Tuesday, March 3, 2009

Dollar Breaking Out to New High…

Below is an article talking about the dollar rising as the men down under have an economy that’s running into a little impotency in the growth department – as in their economy is shrinking. What they need is stimulis – and now a word from our sponsor:

Stimulis: Because all economies have performance issues:

- certain side effects, including lack of response to stimulis may occur if economy over stimulated for periods exceeding 8 years. Should displacia lasting longer than a decade occur, please consult an economist who understands math and ignore everyone trained in the ways of Freidman or Keynes.

So how do the Aussies affect the U.S. dollar if their currency is not a part of the dollar basket?

The U.S. dollar is weighted against six other currencies:

These six currencies represent 20 countries, 15 of which comprise the countries within the Euro. Over the past few years the Aussies, along with Iceland as the most notable, kept their interest rates artificially high to attract foreign capital via the carry trades. As deleveraging has occurred, those carry trades have unwound, adversely impacting the carry trade destinations (carry trade is simply borrowing money in a country at a low interest rate and “carrying” it to a country with a high interest rate to profit from the differential). Now, with their economy shrinking, the Reserve Bank of Australia just decided to keep interest rates relatively high. That is now perceived as putting their economy at further risk and thus money is scared and flees into the dollar – thus the dollar goes up even though Australia is not in the dollar currency basket.
Dollar Gains as Investors Seek Refuge After Australia GDP Data

By Theresa Barraclough and Ron Harui

March 4 (Bloomberg) -- The dollar rose to the highest level in almost four months against the euro after a government report showed Australia’s economy unexpectedly shrank last quarter, boosting demand for the U.S. currency as a refuge.

The greenback climbed versus all 16 most-active currencies as Australia’s gross domestic product contracted 0.5 percent in the fourth quarter from the previous three months, compared with economists’ estimates for 0.2 percent growth. The Dollar Index rose to the strongest since April 2006 on speculation Federal Reserve officials today will reiterate the need to expand aid to the banking system.

“We’re going to go back to the theme of heightened risk aversion,” said Emmanuel Ng, an economist at Oversea-Chinese Banking Corp. in Singapore. “This favors the dollar.”

The dollar climbed to $1.2495 per euro as of 11:35 a.m. in Tokyo from $1.2561 late in New York yesterday. It reached $1.2457, the highest since Nov. 21. The greenback rose to 98.49 yen from 98.16 yen. The currency appreciated to $1.4026 from $1.4050 against the British pound and advanced to 1.1811 Swiss francs from 1.1760.

The yen strengthened to 123.03 per euro from 123.31. Japan’s currency rose 0.6 percent to 15.71314 versus South Korea’s won and advanced 0.5 percent to 62.29 against Australia’s dollar from late in New York yesterday.

The Dollar Index, which the ICE uses to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, rose as much as 0.8 percent to 89.624 as investors sought shelter in the world’s reserve currency.

Australia’s GDP ‘Sobering’
Australia’s fourth-quarter GDP figures are “sobering,” Treasurer Wayne Swan said today in Canberra after the report. The Reserve Bank of Australia kept the benchmark interest rate at 3.25 percent yesterday, after cutting rates by four percentage points since September.

The U.S. currency advanced for a fourth day against the euro on speculation Dallas Fed President Richard Fisher and Atlanta Fed President Dennis Lockhart will today reiterate the need to increase financial assistance to the banking system.

Fed Chairman Ben S. Bernanke said yesterday in testimony prepared for the Senate Budget Committee that policy makers may have to expand aid to banks beyond the $700 billion already approved and take other measures even at the cost of soaring fiscal deficits.

“Bernanke is telling the public that the Fed and the government will act to support the banking system, which is a support for the U.S. dollar,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, a unit of France’s Credit Agricole SA. “Stronger initiatives by the U.S. will be the driving force of currency markets.”

Dallas Fed’s Fisher speaks at 8 a.m. in Fort Worth, Texas and Atlanta Fed’s Lockhart speaks at 12 p.m. in Miami, Florida.

Japanese Politics
Gains in the yen may be limited after an aide to Japan’s opposition leader was arrested in a funding probe, signaling further political turmoil in the nation.

The senior aide to Ichiro Ozawa, head of the Democratic Party of Japan, was arrested on suspicion of receiving illegal political donations from a construction company, local media reported yesterday. “I did absolutely nothing illegal,” Ozawa told reporters today in Tokyo, vowing to stay on as leader.

“There is still instability in Japanese politics,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG. “This may increase foreign investors’ negative perception of Japan. The yen is likely to be sold” to 98.70 against the dollar and 124 per euro today, he said.

Japan’s currency had its worst month in February since 1995 after a government report showed the world’s second-largest economy shrank the most since 1974 last quarter and Finance Minister Shoichi Nakagawa quit amid accusations he was drunk at a press conference, eroding confidence in the government.
Below is a daily TOS chart with the horizontal red lines showing the previous dollar futures (/DX) peak close and pin high. Note that today during trading hours we broke that pin high, and that after hours we have been trading above it:

Here is an interesting chart, it’s a 3 year dollar chart with the SPX behind it showing how the dollar/ stock market relationship has changed over the past 3 years. Note that as the market was peaking in late 2006 and in 2007, that it was being propped up by a falling dollar. It is quite obvious that had the dollar not been falling, then the stock market would have. Well, in fact in real terms it was. Now that deleveraging and the flight to safety trade are raising the dollar, equities are suffering:

Here is a 6 month dollar chart showing the recent relationship and today’s break out higher:

Below is the Point and Figure chart of the dollar showing a bullish breakout today with a preliminary target that’s all the way up at 112:

As you can see from the charts above, equities suffer when the dollar rises. Even though Bernanke and company have the dollar creation going strong, there is a shortage of dollars as deleveraging occurs. Dollars are needed to pay down debt that is denominated in dollars as most of the world’s debt is.

If that 112 dollar target is reached, equities are going to be down, as in way down under. This is, quite frankly, yet another piece of technical evidence showing that the disastrous pennant targets are in play (sub 300 on the S&P).

With their economy slowing, the men at work in the land Down Under have their work cut out for them and what goes on Down Under affects the entire world in this age of interconnectedness.

Men at Work – The Land Down Under: