Riksbank Hikes Rates!
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In This Issue.

* Dollar rallies back!

* Riksbank talks dovish.

* Home Sales jump 10%!

* Debunking the currency wars.

And Now... Today's Pfennig!

Riksbank Hikes Rates!

Good day... And a Terrific Tuesday to you! Well, the excitement from Saturday night's Missouri Tigers win, hadn't faded yesterday, as some of my colleagues went to the game and had great stories about the crowds, etc. And then the game was replayed last night! I sure hope the team isn't as giddy about the win as I am, for they have Big Bad Nebraska this weekend.

Well. the dollar selling that we saw going on yesterday morning in reaction to the G-20 pledge that each respective G-20 country would avoid devaluing their currency to help exports. (But, isn't that what the U.S. has been doing for the last 8 years?) , where was I going with this? Oh yeah! The dollar selling we saw, dissipated as the day went on. Apparently, the U.S. traders didn't like the G-20 results! HA! No. for some unknown reason, U.S. traders are thinking that the FOMC will not implement the size of QE that the markets had anticipated ($1 Trillion). As if, any amount of QE is good! UGH! So. why are the U.S. traders thinking this way, when the foreign markets traders and me, believe the amount of the QE will be larger than $1 Trillion? Hmmm. You don't think that they received a memo on Gov't letterhead telling them to "play the game with us"? Nah, I guess not, that's just my conspiracy blood flowing to the brain! I really don't have an answer for you on why here in the U.S. traders are buying dollars. Seems like a layup to me. But then, you've got this call of the so-called "currency wars" still hanging over the currencies like the Sword of Damocles.

So, the lofty levels of currencies we saw yesterday morning, have been wiped out, but let's not get scared or panicked for we've seen these short-term bouts of dollar bias so many times in the past 2 years, that you would need an HP to calculate how many times we've seen them! So. I guess the G-20 leaders will come back to the table on Nov. 11-12 to discuss the trade imbalances. I have to wonder just how much progress can be made in this area, and if G-20 is hanging their hat here, then they don't have a chance!

You see. I think that people think that weaker currencies can correct the U.S.'s Trade Deficit. The U.S. wants and needs a cheaper dollar, but not to correct its Trade Deficit. They need the cheaper dollar to allow them to pay back deficits or interest on those debts. You see, in this country, we have higher wages built in to every product that we manufacture. And so, the dollar could get 20% weaker than it already is, and the affect on the Trade Deficit would be minimal. The Chinese have tried to tell our leaders that for a few years now, but the markets are listening, and neither are the lawmakers, for they keep barking at China. Having China increase the value of their currency against the dollar, isn't going to make a dent in the trade imbalances, and if it did for some miraculous reason, then there will be another low-cost producer that doesn't have higher wages built in to their products, take China's place, and the U.S. Trade Deficit would not change. The only thing that would change is "who we owe".

Brazil's Finance Minister, Mantega, the guy that started this whole "currency wars" business, said the "reaction of the real to steps aimed at tempering its gains has been "good" and that the moves could be scaled back should the dollar and yuan (renminbi) strengthen." This Mantega guy has been stirring the currency drink for almost a year now. First trying to water down the rate hike forecasts for his country. (The Central Bank did raise rates by 6% this past year) Then announcing that he would intervene to stem real's rise, and then announcing a tax on bond investments by foreigners. I can tell you this, Mr. Mantega isn't on MY Christmas Card list!

Speaking of China, (above) I've had some thoughts lately about the relationship of the renminbi and the Hong Kong dollar (honkers). Long time readers may recall, or maybe not, that I've long said that since China took over Hong Kong, that the Chinese would allow the honker to float first, see how it all works, and then allow the renminbi to float. with the two eventually merging, since both would be free floating, and tradable, there would be no need for two currencies. I still believe this to be the course of action. The honker is still pegged to the dollar, and that peg needs to be dropped first. I would suspect that by 2012, we see this happening.

Speaking of 2012. have you seen that movie? Great special affects, eh? You gotta believe that 2012 isn't the end of the world, eh?

OK. Sweden's Riksbank did raise rates last night, 25 BPS or 1/4% to 1%... But instead of rallying, the krona sold off. Why, I hear you asking? Well, once again the Riksbank, just like they did the last time they hiked rates, came out afterward and said that it "won't need to raise its repo rate as much as it previously estimated in the coming years because of weak developments overseas." Hmmm. that's a very dovish statement folks, and that's the reason the krona slid after the rate hike. But I'm not buying it. Like I said, the Riksbank did this the last time they hiked rates, so, I'll just be patient with the krona, and think of this slide as an opportunity to buy at a cheaper level!

I came across two different stories talking up Germany, so I'll give you snippets of both stories. the first one was in the Telegraph.

"Spectacular recovery of the German economy probably will drive a sharp increase in the value of the euro and force the European Central Bank to tighten monetary policy, while southern Europe is still struggling to reduce debt, Standard & Poor's said in a report. Benefits of Germany's boom are expected to spill over into weaker Eurozone economies, but the stress of a rising euro and higher interest rates would hit them first, the credit rating agency said."

And the second one was in the Economist. "Germany holds a commanding lead in exports to Brazil, Russia, India and China, possibly creating profound consequences, and not only for Germany, according to The Economist. Emerging economies account for a fairly small portion of global trade and gross domestic product, but they represent a big and increasing share of the world's economic growth."

So. you've got Germany pushing the envelope for the rest of the Eurozone, with a little help from its friends in: Holland, Austria, & France.

And in the U.K. this morning, the pound sterling is rallying on the news that 3red QTR GDP was stronger than expected at .8% (.4% was expected). the report showed some very strong domestic demand, which was surprising given the fact that lawmakers are pushing for more QE.

Well. The Existing Home Sales for September printed much stronger than expected yesterday, rising 10%! WOW! Of course, like I said yesterday, in September the foreclosures hadn't been stopped yet (that happened earlier this month), so those sales have all those foreclosures in the numbers. We'll also get a clue to how those sales were so strong, this morning when the S&P/CaseShiller Home Price Index for August prints. (yes, I know the two months don't match up, but..) we'll see if home prices were still falling in August, for if they were still falling in August, they'll show that they were still falling in September!

Besides the CaseShiller Home Price Index today, we'll see Consumer Confidence for October, which is expected to inch higher. May be Confidence is stronger because we are drawing closer to "take the trash out day" Nov. 2nd!

OK. here's a comforting thought for those of you that own Treasuries. Treasury Inflation-Protected Securities (TIPS) sold at a negative yield Monday for the first time since the U.S. launched them in the 1990s. Buyers paid $105.50 for $100 worth of debt, effectively paying the government to hold their money. Ooooohhhh. where do I sign up for that program? NOT!

Then there was this. (you have to promise to just go yell at the wall after reading this, and not get out any sharp objects!)

The U.S. Treasury Department hid $40 billion in likely losses on the bailout of American International Group when it changed the way it calculates such data, said Neil Barofsky, special inspector general for the Troubled Asset Relief Program. "In our view, this is a significant failure in their transparency," he said.

Chuck again. Hmmm. I told you back then that there were back room deals going on, and that the Treasury and Fed / Cartel, were involved. I just shake my head in disgust at all that went on during 2008.

To recap. The currencies gave back the gains they made on the announcement from G-20 to avoid currency devaluations for exports. The U.S. traders weren't buying it, and bought dollars all day! The Riksbank hiked rates 25 BPS to 1%, but then came out with a very dovish statement, which has caused the krona to weaken. Existing Home Sales were up 10% in September. WOW! And don't look now, but if you buy the Gov't's Treasury Inflation Protected bonds (TIPS), you are buying them with a negative yield!

Currencies today 10/26/10: American Style: A$ .9890, kiwi .7520, C$ .9795, euro 1.3950, sterling 1.5890, Swiss $1.0290, . European Style: rand 6.8850, krone 5.8230, SEK 6.6610, forints 196.25, zloty 2.8165, koruna 17.63, RUB 30.35, yen 81.10, sing 1.2955, HKD 7.7575, INR 44.43, China 6.6625, pesos 12.35, BRL 1.6975, dollar index 77.20, Oil $82.61, 10-year 2.58%, Silver $23.48, and Gold. $1,335.60

That's it for today. Whew! What a long day yesterday! It was like "old times" for yours truly! I did a "Skype" interview with the Martin Weiss group yesterday. Thanks to our video/broadcast guru, Lori, for getting that set up for me! Today, I'm recording some answers to questions for a radio broadcast. Speaking of which, this Sunday beginning at 3 pm CT, I'll be on the WAAM radio show. The host told me that I can talk for as long as I like! I think I'll stick with about 30 minutes! But, you can find out more about listening by going here: http://www.waamannarbor.com/home.php I'll be sticking with my long battle with deficit spending, and how currencies and metals help to diversify your investment portfolio. so just go to that link and click the "listen" button at the top of the page. Hey! Sunday is Halloween! I have to tell you that my little granddaughter, Delaney Grace, is the cutest "Annie" You've ever seen! And, she'll belt out a couple of songs from "Annie" too! That red wig is almost too much for me! Brother, was it raining hard this morning on my drive into work, I went through several places with standing water. I'm bopping in my seat to the Foundations great song, Baby, now that I've found you. That's the song of the day, and with that it's time to hit send. I hope you have a Terrific Tuesday!

Chuck Butler


EverBank World Markets



Posted 10-26-2010 11:38 AM by Chuck Butler
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