CB Diversification, Iran...PM Pants
I had planned on a weekend edition but then out of town visitors came over and, well, you know, the time flies, the wine flows and then there seems so little time for all that reading and writing stuff. Then, this morning my plane was delayed 5 hours while we all were crammed into an overheated compartment. Needless to say, I didn't even try to get out my laptop and work with my knees against my chest. But I did read the following headline "Central Banks turn from US". At that point I felt the hair on the back of my neck rise and thought to myself - It has commenced.
Ok, enough of the melodramatic staging. The point is, and this should be very relevant for all US Dollar holders and all currency traders, will the Central Banks KEEP turning from the US Dollar ? The so-called new tax rules which allow for US offshore incorporated companies to repatriate their funds back into the US at considerable tax-beneficial rates is a mere fraction of the total that foreigners have been steering into the US economy and which may now be steered away from the economy. Something like $38 bn was mentioned that US corporations would repatriate. My response: Big deal. That is only one month of capital pumped into the US economy by foreigners, i.e. about $2 bn per day. Oh, by the way, the US current account deficit looks headed for roundabout $630 bn for 2004. Foreign central banks have been financing that US debt to the order of 80%. It seems now even the mouldy, stodgy Central Bankers have caught on to the fact that nothing lasts forever. This might very be the recognition needed in the financial community that deficits do matter and that abuse of a reserve currency does have consequences.
Equally, one of the biggest drivers, as I written about quite often, is the need for investment returns. Foreigners who have until now invested in USD based investments / vehicles have seen their returns eaten up by the sharp drop in the USD over the last years when repatriated back into their home currency. Has it really taken people so long to wake up to this fact ? Seems yes, but it is now reaching the critical recognition point as well.
The poll taken of the central bankers now shows that over the past two years 70% have increased their exposure to the Euro. Interestingly, they now find the Euro an equally attractive place for investment. This, in conjunction with my thesis that the Asian Central Banks are only biding their time with the US dollar and will likely not re-peg their currency anytime soon, despite the consensus that they will, this looks to be a double whammy for the US Dollar, and we have not yet even considered the other mess(es) on Mr. Bush's plate like Iraq, Iran?, Social Security, tax cuts, exposure to oil rises, etc.
I know many professionals have called for a sustained US Dollar bounce lately, I saw it bounce briefly, but a single bounce doth not make a bounce permanent and sustained. My feeling is that, yes, although the oversold negative sentiment in the USD should point to a contrarian bounce, there simply might be too many solid facts on the table to refute - as stated above - thus which render any bounce to simply end in a puddle. Right now the USD surely did not take this news today too badly. Or maybe people are just digesting these headlines...or should I say those high rollers who are now meeting in Davos, Switzerland at the World Economic Forum. If the USD gives them any indigestion at their banquet, then surely a few Swiss Francs would brighten their outlook.
And then comes Mr. Dick Cheney, Vice President of the United States of America. By the way, Iran has the 2nd largest known oil reserves. A mere coincidence that Mr. Cheney made his remark after Mr. Bush's inauguration about Iran being the next target? Iran might also be a nuclear power. Iran might also be a safe haven for Islamic extremists or might be totally benign. Who knows. Are these the premises from which to invade ? Again, we in the general public do not know what goes on at Cabinet discussions. Will this be the next crusade to bring democracy to the darkest corners of the earth as Mr. Bush eluded to? Mr. Blair, Prime Minister of the United Kingdom, might be rather careful in his next steps. If this were to be the case, then what consequences would be forthcoming for the US Dollar?
Overall, I believe those in Washington DC must simply now succumb to the fact that the USD needs to go lower and despite the rhetoric of a strong dollar policy, the policy is in fact dead and the foreigners will de-facto dictate the policy. Although Central Banks worldwide still hold massive amounts of USDs, I believe a critical juncture is approaching within the next 2 years whereby the USD either is stage-managed into a further secular devaluation as has been the case, or if left long enough unattended, may simply free fall for a few days until a suitable level is found. At which point gold and silver will have gone limit up for those days. Don't be caught with your precious metals pants down.