Notes From Underground

(and I Thought Madoff Was In Jail)

It seems that Vice President Biden used some of his miles to head to China for his summer vacation. The Chinese have been vocal critics of the U.S. and its profligate ways. As the largest foreign holder of U.S. Treasury debt, the Chinese have more than a passing concern in the outcome of U.S. economic and fiscal policy. The Chinese are not the single largest holder of U.S. debt as that award goes to the FEDERAL RESERVE. The Obama administration sent BIDEN to reassure the Chinese that the U.S. still maintains a FICO score more than 720.

Does nobody in the Obama group remember the rude reception Geithner received from the Chinese students in a Q and A session in June 2009? The students laughed at Secretary Geithner’s response that the U.S. was in favor of a strong dollar. Two years later we now have Biden reading from the same script in a much more volatile financial environment. Good Luck Mr. Vice-President as it is a tough sell with the FED pledged to ZERO INTEREST RATES FOR TWO YEARS, THE PRESIDENT ON THE CAMPAIGN TRAIL AND THE CLARION CALL OF JOB CREATION BEING THE MAIN 2012 ELECTION ISSUE. 

Does anyone really believe that a STRONG DOLLAR is the key issue for the OBAMA ECONOMIC TEAM? The Chinese have to be more than concerned that the DOLLAR cannot find a bid even amongst all the global financial turmoil. The U.S. DOLLAR seems to be the mainstay of the CARRY TRADE and no longer the beneficiary of HAVEN STATUS.

The big story today was to be the news from the SNB and the SWISS Finance Ministry about the elevated value of the FRANC. The market had evidently believed that the SNB was going to announce some type of PEG to the EURO and when that  failed to materialize the SWISS FRANC became BID in a relief rally. The SNB did announce a further add to bank reserves resulting in the short-term rates (EURO SWISS FUTURES) rallied to 100.25, resulting in 3-month deposits yielding a negative 25 basis points.

It seems that the Swiss believe that adding reserves in an effort to penalize money entering Switzerland is the easiest tool to use as it will be the least onerous to unwind, for when the FRANC finally stabilizes it will be able to withdraw the reserves. The SWISS closed fairly strong as the finance minister announced that the government will provide support funds to businesses and citizens adversely affected by the huge rally in the FRANC. Providing short-term economic relief was deemed by the markets to be a very soft response. Investors are nervous about the Swissie but at some point the markets will move to test the resolve of the Swiss authorities, especially as GOLD continues its climb as being one of the few havens remaining.

In a further testimony to the weakness of the U.S. DOLLAR, the British released two key pieces of economic data: the unemployment report and the notes from the BOE meeting. In the U.K., the jobless rate climbed to 7.9% from 7.7% as the market was expecting  no change from the previous month. The claimant number also increased as more Brits went on unemployment relief. It was also revealed that the MPC of the BOE voted unanimously to leave interest rates unchanged versus the previous 7-2 in which two dissenters wished to raise rates.

These two releases would have previously been deemed very negative for the POUND. In fact, the British currency did initially drop but snapped back quickly. By New York’s close, the British POUND had put in its highest daily close since April. Let’s see … very weak economic data and a previous week of riots by a lower middle class citizenry growing disillusioned by the economic malaise of the past three years … and the POUND still gained in strength. It may be related to the EURO but it may be more closely tied to the DOLLAR–certainly something to be paying close attention to.

MR. BIDEN, I DON’T ENVY YOUR TASK, but as Henry Wotton said back in the early 17th century, “A DIPLOMAT IS AN HONEST MAN SENT ABROAD TO LIE FOR HIS COUNTRY.”

Tags: carry trade, China, Election 2012, euro swiss futures, Federal Reserve, Gold, haven status, Joe Biden, Obama, Pound, SNB, strong dollar, Swiss Franc, zero interest rates

This entry was posted on August 17, 2011 at 7:49 pm and is filed under China, Currency, Switzerland, UK. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.