they came from. In China's case, it comes from providing Chinese companies with a market for their dollars earned from exporting products in USD terms of trade.
Another way of looking at foreign currency reserves for countries like that (China and other countries where the currency is not convertible) is that they are the not yet repatriated profits of a positive trade balance.
Look at China over the longer-term and you start to understand China has a forward trade balance which is quite possibly negative. China's key competitive edge is low labor cost, extremely large scale of manufacturing, and existing logistics to get product from one place to another (India has extensive, cheap labor, but it does not have the scale of manufacturing, or the logistical infrastructure in place to be a major product exporter, and building it will take a long time).
Chinese workers are anxious to be paid more (raising costs so China is not nearly as attractive a manufacturing base). The demographic nightmare that is China will mean that growth in worker base is negative. And worldwide growth among emerging economies reaching the "industrialized" level means that global marginal demand for base commodities (oil, coal, iron ore, etc) outstrips Chinese demand and China has to compete to consume these (raising imports).
When that happens, the foreign currency reserves currently in place will lead to outflow, and people will wonder why everyone didn't see it.
"It amazes me to see how the economic fate of nations is being played out in the currency market."
This will continue until the those play HAARPs, listen to hydrogen fusion dance music, get down with BIOFUn, and diddle themselves with NanoTech Nasties get the losing hand. After that, those without such sweet play toys will find themselves having fallen head first off the swing in in the playground.
Don't suppose you would care to translate that to useful information, decoded, wouldja?
/
This whole 'market', if the fucking thing can even be called a market anymore given the gross distortion of price discovery as a result of continued inteventions by the perverse rulers is probably better described as something more like mindfux on top of mindfucking on top of layers of psychobullshit played by the players on one another while at the same time perpetually fucking the ass off of the Main St class as a sideshow with the assisatance of the paid for and subverted political class.
It must thave been reported here - where else - about Wall St projecting bonus payouts for this year approximating $160 billion???
If the banks took record bonuses the first time around with QE to save the world what are the odds the banks will be/are taking again and probably more this time and the time afte that too.
Dow gonna break 11,200 or not?
Anyone who can admit to being wrong freely and openly is deserving of respect in my book.
Bruce, i've lived in very urban settings most my life. i like that its life lived on street level instead of the indoors-car-indoors suburban way. when you walk around instead of just drive by you can't help but notice all the graffiti. its quite universal. in lisbon the road to the airport has 2-3 miles or so of street art on 10 foot walls on either side of the highway.
very cool that you've been ending ze articles with such pics. i've been enjoying them.
The US owns 8000 + tons of gold? You can't be serious!
If you're taking more pain than you want to take from Japanese interventions or the lack thereof, then in my opinon it's not because you miscalled them, it's because you're overleveraged, or trading too often, or just overly emotional about short-term movements. Unless you have insider info, or you've discovered the secret chartology alchemy that turns micro-wiggles into gold, then just jump on a horse that you believe in and hang on until you see the finish line. I still think the yen's got some distance left to run.
The China question as I see it is to what extent it will be displaced out of the Treasuries market by QE2, and how it will adjust. Especially if the scale of QE2 turns out to be at the bigger end of the predicted range, China could be practically squeezed out of the Treasuries market, which for China would mean being squeezed out of dollar assets, as there really is no other dollar asset that China is comfortable buying in large amounts.
The only other options I can think of are agencies, but net issuance of those is negative, or depositing cash dollars at a Chinese bank, which could keep them 100% reserved at its US branch and thus earning 25 bips from the Fed. I wonder if any foreign central banks are already doing this as an alternative to short-term Treasuries, and if that might help explain the c. $300b of reserves held by US branches of foreign banks.
Of course, any substantial reduction of China's dollar asset purchases is dollar bearish, whether it's achieved through revaluation or by switching to buying other currency assets. But the market has already priced in a good amount of expected QE2-driven repulsion from dollar assets.
tom,
Your first sentence is important to anyone and you can replace the underlying with anything out there. Thanks for being a voice of reason.
"If you're taking more pain than you want to take from Japanese interventions or the lack thereof, then in my opinon it's not because you miscalled them, it's because you're overleveraged, or trading too often, or just overly emotional about short-term movements. Unless you have insider info, or you've discovered the secret chartology alchemy that turns micro-wiggles into gold, then just jump on a horse that you believe in and hang on until you see the finish line. I still think the yen's got some distance left to run."
Great points & wld have to agree that my own positions fall into 1 or more of those categories. Still holding on though!
GLD. buy it, option it, go "long" it.
GLD, and SLV are both missing vowels.
BuLLioN is what you want.
You don't hold it, you don't own it.
Get Physical.
and hope the dollar will still be worth something when you are taking out profits
I feel the pain. I was betting... hoping... (which then turned into praying...) the BOJ would intervene. Didnt turn out to be much of a trading strategy... lol!
I like option #3, especially your 7% number, as it is less than the recent falls in the $/euro and $/yen. This dovetails nicely with what I have been hearing from FX desks in Tokyo, which is that China is a firm bid every time the BOJ wants to sell yen. BOJ had to have learned its lesson after the first two attempts.
So, dollar falls approximately 13% vs. both euro and yen over the last few months, and China can say, "See, we're trying" by letting the yuan climb 7% vs. the dollar. Thus, the market that represents 175% of China's trade surplus, is still within reach, maybe even more so. I don't know whether it's a J-curve effect or not, but both total imports and the total deficit with China has been increasing every month since February, and in number terms, what the BOJ sold to intervene represents about a month's worth of China exports to the US.
Seasonal factors should keep pushing the dollar lower now until the start of 2011.
http://www.seasonalcharts.com/classic_usdindex.html
Corporate tax effects I believe....even if QE2 expectations roll off at the start of November this effect will kick back in during December.
Would appreciate any comments?
With your gold estimate and the estimate that $4 billion could buy all of the silver in the world today(above ground) China will take the hit on the dollar because when the dollar collapses to such an extent where people lose faith $4 billion in silver and $400 billion in gold will buy a lot more than $404 billion of tangible assets when the fiats collapse . Supposedly there are only 4 oz. of silver per person in the world and an olympic swimming pool full of gold . No you tie that to a new commoditybasket based currency and that shit becomes ...well like better than gold(as it is currently valued) - Get as much as you can Bruce because in my playbook there is a number 4 everybody just keeps debasing the shit out of their currency until one is totally worthless and the rest fall like dominoes because after all it is just paper .
B2A5DE8E-17C4-29EB-4B06-4C8A89D4ED7D 1.02.28that order of magnitude between, in this case, china's foreign reserves and the value of the (putative) u.s. gold reserves (supposedly the biggest hoard going) caught my eye as well. jesse's cafe has an interesting bar graph of the value of gold and gold stocks (not sure of the treatment of etf's and derivatives generally in it) as a percentage of world assets. gold, etc. varied between 20% and 30% from 1921 to 1981 (from four observations). 2009? south of 1%.
You are one of the good guys Mr. Krasting.
I hear ya, Bruce.
At least you have the guts to come out and say you missed one. We all have, of course. Just keep swinging, stay in the game!
Charts
The USD has bottomed against the EUR and JPY. It's not just China that would like to see a stronger dollar; the BRICs and emerging markets in general want this. They've had it with America's attempt to export inflation and attempt to reduce the US national debt this way.. The price action may see greater volatility as we approach the G-20 meeting in November when we may well hear a discussion of a new currency regime. Buckle up.
http://www.zerohedge.com/forum/99er-charts
http://www.telegraph.co.uk/finance/comment/liamhalligan/8068335/Chinas-n...
Why was the possible list of things to do devoid of any suggestion that the U.S. devalue the dollar overtly rather than through QE? That's the most reasonable solution and therefore has a probability or realization that is immesurably close to zero. After all Pickering, how would all the politicians explain their support of globalization and the destruction of the US manufacturing base if they were forced to do that?
There is an economic war still going on over Western economic capitulation and the terms of our surrender to the East.
Looks like it's going to devolve into 'every man for himself' and be chaotic.
Ya win some, ya lose some. Thanks for telling it like it is.
China, as America's absentee landlord, at some point's just gonna serve an eviction notice. A proverbial fuck you. Like maybe take every single last unit of dollar denominated reserves and buy up every single originator of factor inputs that they can get their hands on world wide.
Sit back and say please, devalue your currency, raise prices, and be the beneficiary thereof...
Let's face it front and center. China is not the source of the global miasma, they are the scapegoat. And very possibly the worst one to have selected.
Landlord in a wheelchair.
i reckon they've been buying cotton, by the looks of the price. And sugar. Why would they not be stockpiling all physical assets as a portion of their creditor 'balance sheet'? Have they any policy limitations? Is this where 'central banking' (hedge fund style) may be heading?
Hey knukles. welcome back. haven't seen you post for awhile. always enjoy reading your whimseys.
wishful thinking.... they don't have the balls to do it.
Only because it would devastate to the two economies. Probably the world's economies. (If you're an Austrian it's brief, and healthy and better in the long run, but that's not the framework they're operating under.) At some point in the future they might take a look around at where all this pseudo-Keynesian Monetarist printing has gotten us, thoughtfully consider the value of their reserves dwindling away at the zero bound while Western politicians flap pathetically about fiscal and monetary judiciousness and think, "Fuck it. Dump it all."
China and the US are joined at the hip. When the US gets sucked under, China will follow.
it is a rather "odd coupling" i must say. its "decoupling" could involve "Americans in Korea" however.
How about if China just told US retailers "We now want all our invoices to be paid in gold". That would do the trick.
It could happen, and then the US could ask for gold as payment for USTs.
Then us gold-holders could finally spend it on something. Real money!...and chicks for free.
To Bruce K.,
Thanks for the post!
Such is the bizarro, backwards ass mentality of the marketplace. Nobody is immune from a off prediction from time to time Bruce. There are days all logic is rendered useless. Appreciate the articles nonetheless.