Market Turns to US Dollar, British Pound in Weekly Play

Scheduled on the same day, both the UK inflation report and FOMC rate decision are expected to jolt the FX market this week, at least a tad. Set for Wednesday, the UK report is anticipated to show a further slowdown in consumer and producer prices with additional central bank statements alluding to a continued slowdown in the UK economy. Recent reports show nothing but support for the near term decline in prices. For the month of June consumer prices rose a paltry 1.8 percent from the year before as producer prices rose at the lowest level in eight years. What pound bulls will most likely be attuned to will be the probable downgrade in overall growth by the Bank of England. Following the expansion in quantitative easing of an extra 50 GBP billion last week, traders are expecting the worse for the subsequent statements. If the same fears are proven right, the underlying currency will come under pressure as further accommodative policies are likely to emerge in the coming quarters. Even worse has been speculation of a deflationary trap in the country, where prices continue to move low enough to choke off spending by both consumer and producer sectors, leading GDP further lower. Adding fuel to the fire has been Governor King’s refusal to completely rule out further expansion of cash injections into the financial system.

To Buy or Not To Buy

Currency traders will also be eyeing the Federal Reserve’s interest rate decision later on in the day, following the UK inflationary report. Although most, if not all, are expecting the benchmark rate to remain the same, the question hovers over any further plans to expand the program to buy long dated government Treasuries. Heading into the month of August, the Federal Reserve has already fulfilled a majority of its previous commitment, purchasing approximately $250 billion of the allotted $300 billion. In addition, the central bank is set to purchase $1.45 trillion in mortgage debt by the end of the year. All of this in order to boost liquidity and lending while ensuring that benchmark rates remain relatively stable. However, given the recent unemployment report, will there really be a need to expand the program? Market participants answer with a resounding “no”. Given the uptick in non-farm payrolls last week, stable economic indicators and a relatively thawed credit market, central bankers will favor completion of the program over expansion. The sentiment is likely to give risk tolerance a boost as slim anticipation still lingers of a rise in interest rates at the tailend of Q4.

Retailers Find a Silver Lining

US retail sales are expected to have kept positive in the month of July, which would be the third consecutive month in a row and a definitive sign of economic stabilization. Set for release on Thursday morning, the report is forecasted to show a rise of 0.5 percent. Good support for market bullishness, speculative sentiment will be focused on the contribution and effects of the Cash for Clunkers program on the actual figure. Beginning last month, the administration’s plan for boosting auto sales may temporary increase the figure, leading some to believe the improvement will be a flash in the pan. Estimates are for the ex-auto number to be considerably lower, rising by only 0.1 to 0.2 percent for the month.

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Where The Money, News and Action is

American International Group, Inc. is in the news, posting huge market gains and rightfully positioned at the center of multiple controversies. On Monday, investors welcomed new CEO Robert Benmosche as AIG continued its powerful rally closing +1.56 or +5.76%. In the past week, the stock has doubled in value and scored some rather ominous headlines along the way.

U.S. taxpayers own an 80% share of AIG. With $180 billion of taxpayer money, AIG is under the gun to divest itself of losing entities and overcome the public’s perception of mismanagement, scandal and stupendous bonus rewards for poor performance.

Interim CEO, Ed Liddy, whose annual salary was $1.00 for his 11 months of service turned over the reins but the AIG controversy appears to be heating up again.

On August 6^th, former AIG CEO, Hank Greenberg, agreed to pay $15 million to settle allegations about bookkeeping misrepresentations at the world’s largest insurer. Greenberg chaired AIG for 38 years and may still face civil charges. Greenberg also agreed to pay $1.5 million to the SEC for other fraudulent misrepresentations.

On August 7^th, AIG announced its first profitable quarter in almost two years.

On August 9^th, questions were raised as to the relationship between former U.S. Treasury Secretary Henry Paulson, his former employer Goldman Sachs, and the AIG bailout.

On August 11^th, Taiwan’s Cathay Financial seemed released an announcement with tie to the company’s plan to acquire AIG’s Taiwan Insurance unit.

Meanwhile, the ongoing dilemma at AIG is rooted in the Financial Products unit’s staggering $99 billion loss in 2008.

Standard & Poor’s Catherine Seifert offered the following analysis; “Results were better than we expected and reflected positive mark-to-market gains, not strength in underlying operations. We believe that the turnaround in Q2 book value may not be sustainable and that the risk/reward for common equity holders is not attractive.”

Liddy Issues Warning

On his last day at AIG, Ed Liddy hoisted cautionary flags indicating that accounting revisions could lead to severe swings. The strategy is to wind down unprofitable units, sell other units and do whatever is necessary to raise $80 billion to retire the first installment in a series of taxpayer loans.

AIG’s second quarter profit was $1.8 billion, which represented a significant year-over-year improvement. Second quarter 2008 losses were $5.4 billion. Adjusted profit was $2.57 per share, well above analyst projections of $1.33 per share.

With the August 7^th release, AIG shares jumped 20% to $27.14. In the four days preceding the release, shares jumped 70% as the improved results pressured short sellers to become buyers to cover their positions.

AIG has yet to deal with $1.1 billion in 2009 retention bonuses. When bonuses were issued in March, Liddy came under heavy fire from Congressional leaders and taxpayer groups.

In 2009, small asset sales of AIG entities have resulted in $2.6 billion returned to the Federal Reserve. A government directed sale of AIG’s largest life insurance units should net another $25 billion for taxpayers.

AIG’s general insurance operations have suffered a 19% decline in new premium issues as premiums to the company’s life insurance retirement account dropped 15% to $8.1 billion.

Paulson & Goldman Sachs

Goldman Sachs was one of the biggest benefactors of the AIG bailout. Not only did Goldman Sachs receive $10 billion in taxpayer funding, but the company captured $13 billion in AIG counter-party payments as a result of the AIG bailout. Meanwhile Former Treasury Secretary Hank Paulson spoke with Goldman’s CEO, Lloyd Blankfein, on more than two dozen occasions during the tense period following the collapse of Lehman Brothers.

To facilitate the conversations, Paulson requested a waiver from White House attorneys. The waiver enabling Paulson to speak with his former employer was executed on September 17^th. Records indicate that Paulson had an inordinate number of conversations with Goldman Sachs.

Paulson and his Goldman Sachs successor spoke three times prior to the waiver and five times on the day the waiver was finalized. These conversations have led lawmakers to suggest a conflict of interest existed between Paulson and Goldman Sachs.

Taiwan Companies Vie for AIG Division

With Cathay Financial’s announced intention to raise $600 million, Taiwan’s largest financial holding company seems ready to enter the bidding war for AIG’s Taiwan division. Previously, Cathay’s biggest competitor, Fubon, announced plans to raise $900 million for the acquisition.

The sale of Nan Shan Life should reap $2 billion for ailing AIG. Every AIG payment is welcomed by U.S. taxpayers, who have a dim view of the company and former CEO Hank Greenberg’s business practices.

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Market Turns to US Dollar, British Pound in Weekly Play

Scheduled on the same day, both the UK inflation report and FOMC rate decision are expected to jolt the FX market this week, at least a tad. Set for Wednesday, the UK report is anticipated to show a further slowdown in consumer and producer prices with additional central bank statements alluding to a continued slowdown in the UK economy. Recent reports show nothing but support for the near term decline in prices. For the month of June consumer prices rose a paltry 1.8 percent from the year before as producer prices rose at the lowest level in eight years. What pound bulls will most likely be attuned to will be the probable downgrade in overall growth by the Bank of England. Following the expansion in quantitative easing of an extra 50 GBP billion last week, traders are expecting the worse for the subsequent statements. If the same fears are proven right, the underlying currency will come under pressure as further accommodative policies are likely to emerge in the coming quarters. Even worse has been speculation of a deflationary trap in the country, where prices continue to move low enough to choke off spending by both consumer and producer sectors, leading GDP further lower. Adding fuel to the fire has been Governor King’s refusal to completely rule out further expansion of cash injections into the financial system.

To Buy or Not To Buy

Currency traders will also be eyeing the Federal Reserve’s interest rate decision later on in the day, following the UK inflationary report. Although most, if not all, are expecting the benchmark rate to remain the same, the question hovers over any further plans to expand the program to buy long dated government Treasuries. Heading into the month of August, the Federal Reserve has already fulfilled a majority of its previous commitment, purchasing approximately $250 billion of the allotted $300 billion. In addition, the central bank is set to purchase $1.45 trillion in mortgage debt by the end of the year. All of this in order to boost liquidity and lending while ensuring that benchmark rates remain relatively stable. However, given the recent unemployment report, will there really be a need to expand the program? Market participants answer with a resounding “no”. Given the uptick in non-farm payrolls last week, stable economic indicators and a relatively thawed credit market, central bankers will favor completion of the program over expansion. The sentiment is likely to give risk tolerance a boost as slim anticipation still lingers of a rise in interest rates at the tailend of Q4.

Retailers Find a Silver Lining

US retail sales are expected to have kept positive in the month of July, which would be the third consecutive month in a row and a definitive sign of economic stabilization. Set for release on Thursday morning, the report is forecasted to show a rise of 0.5 percent. Good support for market bullishness, speculative sentiment will be focused on the contribution and effects of the Cash for Clunkers program on the actual figure. Beginning last month, the administration’s plan for boosting auto sales may temporary increase the figure, leading some to believe the improvement will be a flash in the pan. Estimates are for the ex-auto number to be considerably lower, rising by only 0.1 to 0.2 percent for the month.

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Canadian Dollar Likely to Fall Further Against US Dollar

Have you ever seen someone make a mistake and not only do they suffer for it but someone else does as a result also? Well, this is exactly what’s happening to Canada right now.

You see, most of last year, you could say that the Canadian dollar was falling because of falling commodity prices. Since Canada exports so many widely used commodities like oil and lumber, when prices fall, so do their profit margins. It costs them about the same amount to produce the product but what they can get for it in the market is determined by where those commodities are trading at the time. Click on the chart below to enlarge it.

USD/CAD Pushes Towards 1.30 Once Again!

Last Year the Commodities Crash Killed the Canadian dollar. This Year it’s the U.S. Economic Crash that’s Killing Them!

So that was what hurt them much of last year. Now we roll into 2009, and they get killed by another dynamic: the increasing slowdown of the U.S. economy!

For three months in a row now, the U.S. economy has shed around 600,000 jobs or more back to back! The unemployment rate seems to be going somewhat parabolic at this point. It jumped from 7.6% previously to 8.1% now.

On top of this, to buffer the blow of the slowdown, Canada’s central bank had to lower interest rates once again (to 0.50%) which put it at the lowest their interest rates have EVER been!

While this is a dynamic that will eventually be good for their economy, it hurts their currency right now for sure.

They also stated that they may implore “Quantitative Easing”. What the heck is that? Well, in simple terms it means that they will print money out of thin air and load up the banks with so much excess cash that they are more likely to lend money and thus spur economic growth.

While that may eventually give their economy a boost, it kills their currency. Why? Look at it this way. Anytime something becomes more abundant, it becomes worth less. Anytime something becomes scarce, it becomes more valuable. (This is why a Corvette in the 1960’s may have gone for $3,000 then and would sell for $30,000 to $60,000 today. These days, they are scarce…yet they weren’t back then).

So when the market is flooded with more money (Canadian dollars), that money gets devalued and is worth less. Therefore it takes more (Canadian) dollars to buy the same amount of goods.

The U.S. is Printing Money too, but Right Now they are Saved Because they are the World’s Reserve Currency (and thus a “Safe Haven”).

Now, you may say but isn’t the U.S. doing the same thing? After all, their economy is slowing down. They are printing money too.

I would say, while I won’t deny that point, the U.S. dollar presently benefits from what is called the “safe haven bid”. What does that mean? It means that investors all over the globe are running to the safety of the U.S. dollar because it’s the world’s reserve currency right now.

In other words, if there’s one currency on the face of the earth that you are most likely to keep and continue to use, it’s the one that most of the goods are priced in all over the world. For example, gold, oil, wheat, soybeans, lumber, etc. are all priced in U.S. dollars.

Therefore in crazy times like this, it enjoys the benefit of being the world’s reserve currency. However, once the global economy finally does return to normal, then this “benefit” will suddenly go away and the dollar will just have to stand on its own fundamentals once again. We all know that once that happens, the buck doesn’t have that much to stand on. Therefore, the “dollar party” may come to an end ONCE the global economy normalizes.

In the mean time, Canada’s currency (and economy) will continue to suffer as the U.S. lays off more workers and continues to slow down. Remember, they derive about 79% of their exports from the U.S. That’s huge! In fact, it’s so huge…it’s the largest trading relationship between two countries according to Canada’s trade department.

This really is huge, because the U.S. hasn’t had three back to back months of layoffs this big since they started keeping records on it back in 1939. So from at least as far as our records go back, this has never happened on this scale before!

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