3% Bullish Sentiment on Dollar – Indication of a Coming Dollar Rally

August 13, 2009 · Posted in Monetary Economics · Comment

Please consider this interview with Robert Prechter:

James Kostohryz recently wrote on Minyanville.com:

3. Dollar to rally.
As I predicted in my article, 9 Post-Earnings Season Predictions, the US dollar is likely to experience a major rally over the course of the next year or so. As I have explained in several of my articles, the US Dollar is the most fundamentally sound of all of the major currencies in the world, and this basic fact will become increasingly evident in the next 12 months as problems in Europe and Asia begin to deepen.

Technically a bottom in the dollar seems to be lining up with the transition in the above-mentioned fundamentals. Although I am not a follower of Elliot Wave Theory I would note that Robert Prechter has come out recently predicting a major bottom for the dollar based on his wave theory.

Aside from the wave count, he has also cited the incredible statistic that the Dollar Sentiment Index is registering only 3% bulls, one of the lowest readings in 20 years. Note that in March of 2008 when the dollar bottomed, the Dollar Sentiment Index registered 5% bulls. This compares to a reading of 93% bulls in March of 2009 when the dollar topped.

Thus, technical and fundamental factors are converging in favor of the US Dollar. Gold will slump in response to a rising dollar for 2 reasons: The first is that the US dollar collapse thesis has been a major underpinning for gold and this thesis will become thoroughly discredited. The second is that a rising dollar means that gold becomes more expensive in the rest of the world and the vast majority of the world’s demand for gold is outside of the US.

I agree with his bullishness on the dollar. I don’t necessarily agree with his conclusions on gold. I think gold may actually do OK during a dollar rally. Maybe it will drop a little, maybe rise a little, but it will most definitely outstrip other commodities. In fact, I think a smarter play when betting on a dollar rally would be to short any other commodity BUT gold.

Gold is a money commodity. A dollar rally would be a sign of further delevaraging and deflation. During deflation cash is king. And gold is the king of all cash.

Tags: dollar, gold, us dollar

US Dollar Looks Bullish Fundamentally & Technically

August 2, 2009 · Posted in Investing · Comment

Mish writes Ewave Count on the US Dollar Suggests Move Up is Coming:

US Dollar Weekly Chart

I have been following the above chart for some time and a few weeks ago emailed a friend “There is room for one more wave down”. And so here we are.

But hold your horses. Wave 5’s can truncate or extend. That is why I have two “?” on the chart. Either way, the count appears corrective and there should be another relatively strong wave (of some sort) back up once wave 5 down has finished.

Right now, should the weekly candle continue up and solidly break the trendline, it would be suggestive that wave 5 is over.

This is very significant given the fact that the US$ is typically inversely correlated with the S&P 500 as well as commodities. So rather than focusing on the S&P 500 “jello” counts directly, one is likely better off following the US$.

Bear in mind, the primary focus of technical analysis in general is not predictive capability, but rather to find spots where one can initiate a trade with a stop loss relatively close by. In that regard, the solid trendline above is the place to watch.

Daneric’s Elliott Waves

I am not the only one to come up with that US dollar count. Dan at Daneric’s Elliott Waves sent me the same, but far more detailed, count a few days ago (click on above link to see).

Since then I have been following his site and I can easily say he knows far more about Ewave than I do. What I really like are his “no nonsense” comments such as:

PS – I don’t really pay attention to what EWI has as a $ count. This chart I just made up tonight completely on my own. It seemed easy enough to count and the chart generally took less than 30 minutes to complete.

PSS – There is a great positive divergence on the RSI. So indeed it may turn back up hard soon enough. Its hard to say exactly how the micro waves will trace over the next month. But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume.The trouble most people get into with Ewave is coming up with a thesis, then struggling to find a count that will fit it. Given Ewave is rather subjective, that is an easy trap to fall into.

Daneric said “the chart generally took less than 30 minutes to complete”.

That is the way it should be. I do not want to spend 4 hours plotting alternatives when all they do is say where we have been, not where we are going, only to be subjected to a barrage of 200 emails all telling me why my count is wrong.

By the way, it only took me 5 minutes to do my chart but then again I only labeled a portion of the chart, a practice I do not recommend because it can cause problems.

Please note Daneric’s comment “But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume.”

That is quite consistent with my long-term belief the US dollar is in a wide trading range and is not about to collapse (because it already has and every county is embarking on beggar-thy-neighbor competitive currency debasement policies).

The key is neither one of us is forcing a count to appease that belief.

I wrote about the fundamentals recently in China Pegging Yuan to US Dollar Again:

From June 1995 through the beginning of 2005, the Chinese government was pegging its Currency to the US Dollar. It was producing money (Yuans) to purchase Dollars, fostering a US current account deficit.

In 2005 the Chinese government ended the peg against the US dollar and switched over to a currency basket. From 2005 though June 2008, the value of one Dollar dropped from RMB 8.28 in 2005 to about RMB 6.83 by June 2008.

Since then, it seems, the fall of the dollar has stopped and the Yuan/Dollar exchange rate remained suspiciously stable. This has gone on through right now. The chart below illustrates this:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

Tags: dollar, us dollar

China Pegging Yuan to Dollar Again?

July 3, 2009 · Posted in General Economics · 1 Comment

From June 1995 through the beginning of 2005, the Chinese government was pegging its Currency to the US Dollar. It was producing money (Yuans) to purchase Dollars, fostering a US current account deficit.

In 2005 the Chinese government ended the peg against the US dollar and switched over to a currency basket. From 2005 though June 2008, the value of one Dollar dropped from RMB 8.28 in 2005 to about RMB 6.83 by June 2008.

Since then, it seems, the fall of the dollar has stopped and the Yuan/Dollar exchange rate remained suspiciously stable. This has gone on through right now. The chart below illustrates this:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

Tags: currency, dollar, yuan

Unbelievable Export Contraction in Japan

February 25, 2009 · Posted in Global Economics · Comment

Bloomberg writes Japan Exports Plummet 45.7%, Deficit Widens to Record:

Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo.

Shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent.

Imports fell 31.7 percent from a year earlier. The drop in exports was in line with economists’ estimates. Analysts predicted a 1.2 trillion yen trade deficit.

Yen Relief

The yen fell to 96.91 per dollar as of 12:28 p.m. in Tokyo from 96.72 before the report. The currency is at the lowest level against the dollar in three months as the weakening economy reduces its allure as a haven.

The yen’s 23 percent gain against the dollar in 2008 eroded the value of exporters’ overseas sales, exacerbating losses at companies including Nissan Motor Corp. and Toyota Motor Corp. The exchange rate has also made Japanese exporters less competitive than their rivals in South Korea, where the won’s 16 percent drop this year has helped to shield earnings of companies including Hyundai Motor Co.

Still, the Japanese currency has weakened 7.2 percent this month, offering some relief to exporters while indicating investors’ growing pessimism about the economic outlook.

“People are coming to realize that Japan is in deep trouble,” said Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. “Considering what’s happening on the export side, and the implications that has for the domestic economy, the yen is clearly not a buy.”

Falling Stocks

Japanese stocks touched a 26-year low yesterday and the government is considering buying shares to support equity prices, the Nikkei newspaper reported today, without saying where it got the information. The Nikkei 225 Stock Average has lost 17 percent of its value this year. It rose 1.6 percent in morning trading.

The world’s second-largest economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and analysts predict the slump will drag into next fiscal year. Japan may shrink a record 4 percent in the year starting April 1, according to economists surveyed. The worst contraction to date was fiscal 1998’s 1.5 percent drop.

Japan became more reliant on exports for growth in the past decade, making the economy more vulnerable to the global recession. Manufacturers shipped 21 percent of their goods abroad in 2008, up from 16 percent in 1998, according to the Bank of Japan.

Production Cuts

Companies cut production an unprecedented 9.8 percent in December from a month earlier and the jobless rate climbed the most in 41 years to 4.4 percent. Economists predict a report on Feb. 27 will show factory output dropped 10 percent in January.

Nissan said this month it will fire 20,000 workers and post its first loss in nine years as the global car demand plunges. Toyota, which is forecasting its first operating loss in seven decades, will halve production in the current quarter versus the same period last year.

Central bank Governor Masaaki Shirakawa said last week that the economy will remain in a “severe” state next quarter and companies will struggle to obtain financing as investors shun risk. The bank, which lowered the key overnight lending rate to 0.1 percent in December, last week said it will buy corporate bonds for the first time to stem the credit squeeze.

The government has been unable to pass a stimulus package that could help encourage domestic spending in the absence of export demand. Prime Minister Taro Aso is struggling to get approval from the opposition-controlled upper house to spend 10 trillion yen to aid companies and households, whose sentiment is near a record low.

The Japanese government is actually buying stocks on the stock market outright in order to keep stocks expensive. This is nothing but sheer insanity. In addition the Japanese central bank is buying up corporate bonds. Japan has learned absolutely nothing from their own crisis.

All this, plus this incredible export contraction, is certainly a harbinger of a substantial and ongoing Dollar rally against the Yen.

A contraction of Japanese and Chinese exports to the US is of course direly needed to restore global balance. Ongoing large current account surpluses and deficits are simply unsustainable. The source of this problem is the credit expansion policy in the US as explained in The US Current Account Deficit. Everything I said in there about China applies to Japan minus the currency peg.

Tags: dollar, exports, japan, yen

Geithner Committed to a Strong Dollar

January 22, 2009 · Posted in Monetary Economics · Comments Off

Aspiring Secretary Treasury Timothy Geithner says he is in favor of a strong Dollar:

WASHINGTON (Reuters) – Treasury Secretary-designate Timothy Geithner on Thursday said a strong dollar is in the United States’ interest and that President Barack Obama believes China is manipulating its currency.

“A strong dollar is in America’s national interest,” Geithner said, reiterating the long-standing U.S. currency policy mantra in answer to written questions from members of the Senate Finance Committee.

“Maintaining confidence in the long-term strength of the United States economy and the stability of the U.S. financial system is good for America as well as our trading and investing partners,” Geithner said.

In the financial markets, the dollar trimmed losses versus the yen and U.S. Treasury bonds fell in price after the comment criticizing foreign exchange policies in China, who is the biggest holder of U.S. Treasury debt.

The Senate committee, which is scheduled to consider Geithner’s nomination starting at 10 a.m. after holding a hearing with him on the issue on Wednesday, released 102 pages of written questions to the nominee and his answers.

“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Geithner said in his written response. “President Obama has pledged as president to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices.”

While China’s currency would be an important topic in U.S. discussions with China, “given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the U.S,” the Treasury nominee said.

He noted that while in the Senate Obama co-sponsored “tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.”

“The question is how and when to broach the subject in order to do more good than harm. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment,” he said.

“More generally, the best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate the disadvantages of doing so outweigh the benefits,” he said.

Geithner also said Treasury had no current plans to request additional bailout money beyond the existing $700 billion already authorized, but said the situation was “dynamic” and required careful monitoring.

“We have to be prepared to act flexibly and with speed if conditions worsen appreciably, to devote more resources if that is necessary to secure our objectives, and we have to make it clear that we will continue to act until we have restored the strength and vitality of the U.S. financial system,” he said.

We shall see if Geithner’s commitment to a strong Dollar is just idle talk or serious conviction. He needs to realize that in the long run he has to look to Ben Bernanke’s Federal Reserve Board of Governors to stop the rampant increase of the money supply. He needs to make sure the banks mark their assets to market value. More debt consolidation across the board without government interference will strengthen the Dollar significantly. Either way, this commitment, along with the steps Obama has taken to boost confidence in government, plus the ongoing deleveraging and scandals in Emerging markets, is likely to continue giving the dollar a short to mid-term boost.

If this administration seriously wants to keep throwing money at failed banks, then the remaining $350 billion TARP money will not suffice by any means. So there are two options: The administration pledges an unconditioal abandonment of the disastrous bank interventionism performed by the previous administration (in which case Geithner won’t need any more money), or they continue down the failed Bush/Paulson/Bernanke plan (in which case there is no end in sight for additional billion Dollar bailout bills in Congress).

It is refreshing that our President actually considers global economic forces and talks about what is going on with China and the currency market. For more accurate information on that read The U.S. Current Account Deficit.

Tags: dollar, geithner

Satyam Profits Inflated

January 7, 2009 · Posted in General Economics · Comment

Reuters writes India’s Satyam chief resigns, says profits inflated:

The chairman of India’s embattled Satyam Computer Services (Bombay:SATY.BO – News) resigned on Wednesday and said the company’s profits had been inflated over the last several years, sending the stock down 60 percent.

The shocking revelation comes after India’s fourth-largest outsourcer’s botched attempt last month to buy two construction firms in which the company’s founders held stakes and key customer World Bank dropping its ties with the outsourcing company.

“The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years,” Satyam Chairman Ramalinga Raju said in a statement to stock exchanges on Wednesday.

Satyam’s woes make it one of India’s most high-profile company scandals in recent years. The comments from Satyam sent Indian equity markets in a tailspin, with Bombay’s main benchmark index (Bombay:^BSESN – News) falling 3.9 percent.

Satyam, which specializes in business software and back-office services for clients such as General Electric (NYSE:GE – News), and Nestle (VTX:NESN.VX – News), was due to hold a board meeting on January 10 to consider a buyback following a rash of broker downgrades even after the acquisitions were called off.

“I think there is no future for this stock. This case for India is similar to what happened to Enron in the U.S.,” said Jigar Shah, senior vice-president at Kim Eng Securities.

“It will not stop at Satyam. Many more companies will come into scrutiny like that. There is a strong possibility investments in India will be affected.”

I would add to that that most likely many companies from all sorts of emerging markets will come under more scrutiny and investments there will be affected. This might give the recent technical dollar correction, which appeared to be over last week, yet another boost for a few more weeks.

Tags: dollar, emerging markets, satyam

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