March 4, 2009
The Technical Outlook
If we observe the $USD graph for March 2, 2009, we see that the USD has just broken above the resistance level of 88. Will this mark the beginning of a new run higher in the US dollar? Currently the US dollar is benefiting from the propaganda of other countries (i.e. China), political games, intervention of the Exchange Stabilization Fund, and the foolish actions of the Bank of England (BOE) and the European Central Bank (ECB) which have caused Europeans to flee the Euro and the Pound Sterling. However, fleeing the Euro and the Pound Sterling for the US dollar is akin to fleeing the Lusitania for the Titanic. All three currencies are sinking ships and fleeing one sinking ship for another sinking ship is just not intelligent and is destined to end poorly for all involved parties.
Therefore, I believe that this subsequent “breakout” above 88 will be short-lived. While the US dollar may meander higher for a short-time longer above 88 as the US Treasury and the Exchange Stabilization Fund reach deeper into their bag of monetary tricks, I do believe that when it breaks back down below 88 sometime shortly, the retreat will be marked by periods of extremely volatility and rapid decline. On a subsequent decline below 88, which in my mind is imminent, I have noted an important level of intermediate resistance at around 81-82 in the above chart, as this was the floor that existed for three years before the USD plummeted below it in 2007.
If it breaches this level, the next point of resistance would be at 76. If the USD breaches 76, then the bottom would be anyone’s guess at this point. This breach may take some time to develop, but right now, I would have to say that the dollar’s breakout above 88 is likely to be a false breakout. However, my belief in a sharp, and at times, violent decline in the dollar’s not-so distant future is not based upon the above technical analysis so much as the political clues that are beginning to slowly rise to the surface in not so aboveboard comments made by other nation-states. So against even against the unsound and increasingly risky Euro and Pound Sterling currencies, betting on the US dollar is still a very risky play at this juncture.
The More Important Political Outlook
On February 11, 2009, the Financial Times out of London reported:
“China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday. China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.”
“Mr. Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: ‘Except for US Treasuries, what can you hold?’ he asked. ‘Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.’ Mr Luo, whose English tends toward the colloquial, added: ‘We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.’”
This is my analysis of the above statement. If you have ever played poker before, you know that Mr. Luo is bluffing to conceal the true intentions of the Chinese government. If you are planning to dump a significant portion of assets (US Treasuries) that you believe will be heading towards massive depreciation, the last thing an intelligent market player would do is to tip his hand before executing his plan. Instead, an intelligent player would tell the world what he wants the world to believe, i.e., that he has no choice but to continue to hold US Treasuries while he makes alternate plans to offload them. The monetary crisis that is the root of all global economic problems today is a game with massive stakes at hand, and no player in this global game, even a key one such as China, is going to reveal her true intentions.
That said, I imagine that Mr. Luo is not a very accomplished poker player, because it appears that he played his bluff very poorly. If I were him, I would have not said another word after telling the world that “US Treasuries are the safe haven.” Instead, Mr. Luo ruined his bluff by trying to hard to convince us that China has no options with his statement: “We hate you guys…we hate you guys but there is nothing much we can do.” After reading this statement, I’m more convinced than ever that China is aggressively seeking to offload their US Treasuries and to make the first move in this game of Russian roulette in the currency markets. In essence, the Chinese government is most likely currently taking actions opposite to what they have publicly stated and now we can almost count on the fact that they will dump massive quantities of US Treasuries in the near future.
Consider this following story out of Australia on February 12, 2009:
“BHP Billiton, the world’s largest mining group, is set to crash the Chinese Government’s $19.5 billion ( £13.5 billion) bailout of Rio Tinto (ASX: RIO.AX). Rio, which fought off a hostile bid from BHP last year, will announce at 6am today that it has secured a capital injection of $19.5 billion from Chinalco, the Chinese state-owned metals group. That will be China’s largest investment in a Western company. Rio’s shares were suspended in New York last night and in Australia this morning.”
“Rio will raise $12.3 billion by selling stakes in its mines to Chinalco and a further $7.2 billion by issuing a convertible bond. When the bond converts into shares, Chinalco will raise its stake in Rio from 9 per cent to 18 per cent. The deal is subject to Australian regulatory approval.”
Though Australian regulators still have to review this deal before it becomes official, it tips all other players in the US dollar pot to what China’s thought processes are as this monetary crisis deepens. Furthermore, with the global economy deteriorating even further since Chinalco’s bid, according to another article released today, Rio Tinto’s CEO Tom Albanese stated that shareholders initially opposed to the deal are now warming up to it. Regardless of the outcome of this deal, I believe that Chinalco’s bid serves as a microcosm for the larger desires of the Chinese government and as an accurate reflection of their true future intentions with their dollar-denominated assets — a desire to move many of their dollar-denominated reserves into hard assets.
Furthermore, when we consider the GCC (Gulf Cooperation Council comprised of Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman) nations’ massive petrodollar holdings, their similar desires to move petrodollars into hard assets, and their desire to not let China beat them to the punch (of offloading dollar assets), I think it’s a solid bet that the USD is set up for a sharp fall from its present position.
Disclosure: The above commentary is an excerpt from my Crisis Investment Opportunities March investment newsletter released earlier this month with some minor changes to bring all topics up-to-date.
[tags]dollar collapse, RIO.AX, GCC, US Treasury Bonds, $USD[/tags]