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In the last several weeks,
tremendous movement and change has occurred in foreign currencies. Almost all
foreign currencies have made multi-year highs against the crippled USDollar. The United States
suffers from wretched finances and a banking system teetering on seizures. In
progress is the gradual dismantling of large tinkertoy
structures within its vast network of bond risk management. Its entire
business of structured finance is under siege and revaluation. The banking
& bond woes cannot be blamed on just the subprime
mortgages, those mispriced collections of slime
used in considerable export to those very friendly parties who supply the
necessary $2.1 billion in daily US
capital. No, the USDollar can be identified as a
‘subprime currency’ slowly enduring
recognition as such. The buck is badly mispriced,
offering a yield under half of the true price inflation rate of 10.4%,
falsely rated as ‘AAA’ under coercion, supported by broad
statistical lies, exported widely to foreign institutions, and wrecking havoc
in economies who peg their currencies to the US$. How shallow can any denial
be?
As one peruses the various
currencies and their exchange rates, multi-year highs can be seen across the
spectrum. Two key currencies stand out in prominence, the Swiss franc and the
Japanese yen. Furthermore, two key crosses are significant in their own
right. The cross of the swissy with the euro, and the cross of the euro
with the yen each delivers a powerful message of
profound change.
The November Hat Trick
Letter covers the currency chess game, but also the most powerful currency on
the planet, the Canadian Dollar. Goldman Sachs shot it down after extended
gains to the 110 level. Soon outgoing central banker David Dodge made some
defensive painful comments in mid-October when the loonie
had reached the 103.5 level following boastful commentary of deserved loonie strength. With John Thain
appointed as the new CEO at Merrill Lynch, the parade continues of former GSax executives taking control of powerful Western
financial organizations. See the US Dept of Treasury, US Dept of Energy,
World Bank, the Bank of Canada, the central bank of Italy,
and now Merrill Lynch. Maybe Goldman Sachs should take control of all regulatory
bodies and debt rating agencies and indexed funds and currency controls and
financial news media?
SWISS FRANC
STEPS FORWARD
In the last couple months,
much attention has come to the euro. It hit 147,
after being 110 in
the summer of 2003 when the late great Kurt Richebächer
sipped coffee on his veranda with me, discussing how euro
warrants were the centerpiece to his estate. He
wanted to bequeath to his children large sums based on designed bets against
the USDollar. The European Union economy has a
juggernaut within it, Germany, whose export
business per capita exceeds even that of Japan,
a little known fact passed from Dr Kurt. The Euro Central Bank feels behind
the curve with an official 4.0% interest rate, now stuck due to the US
problem. The Swiss franc is the real story on the currency front in Europe though. It soon will register a
multi-decade high.
Some crucial comments are warranted on the Swiss, from a geopolitical
standpoint. As a preface, former USFed Chairman
Alan Greenspan took a paycheck from the Swiss
bankers. Its size is unknown, so one must wonder if it was indeed larger than
his US-based paycheck. A suspicious person (it
pays to be suspicious these days) might regard Greenspan as having worked a
second hidden agenda, to restore banking power back to Switzerland
after sixty years. The Swiss quietly resent the Americans, who after
World War II wrested banking power as the spoils from war. They see the US
bankers and economists and politicians and war machine as having essentially
destroyed the global banking system. The Swiss want power to return to
central Europe.
Recall that the owners of the US Federal Reserve are reported to reside in
both Switzerland
and London, in more
control of US monetary policy (if not political leaders) than people realize.
One signal of power restored to Switzerland
can be interpreted as the Swiss franc making decade highs, in order to
confirm prominence in its quintessential power center,
banking. Notice the increase in trading volume in the last 18 months.
SWISS-EURO
CROSS REVERSES
During the brief correction in midweek last week, a very important
event occurred. The Swiss franc hardly budged, not correcting much at all. Many
regard the swissy as a currency-based insurance
policy in the volatile FOREX trading pits. The swissy
often is overlooked in the central bank interventions, where the USDollar, euro, and yen
dominate. This Monday when the euro, pound
sterling, Canadian dollar fell by well over 100 basis points each, the swissy remained steady. We probably have seen yet another
one-day USDollar bounce. The beleaguered buck
suffered multiple slow bleed down days in the last couple weeks, but only one
fleeting day with a powerful corrective bounce upward. In the last month,
the Swiss franc has reversed its position relative to the euro
currency. While the euro has risen, the swissy has risen more. As the euro has corrected very moderately, the swissy has not corrected much at all. The call is early,
but the long two-year slide for the Swiss franc relative to the euro appears to have halted. Two weeks ago, a powerful
reversal occurred, one in continuation. The ratio swept past the 20-week moving
average easily. Let’s see if the ratio moves past the 50-wk MA. Let’s
also see if the 20-wk MA crosses above the 50-wk MA to flash a strong bullish
signal. The Swiss franc might be working to take back its position of
prominence, where for over a century it stood firm as the true primary
investment currency.
Both the Swiss franc and the Japanese yen are important to monitor
during these crisis times. Europe is taking a lead role in currency
adjustment, setting the euro as a defacto dual standard for a world reserve currency. They
feel pain for that lead role, as ECB head Trichet
calls the adjustment brutal. Asia
is taking a lead role in currency management, setting the pathway for
diversification away from the USDollar AND for the
management of Sovereign Wealth Fund. The SWFs are
rendered controversial by the secrecy and confrontational positions to energy
and mineral dominance. The US Congress mulls over options to regulate foreign
billion$ in a truly laughable toothless display of helpless weakness. They
want more disclosure like with Norway’s
SWF. In the background is the Persian
Gulf group of nations, threatening to loosen their
tight peg with the USDollar, but succumbing to US
pressures. They possess no military. However, back to the yen and its cross.
JAPANESE YEN REFLECTS ITS CARRY TRADE
The most watched currency cross in the last several months, for its
indication on global speculative finance, has been the euro
over the Japanese yen ratio. Both currencies are rising, but the yen is
rising faster. The 91.5 level is crucially important from a technical
standpoint. The correction in August 2005 (to hit the 20-week moving
average) and in the May 2006 spike when the Bank of Japan
began its ultra slow motion interest rate hike sequence, these set the
resistance levels which are soon to be broken. Notice the crossover of
the 20-wk MA above the 50-wk MA in September, a siren call warning in the
currency world. In fact, the powerful reversal since
June-July 2007 from the 80-81 level coincides with a gradual unwind of
the grandest carry trade phenomenon in the history of the modern world. The
Yen Carry Trade profits from borrowing cheap Japanese yen and investing in
higher yielding USTreasury Bonds, with a currency
risk inherent. It is unwinding. The impact not only to speculative
investment, but to baseline structural investment, is enormous and given
little emphasis. The correlation between the S&P500 stock index in the US
and the Japanese yen is strong. The linkage has been apparent to me for over
a year. The implication is that the Yen Carry Trade might govern the US
stock market. Its unwind governs the selloff in the largest among US stocks. The November Hat
Trick Letter provides further crystal clear, if not shocking evidence of
linkage.
EURO-YEN CROSS
BREAKS DOWN
With little tested history, the euro is the
product of an amalgam of currencies in loose association from a European
continent attempting to unify once again. Some call the euro-yen cross the most important currency related signal
to monitor appetite for risk. The yen is a suppressed currency, kept down
with US
blessing and brute force. The yen appears to be awakening after a decade or
more of slumber. In my view, the emergence of China
makes the yen awakening unavoidable. China has become the most
important focal point in Asia, so Tokyo
had better acknowledge this change, and show respect with a bow. The Bank of
Japan has continued its hawkish tone, threatening to hike interest rates, but
holding back. They show deference to the USFed. The
double top failure in this euro-yen cross indicates
clearly that the Japanese yen currency is to continue its rise. In the
process, the global finance system will be forced to endure shock waves. The
Yen Carry Trade is unwinding at the same time that the US
financial structure of risk management is being dismantled. These two corners
of the globe are extraordinarily important. By contrast, Europe seems quiet, staid, and boring, with
a task of leading in the currency adjustment process. Soon the yen will share that burden.
A powerfully important
dynamic requires attention. The entire commodity investment bull market,
precious metals, energy, and base metals, depends on continued easy money
from Japan AND a yen currency which does not continue to rise. The yen is
rising from the weakness of the USDollar, a shaky US
banking system resisting seizures, and the likelihood of further USFed rate cuts, more than from the prospect of a series
of BOJ rate hikes. The USDollar weakness is
profound enough to jeopardize financial investment flow of Japanese funds for
the commodity bull market itself. And that bull market trend is leveraged by USDollar weakness. Talk about a paradox!!!
On November 13, the Bank of
Japan held steady on interest rates, keeping their official cost of money at
the insane 0.5% rate. Their credibility is not as firm as the Euro Central
Bank. BOJ Governor Fukui voted to hold steady on interest rates, citing a
reduced economic growth estimate, a construction downturn, export risk from
the US
housing & mortgage problems, and hardship to small businesses from higher
energy costs. The combined effects of higher energy costs, US woes, rising
yen currency, and Japanese stock market breakdown enable the BOJ to salute
the US Federal Reserve and hold steady. More details are in my November
report. Do other people grow uncomfortable when the two leading Japanese
names are Fukui ad Fukuda? Do
such names pass the political correct test? Japanese Prime Minister Yasuo Fukuda refused to dismiss the possibility of formal
interventions so as to keep the yen currency from rising too much too fast. The
Nikkei stock index in Japan
is showing distress.
CONCLUSION
The November Hat Trick Letter contains a frightening list of relevant
important quotes regarding the developing dire situation with the USDollar. In focus is the US$ as world reserve
currency, the global banking system stability, foreign accumulation of
reserves, lost sovereignty of US policy, imminent breakdown of the PetroDollar standard, and palpable US vulnerability. In
the last few years those leaders subjugated under USDollar
policy dictated to them have been actively resisting, if not revolting. The
fall of the USDollar from grace amounts to a tectonic
shift in the global hierarchy. This time, the US
currency is on the clear defensive. A description of hegemony (abused
dominance) applies. Recent chapters center on the
ascendance of China and India, growing confidence in the European common
currency, record American deficits, the challenge by London over New York as
a financial center, the ongoing housing recession
in the US, the mortgage banking debacle, the export of mortgage bond fraud,
and the gradual seizure of the US banking system. Prominent economists are
raising the specter that the USDollar
status as the world reserve currency is no longer dominant. For the first
time, Treasury Secy Paulson has been on the
defensive in the face of stated concerns of the USDollar
role as a reserve currency, as in during G7 Meeting of finance ministers.
The falling USDollar is a hidden mechanism for importing price
inflation. The tremendous money supply growth guarantees the continued
falling exchange rates for the USDollar versus other
currencies. As the USEconomy finds increasing
obstacles and backfires to exporting its inflation, the end result will be
more price inflation within the United States
as it cannot escape so easily. Refer to the reaction by foreigners to bond
fraud in subprime mortgages, and refer to trade
sanctions planned against China.
The growth in US$ money supply is shocking, reminiscent of Weimar Times in
pre-WW2 Germany.
The M3 annual growth of US$ money supply is at a 36-year high, running at
14.7% and adding pressure to the USDollar. A global
currency war is underway. Foreign central banks will ramp up their own money
supply growth rates so as to defend themselves and prevent their currencies
from rapid appreciation. The round robin game to undermine currencies
is precisely what lifts the gold price to the heavens. Eventually, people
will call into question the value of paper.
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By : Jim Willie CB
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Jim Willie CB is the editor
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Jim Willie CB is
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