Tag Archives: meltdown

Currency Conundrum: Where Do You Hide?

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The big currency story of last week was the dollar meltdown, taking the dear old greenback (or the wicked insignia of imperialism, take your pick) down from over 83 to under 80 on the USDX (dollar index – an index measuring the dollar’s strength against a basket of currencies). Everything strengthened against the dollar – pound, yen, loonie, aussie, kiwi, rupee, gold, silver..

And only a few weeks ago we were within striking distance of 90. When will I ever learn not to try and pick tops? My perfectionism gets in the way of money-making. I seem to want to  be a soothsayer rather than rich.

But weeping aside, we saw this same sort of slide last year, only in spades. The dollar sank almost to 70 in March 2008, a move unequaled since the USDX began. After that, it resurrected itself, near miraculously, and continued treading water for the rest of the year. I’d hoped dollar-holders would see 90 plus. But 89 was as high as we got and then went back into the upper 70s, a 12.17% drop (11/21/08). Right now, we’re roughly at -8.9% (approx 10 points down from 89.6%), with the momentum to the downside still strong.

Last week’s swan-dive has the sweaty, knuckle-whitening smell of 2008 all over it. Chuck Butler of Everbank cautions against chasing the move, but who wouldn’t be tempted to have a go? The momentum is there, the fundamentals are there, the news supports both – so says the ever insightful Kathy Lien at GFT Forex.

The next crisis will be in currencies, points out Jim Rogers, rather redundantly.

But even he confesses to being baffled over where to hide.

The big driver behind all this is a statement by Bill Gross, Pimco’s manager, that the US could see a downgrade in its credit rating.

This struck me as rather odd. Especially, seeing as how dear old Pimpco was the charity child of the Fannie and Freddie group-hug from the government.

I wonder…I cogitate…I roll my eyes….

After all, the credit rating agencies (S&P, Moody’s Fitch’s) were talking about the UK heading for a ratings downgrade, not the US. They didn’t say anything about the US. And the UK’s debt -to-GDP is worse than ours (it’s near 100% GDP). Correction June2, 2009): I should clarify that I’m referring to public debt as a ratio to Gross Domestic Product, and checking the figures, I think I got this wrong. Will repost the figures.

Who the heck is listening to these ratings racketeers anyway? Weren’t they the same folks who put gold stars on some of the stinkiest pieces of manure being sold on the market?

Hmmm. What have we here? Could it be a little PR stunt? A little one-downmanship among friends to make a bit of pocket-change all around? A little game of push-the-buck- over-the 200-day- MA-cliff?

On the other hand, forgetting my cynicism for the moment, there are lots of real reasons for this weakness, besides trial balloon-floating from Mr. Gross, the main ones being the bounce in the stock market and the relatively smaller size of the quantitative easing in the Eurozone.

Add to that a thin trading day, which exaggerates any move, and the anticipation of the long weekend…

Market Up and Dollar Down

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The dollar is at the low end of its trading zone (roughly 81-82 on the low end and 84 on the high) and likely to be under pressure this week.

The general idea is that risk appetite has returned, following some supposedly good data.

One is an improvement in sentiment among builders.

Another is the news that apparently banks have raised about $48 billion out of  the $78 billion needed to get through the downturn.

But it’s my view that the dollar holding up was not about risk aversion as such, although it probably included a component of it.  (Actually, recently,  you can’t really say it has shown any strength – it’s been struggling bravely).  The dollar’s rally was about deleveraging – which is not the same thing at all. Investors might think that sentiment is getting better but that doesn’t mean that positions don’t still have to be unwound and debts paid back.

But right now, it’s a giddy party again. The Indian Sensex went up 17% in one minute on May 18 on the unexpected news that the incumbent Congress party and the liberalizing PM Manmohan Singh had been reelected. But notice that the spike also involved some hasty short-covering. And it was helped by Sri Lanka declaring that the 25 year war with the rebel (or terrorist, depending on your persepctive) Tamil Tigers was officially over. The Sensex led the world financial bounce with an upsurge of 48%.

We’ll see how that goes.

Meanwhile, injecting some unseemly gloom into the festivities, Jim Rogers tells us that the next meltdown will be in currencies.

I notice that the COT (Commitment of Traders) report shows net long positions in the dollar are at their lowest since 2008. That usually signals a reversal of trend, but expect further pressure in the short-term.