Risk Aversion Sets In.
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In This Issue.

* Another Risk Off Day.

* Silver on the downside of its ascent.

* BOE & ECB meet today.

* China is doing it again.

And, Now, Today's Pfennig For Your Thoughts!

Risk Aversion Sets In.

Good day. And a Tub Thumpin' Thursday to you! Let's all get our tubs out, and get to Thumpin' because we need to generate some warmth, as we're still dealing with cooler than normal weather here in the Midwest. We could also Thump the tubs to cause a distraction from the current trading themes. Hey! If that worked, that would be something! HA!

Well. thanks to Chris for taking the conn on the Pfennig yesterday. As he told you I had been to a Jimmy Buffett concert the night before, and brother was it a late night, and cold! UGH! I'm still draggin' the line this morning, but I carry on despite my lack of sleep!

I'll start today's discussion with some thoughts on Silver. Yes, that same Silver that touched $50 two weeks ago, has seen the slippery downward side of its ascent VS the dollar, with only a brief pause last Thursday and Friday. Silver needs to find a bid somewhere! I talked to my friend (exchanged emails), Sean Hyman yesterday. You know, the same Sean, that broke the news that Silver had gone parabolic on the charts. Well. if it was parabolic at $40, then it must have been uber-parabolic at $50! But it finally broke to the downside. So, I asked him where he saw Silver falling back to. he said, "If the $38-39 area holds at the 50 day SMA then it could bounce back upward. But if silver crashes through that area, then $27-$30 would be the next stop (the 200 day SMA area). Parabolic moves usually eventually make it back to their 200 day SMAs. So if it doesn't do it now..there's a great chance it does it upon the next bounce and then sell-off."

Thanks Sean! Well. that's technical talk for you today! I sure wish Silver would prove the chartists wrong. But, even Silver bulls like Eric Sprott (in Canada) sold a ton of his Silver this past week. Now, if Silver guru, Ted Butler, sends out a sell signal for Silver then, I would say run for the hills! But I doubt we'll see that happen!

I have to wonder though, where the CFTC regulators are during these past few weeks, when a ton of the trading /selling is being done after hours? Doesn't that smell bad to you? It does to the guys over at www.zerohedge.com who have been following this price action, and had this to say. "Just like yesterday and the day before, 6:30pm is now the official precious metal "bang the afterhours" launch time."

OK. I know, I know. if the regulators aren't going to do anything about it, then I should just let it go, and accept the daily beatings. Ahhh grasshopper, but that's how you become a victim. So, I'll soldier up, and continue to report on this stuff!

As I mentioned the other day. The CME raised the margin requirements for Silver contracts. The CME has made it 84% more expensive for speculators to trade Silver. On Tuesday this week, I wrote in the Pfennig. "The Commodities exchange announced yesterday that they were raising the minimum amount of cash that must be deposited when borrowing from brokers to trade futures, from $14,513 to $16,200." Well. now, today, on this Tub Thumpin' Thursday, the Commodities Exchange has raised them again, and beginning May 9th (next Monday) the cost rises to $21,600 per contract.

While I commend the Commodities Exchange for raising the margin requirement to keep Silver from getting too extended in its price. I wonder why they allow this daily after-hours selling to occur?

Well. the dollar is really having its way with the currencies, as the Risk Off trading theme is really digging a deep trench, and appears to want to remain there for now. Not to get too upset, we've seen these periods of time in the past, and they don't last too long. But while they are around, you get all kinds of knuckleheads talking about the dollar going on a multi-year rally. Not me! Look. the dollar went into the weak dollar trend in Feb. of 2002, for a fundamental reason. The deficit had reached a level that historically spelled a currency crisis for any country that allowed their debt to GDP ratio to reach 4.5%...

Well.. history may not repeat itself, but it sure does rhyme! And the dollar has experienced major weakness since then (except for 6 month rallies in 2005, and 2008/09) and will continue to do so, until the fundamental reason is corrected or is well on the road to correcting. Does the dollar qualify as correcting or well on the road to correcting the debt to GDP ratio of 4.5%? Shoot Rudy, it hasn't even turned on to the road to correcting, much less traveling down it! The debt to GDP ratio is around 6% right now. and the CBO has forecast that the ratio will average 4.5% for the NEXT TEN YEARS!

So. when I turned on the currency screens this morning, the usual suspects that rally on Risk Off days, dollar, yen, francs, were all stronger. But there was a newcomer to the party. The euro was also showing some strength, which was weird, but actually happening. But now that I look at the screens, after typing away here, I see that the euro has come back to earth, and is struggling to remain in the green this morning.

On a side bar. In Panama last week, a Pfennig reader, came up to me, and said, "OK, let me see those fat fingers you always talk about". So I showed him! HA!

So. Risk Aversion rules the trading arena this morning. We've seen this all before. it panics the weak hands, and provides opportunities to the bold hands.

One thing that Risk Aversion does give us, is cheaper Oil prices. And that's a welcome sight. I'll betcha a dollar to a Krispy Kreme that Big Ben Bernanke is sitting in his office and watching the price of Oil drop from $112 to 106 this week, and smiling. leaning back in his big overstuffed leather chair, with his feet propped up and smiling like a Cheshire Cat, and saying. "See! I told you all that the inflation pressures we all felt were "transitory".

Now. don't let this "slippage" trick you. When assets rise in price so quickly, they hit targets, and profit taking takes over, and once selling is in place, it triggers more selling. until somebody says. "Hey this is stupid", and we get back to the underlying fundamentals trends.

OK. Well. the Bank of England (BOE) and European Central Bank (ECB) are meeting as I type away with my fat fingers. And, I'm still of the opinion that the ECB has an outside chance at a rate hike today, while the BOE has no chance. It would be a huge feather in the euro's cap to see a second consecutive rate hike, but I don't think that ECB President, Trichet, wants the markets to feel that every meeting will produce a rate hike. But. you never know, Trichet, may just throw caution to the wind, and strike now while the inflation pressures are still hot.

The key here is that the markets are at the very least looking for Trichet to mention the ECB's "vigilance" in fighting inflation. if he does that, the markets will be satisfied for now, and look to next month's meeting.

Speaking of Central Banks. the one that I have the most problem with, is the Fed. plain and simple. No punches pulled, and now letting them off the ropes. Well, did you see the Fed Head Rosengren's comments? Rosengren is a strong believer that the stimulus won't be removed for some time. He said, "Right now we're pretty far away from our targets, and right now we're keeping monetary policy accommodative. It's very appropriate given how far we are from our targets."

Hmmm. just for the record, the targets that this Fed Head is talking about are: full employment, and inflation. I'll keep my thoughts about these targets to myself this time, as the last time I dealt with them, I got my hands slapped, for being so hard on the Beaver.

The Big Winner in the currencies overnight is the Japanese yen. Yen has gained VS the dollar to less than 80 yen per dollar. The last time this happened (a month or so ago), the Bank of Japan (BOJ), gathered their central banker friends to sell yen in a coordinated intervention. See how long that lasted? I think this is just speculators and traders testing the BOJ's resolve. I don't think that fundamentally yen is in any good shape to warrant a sub-80 price. But G-7's coordinated intervention laid down the gauntlet for traders and speculators, and now it's the traders and speculators turn to hit back!

In Australia overnight. Aussie Retail Sales for March showed a decline of .5% from the previous month. and it's this kind of data that pushes the Aussie dollar (A$) down, as the rate increase forecasts get weakened.

And In New Zealand, 1st QTR Employment rose 1.4%, lowering the unemployment rate to 6.6%, but it's just not enough to offset the drag of the A$, and kiwi sold off.

I see where Gold is hanging on to $1,500, barely. One would have thought that hearing the news that broke yesterday that Mexico had bought and taken delivery of 93 tonnes of Gold, would be enough to strongly underpin the shiny metal. But Gold is down $13 this morning nonetheless.

Then there was this. Officials from China, Japan and South Korea agreed on Wednesday to study a proposal to use their own currencies for regional trade settlement instead of the U.S. dollar, according to a Dow Jones Newswires report.

Chuck again. Yes, the exit away from using dollars continues folks. Remember, that as the reserve currency of the world, the dollar is in the middle of all commodity transactions, and in terms of trade. But China is circumventing that arrangement and has been for about 2 years now. The Chinese will eventually remove the dollar from all of their trade. (except with the U.S.) When other countries see how successful these trade agreements are for China, they will want to do the same, and then. the dollar is reduced to second place. Not this year, not next year, but can you believe that by 2017, I think this will happen?

To recap. The Risk Off trading has turned to deep Risk Aversion, with the usual suspects of dollars, yen and francs as the clear winners. Silver saw another day of heavy selling, and another day of added margin requirements on Silver contracts, which has scared away the speculators and traders.. The ECB and BOE meet this morning. And China is at it again!

Currencies today 5/5/11. American Style: A$ $1.0665, kiwi .7875, C$ $1.0345, euro 1.4825, sterling 1.65, Swiss $1.1645, . European Style: rand 6.7075, krone 5.3460, SEK 6.1140, forint 178.60, zloty 2.6604, koruna 16.3150, RUB 27.25, yen 79.85, sing 1.2340, HKD 7.7725, INR 44.76, China 6.4932, pesos 11.69, BRL 1.6175, dollar index 73.09, Oil $106.75, 10-year 3.20%, Silver $37.75, and Gold. $1,500

That's it for today. It's Cinco de Mayo! Whenever we get to this day, I'm reminded of when I was in Cancun, in 1997. We passed a outdoor square and a guy was playing his guitar (electric) and had all his equipment set up. We stopped to listen, and soon, he was playing Dust In The Wind, I recognized it, and grabbed his microphone, and began singing along with him, right there in Cancun! Of course my wife was embarrassed, but the couple we were with thought it be cool. So. there you have it! There's a day game at Busch stadium today, but I'm stuck here! UGH! So, go out and thump your tub, and celebrate Cinco de Mayo, if that's what you like to do, and be careful!

Chuck Butler


EverBank World Markets



Posted 05-05-2011 9:22 AM by Chuck Butler
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