Weak Dollar? Blame Evo

This morning, Bolivia's Central Bank announced in a communique that it was lowering the exchange rate of the Bolivian Peso (BOB, aka "El Boliviano") by 1 cent, with the sell now set at 7.06 (was 7.07) to the US Dollar and the buy at 6.96. This slight appreciation is part of the crawling peg system used (very successfully) by Bolivia and reflects demand for the local currency.

All fair enough and not a big deal, but it has brought up the IKN "Dumbass Biz Headline of the Day" award handed to Disassociated Press via El Nuevo Herald:

"Bolivian Government Devalues The Dollar"

Seriously, who writes this piffle? Since when can the government of Bolivia devalue the United States currency? Sure they've appreciated their own currency but FerCryinOutLoud, it shows just how little these hacks knows about their subject matter.

Silver, the US dollar and SezMeMan

You should visit the interwebs space run by Sez-Me-Man because the dude is smart as a whip when it comes to gold, precious metals, oil and the companies in those spheres. He's also more TA-oriented than around here with this chart swiped today from his site as proof:

(click to enlarge)

So, is silver doing the old DonCoxe triple waterfall here? Is the dollar about to roar back? YOU BE THE JUDGE but get smarter about the markets by making Sez a part of your interwebnetpipes life (or follow his  twitter account as he's pretty active there). Solid, straightshooting guy too.

These two charts related, perchance?

No further commentary.

the euro and the dollar, charting the recent action

Not usual IKN fare, but it gets a space today by way of a request.

This visual shows the bounce when the Big Fat Greek Bailout was announced, the subsequent selloff vs the greenback and then the recent climb. The rebound is modest so far, but according to this 90 min candle chart it does seem to have legs.

The Fed, the discount rate, the dollar and gold

So the Fed did this after the close today (excerpt)

In a statement Thursday, the Fed said it would raise its discount, or primary credit rate, to 0.75% from 0.5% effective on Friday. The central bank also said that, effective on March 18, the maximum maturity for discount window loans will be shortened to overnight.

Then the dollar did this....
.....but gold's reaction did catch my eye.

Gold first did the logical swandive, but then got bought back up. It's after-hours action so maybe the market is too thin to read with accuracy, but the action and then re-action in Au suggests that you shouldn't read too much into the Fed's move. After all, it was expected in March, so even though it's come maybe three weeks earlier than expected it's not a big shocker.

Whatever happens tomorrow, it is shaping up as an interesting day for the metals.

Update: Nice comment from Gary Biiwii. Also, gold futs dropped again...like i say...thin market and we'll get definition tomorrow. It's gonna be a fun day for sure but until then no more silly micromanagement

Venezuelan financials

For those of your versed in the language of Cervantes, this report from America Economia comes highly recommended. It covers the financial system in Venezuela, the exchange rate system from a micro and macro viewpoint, the role of the parallel dollar market, the Central Bank, PDVSA and all related matters.

It's good, solid, balanced reporting that has something for everyone, from the 101 level to the expert insider. Refreshing to see an article based on facts when it comes to the subject of Venezuela's economy instead of the usual soapbox idiocy. Good job AE.

What good is a dollar?

This fabbo image...

.....and more of the same style (there's a dragon, a camera, a penguin and a scorpion... the scorpion is my fave) are from this post at Humble Student of the Markets today. Cam Hui adds even more value to the origami with an observation on the dollar that I agree with totally.

Today's must see.

mailbag

Reader 'T' and I have swapped a few mails this morning and he's given me permission to publish the following mail he sent as part of the exchange.

It's a salutory reminder. A smart, financially literate guy such as 'T' who is making a positive difference to his net worth by being successful and trading metals stocks can see that by being inside the dollarzone, all he's really doing is running to stand still. So what about the vast majority of citizens that aren't as market savvy as 'T'?

I get the feeling that what they've been through in the last 18 months or so may be just the tip of the iceberg. Here's 'T's mail:

You're lucky you don't have to figure out what to do with your cash, with our default being USD that means we are at risk even when we're trying to be conservative. Even our savings "cushion" doesn't give us the security it should because it erodes every week. No wonder the markets are levitating, who wants to park cash in USD? But I have to say while it's a fun intellectual event it sucks to live in the country whose currency is going down the shitter. My wife's money is kept all in cash (and some physical gold) because I didn't want to be risky with it, but it turns out she is much worse off. That's what the country gets for abusing its reserve currency, but there are lots of individuals (like her) who only acted responsibly and never spent more than they had (or anywhere close to what they had), and it looks like they are going to be the biggest losers.

Sorry, just a rant. Times are getting more and more "interesting" in the Chinese fashion.

Chart of the day is....

...the US Dollar index..

....because it's the centre of everything today. The hikes in gold, copper, lead, zinc, silver, nickel...hell, even alu is up over a point this morning, it's all directly related to the dollardrop.

The above is the 15 minute candle showsing what's happening right here right now, but if we pan out and look at the hourly candle....

....it seems clear that 76 is the line in the sand. The USD bounced slightly North of 76 this morning with a re-test likely.

Looking further afield, thoughts on that 76 number are confirmed....

...and any breakdown would see the next resistance level at 72.

All the above should be considered by technical analysts. Personally i think it's all total bunk and a pseudoscience created by people who think they can get rich quick by following squiggly lines or become experts in a field without ever having to do serious study or hard work, but WTFDIK?

UPDATE: LOL! I knew I'd get him :-). Click through to find one of the exceptions to the rule.

You may be wondering why the financial media haven't mentioned Venezuela's parallel currency rate recently.

The reason is that the Bolivar Fuerte (VEF) has appreciated by over 10% versus the dollar since the beginning of August.

As Insipid Bridges said on July 8th "Any further weakening of the Bolivar will mean problems for Chavez", so as the VEF has strengthened since then (from 6.6 to 6.22 vs the greenback), it therefore follows that this must be good news.

Therefore it isn't reported.

Mojitos served, the end.

Nice Chart from Biiwii this morning

Check out this link on which you'll find a smart graphic from the meisterchartman, Biiwii Gary. It's all about the S&P index and the dollar, so not the normal LatAm fare you find here, but I reckon it to be a very astute observation.

I'm not pasting it here, you can go over and see it at the source. Daylight come an' me wanna go home.

Neil Innes versus the goldbugs

They're still sending unsolicited crap to my mailbox, you know. Normally it just gets deleted unseen, but as it's August and quiet and all that I've been reading a few this morning and having myself a jolly good titter. The latest from the arch-dumbass pied piper Jim Willie was a good one, as it has this chart:

Longer-standing readers might remember this IKN post back in September on the idiotic Jim Willie that had him on about exactly the the same dollar demise, exactly the same "gold to da moon Alice" and exactly the same hilarity-by-chart (which I've just noticed predicted the imminent arrival of "mammoth inflation"....on September 12! ROFL!)

So now that the dollar has broken back up'n'thru the dumbass's latest set of squiggly, wiggly lines less than a week after yet again calling for the-end-of-the-world-we're-all-doomed-doomed-ah-tells-ya, I think it best to hand over to Neil Innes and his Protest Song:

All the prophets of doom can always find room
In a world full of worry and fear
Tip cigarettes and chemistry sets
And rudolph the red-nosed reindeer
So I'm goin back to my little old shack
And drink me a bottle of wine
That was mis en bouteille before my birthday
And have me a f****** good time*

(*this youtube version uses "fantastic time")

Venezuela parallel rate update

About time we checked out the progress of the parallel rate. Here's the main chart....

..showing the recent action, April 2009 to date. And what we see is another case of "not much happening". This morning the ask is at VEF6.82 for a dollar, by the way (much to the chagrin of dumbass doom prophets). But as is our wont, let's check out a couple of the main underlying fundamentals that explain why the permuta VEF is where it is. First the evolution of international currency reserves in Venezuela...

...and please note that this chart (for my own screwy XLS reasons) reads right to left. So right now Venezuela has U$30.69Bn tucked away in its reserves pouch. That's a tidy enough sum. However, the good news about reserves is outweighed by the bad news in the next chart:

As a quick reminder (we've done this one before) "M2" refers to the money in circulation in the country, both in the form of physical bills/coins and the money kept in the banking system (your savings amount desposit total, for example). In other words, M2 is basically "how much money there is in the country".

So in the above chart, we see that M2 has risen from the VEF equivalent of U$88Bn in April to VEF eq U$97Bn in July. People, that's a LOT. This means there's 10% more currency floating round Venezuela than there was just three months ago. M2 growth is acelerating since the last time we looked at it, from around 30% per annum to around 43%. This means that Venezuela will come under further inflationary pressure, sad to say.

But back to the parallel rate for a moment: Right now the rate stands at 6.82/1 and this is backed up by monetary theory. If we divide M2 by reserves and then multiply it by the official exchgne rate to get the VEF equivalent, the answer 6.82 pops, out, which is right on the button at the moment. However as the trend is for M2 to grow faster than reserves, the chances are that the parallel rate with continue higher and break 7 in the months to come.

Regional currencies update

With Bloomie blasting silly headlines about Chile's Peso (CLP) being "the world's best currency this week" and Colombia's "the worst", I thought it was high time to revisit the evolution of local currencies versus the dollar and get a bit of perspective. This one year chart....

.....shows the various rises and falls (or in Argentina's case rises and rises) against the dollar for the major locally floated currencies (not much point in featuring the Vzla Bolivar Fuerte here, and Paraguay's Guaraní.....well, it's never going to attract the attention of George Soros, is it?).

The main takeaway? Some currencies are strengthing back more quickly than others. But in the end, when push comes to shove and despite all the worldwide handwringing about Helicopter Ben and his printing presses, the dollar is still the daddy. Every single major trade currency in LatAm is down against the dollar YoY, even the economic miracle packaged up for saps with a bow and labelled Peru. And with base lending rates dropping fast all over the region as countries try to stimulate growth, the attraction of parking cash at higher risk is lessening, too.

Anecdotally, if you ever need a lesson in what the term "reserve currency" really means come down here with a thousand British Pounds, or Euros, of Aussies or Loonies or even an ounce of gold in your pocket and try to exchange them for the local currency of your choice and at the same time get the same fair deal you'd get for the equivalent amount of USDs. They say travel broadens the mind..................

"Psst! Wanna buy a Venezuelan gold backed dollar bond, guv?"

In Venezuela, there is mucho talk from mucho places about how the goverment is setting itself up to raise cash by selling (or attempting to sell) a new swathe of bonds to a willing world. This article in Bloomberg outlines the bureaucratic nuts'n'bolts filings that have taken place recently. Most intriguing are the manifold rumours swirling around about gold-backed bonds being emitted by CVG. There is a lot of confusion and the story is by far from definitive yet, but this (as far as I can work out) is the general scenario:

1) CVG is a quasi-state run company that operates heavy industry in the South of the country

2) The idea is for CVG to raise up to U$6Bn on dollar denominated bonds that will be backed up by gold production in the years to come.

3) Much the same way as the previous years' PDVSA bonds emissions, the bonds will be offered to Venezuelans via the private banking system. Citizens can pay for the dollar bonds using Bolivares Fuertes (VEF), probably paying a significant premium to the official 2.15/U$1 rate.

If it happens this way, the bonds will be wildly and incredibly popular with the local citizens. Even if the government makes people pay 3.0 for every bond-dollar, it's a big difference to the 6.50/6.90 spread currently offered by the parallel market. Or put theoretically:

• You buy a $1,000 dollar bond using VEF3,000
• The next day you sell that bond back to the banks for, let's say a 10% hairut. The bank gives you U$900.
• You run down the street and buy VEF5,850 with your dollars.

Now for sure the scenario isn't as smooth as that, but the theory will hold true even if the bank takes a more probable 30% haircut on the bonds (i.e. gives you U$700) and even if the parallel rate drops to VEF6.0 = U$1 (you finish with VEF4,200, which is still a nice day's work).

The question will then be "What do the local banks do with all their CVG dollar bonds?". These will be rather....hmm, how can we say this diplomatially...rather dubious financial devices in the end. Backing a dollar bond with revenue from gold that is still underground and mixed up in its mineral rock is a bit of a stretch, especially when you consider the dog's dinner that CVG has made of its non-production around the KM88 region so far this....well, this century, basically. Then there's the inflation in Venezuela and the way the local currency is fading against the dollar. A large lump of dollar debt may become rather difficult for CVG to service in the medium term and the local banks know it. They won't want to hold a stack of CVG dolalr bond paper in their safes, whatever nominal asset value may be printed on them

So Venezuelan banks will be keen to punt plenty of this paper on to other people. AND THAT'S WHERE YOU COME IN, GRINGOS! If all the above does come to pass as has been suggested by the Veenezuelan financial jungledrums, the world financial community will certainly get the "wonderful opportunity" to invest in "gold-backed dollar bonds" from Venezuela "at a considerable and attractive discount to face value".

My advice is that you should avoid such paper like the plague, as the buck has to stop somewhere. If...

• Venezuela is happy with its shiny new U$6bn in funds, and...
• Locals are happy to have made some coin from a quick flip, and....
• Venezuelan banks are happy to have made coin by punting the bnods off to foreign concerns...

...there has to be someone who pays for the party. Look in the mirror, blue-eyed-whitey. If all this happens, Venezuelan banks will be keen to offer any sort of arbitrage over the haircut offered to locals, so if you get the "$1,000 worth of dollar bonds back up by GOLD! for just $710" pitch, please don't go there.

However there is another side to all this. The Venezuelan government needs the cash, so it'll be keen to make this happen. So it must appease the local banks and make the deal profitable one for them, because otherwise it's not going to happen and Hugo&Co won't get their hands on the funds they seem to need (and with more than a little urgency, I gather). Therefore if the bonds deal doen't go ahead, the flipside is that Venezuela ill have to do something quick to shore up its finances. This mean...yep you guessed it...the deval. Thus watching the parallel market in the days and weeks to come will give you a very good idea of whether the government bonds deals will happen and, more importantly, whether they will be successful. Here's what the exchange rate looks like right now.


DYODD.

Ecuador Bonds: Game on

It took over four months for the Ecuador defaulted bondholders to make a move, but yesterday they tipped their card everso slightly. Reuters reported yesterday afternoon (Soto, natch) that they had got their hands on (i.e. sent by bondholders on a courier bike) a letter sent by the holders of a minor slice of the bond pie (estimated at $130m or above by Eurasia's Patrick Esteruelas). The letter had been sent to the government of Ecuador and requested the government to make good on the full amount of the bond capital and interest due.

Interesting that they should have waited until after the Presidential elections to make this opening gambit. This story is at the top of the second, approximately. Watch this space.

The inflation menace on weak-currency LatAm: a practical example

Here's the chart of the Argentine Peso (ARS) over the past three months (basically 2009):

We can see the near 10% devaluation versus the greenback in this period. This is good for exports, of course......errrr...except that nobody is buying anything. This makes imports more expensive, but that's not a real problem because....errrrr...nobody is buying anything. Hopefully both those situations will change, as LatAm as a block is a net exporter and therefore a net gainer from a recharged world.

But for dollar demoninated goods (eg world traded commodities) it means that locals will have to pay more for more inelastic demand goods things like wheat, porkbellies and fuel, even if they're produced at home base. As our topical example, Critica today reports that fuel prices in Argentina have risen by up to 5.5% due to the softening of the local currency against the greenback.

The problem is not limited to just fuel and just Argentina, of course. With most of the regional currencies having suffered recently versus Uncle Buck, the phenomena of monetary inflation is starting to arrive on the shores of the continent. This is not something to ignore in the months ahead because the last thing a collection of emerging markets needs is a nasty dose of stagflation.

Bistromatics, Venezuelan edition

In my ongoing efforts to popularize the late Douglas Adams' stunningly perceptive concept of Bistromatics, my idea was to write a really long and wonky post about the problems Chávez&Co are unleashing upon themselves by tapping the country's international currency reserves to the tune of $12Bn, the money transfer coming up this month.

However there is good news: I've just been given a headsup that Quico over at Caracas Chronicles has just beaten me to it. And now the GREAT news; his post is much easier to understand on the subject than mine would have been, so please go over and have a look for yourself. Here's the link. But before I go, here are a couple of comments on his generally excellent article.

1) Quico is a raging Chávez hater and carries that message in everything he writes. So be it, I'm not my brother's keeper etc.

2) However, all the numbers and charts and stats he uses are, in my view at least, spot on. So Otto sez filter out the dogma, forget the politics on offer and concentrate on the fact that the numbers show Chávez is heading for an economic SNAFU. After all, Venezuela has always been totally addicted to oil and the same problems have shown themselves in any administration that lived through an oil price slump; this isn't something unique to Señor RedShirt.

3) I'd like to add this chart (which I cooked up yesterday) as this is just about the only chart relationship Quico didn't have that I would have used. It shows the Reserves-over-M2 rate compared to the real parallel exchange rate in Venezuela, January 2008 to date. It adds that final light blue spike to show where the reserves ratio predicts the parallel rate once the $12Bn is taken from Central Bank reserves.

You'll note that over the longer term the blue line has acted as a sort of anchor for the more volatile parallel rate. It's not an exact fit though, as other things affect the parallel market that live outside the world of theoretical economics and in the world of reality. For example in the April 2008 to July 2008 period the parallel rate was suppressed by bonds emissions that offered virtual free money for those lucky enough to be on board. Then when it became clear in August that there would be no more bonds delivered to market by Venezuela, the parallel popped back up (and overshot somewhat in my opinion). Then in the last few weeks we've seen extra pressure on the VEF due precisely to the recently announced policy of central bank reserves withdrawal. As the move was widely expected, the speculative pressure was already on the parallel VEF.

Really, this chart is just another way of presenting Quico's chart of the comparison to inflation data, but as the chart here is more pure monetary in nature it might be a better way to play. You be the judge. Anyway, all the above doesn't really stand on its own. To get the full idea of what's going on, check out Quico's really top class post. Here's the link again, just in case. now for that Bistromatics excerpt again.

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Bistromatics was created by Douglas Adams in the "Hitch Hikers Guide to the Galaxy" series. For those unacquainted with this important mathematical theory, here is the definition of the term as culled from the book:

The Bistromatics Drive is a wonderful new method of crossing vast interstellar distances without all that dangerous mucking about with Improbability Factors. Bistromatics Itself is simply a revolutionary new way of understanding the behaviour of numbers. Just as Einstein observed that time was not an absolute but depended on the observer’s movement in space, and that space was not an absolute but depended on the observer’s movement in time, so it is now realized that numbers are not absolute, but depend on the observer’s movement in restaurants.

The first nonabsolute number is the number of people for whom the table is reserved. This will vary during the course of the first three telephone calls to the restaurant, and then bear no apparent relation to the number of people who actually turn up, or to the number of people who subsequently join them after the show/match/party/gig, or to the number of people who leave when they see who else has turned up.

The second nonabsolute number is the given time of arrival, which is now known to be one of the most bizarre of mathematical concepts, a recipriversexcluson, a number whose existence can only be defined as being anything other than itself. In other words the given time of arrival is the one moment in time at which is impossible that any member of the party will arrive. Reciproverexclusons now play a vital part in many branches of maths, including statistics and accountancy and also form the basic equations used to engineer the Somebody Else’s Problem field.

The third and most mysterious piece of nonabsoluteness of all lies in the relationship between the number of items on the check, the cost of each item, the number of people at the table and what they are each prepared to pay for.

Numbers written on restaurant checks within the confines of restaurants do not follow the same mathematical laws as numbers written on any other pieces of paper in any other parts of the Universe….

Bad news for Ecuador-haters

Isn't it strange how people vent anger by demonizing a whole country? Anyway, that slight non-seq aside, here's a couple of snippets from the land of the Muffin:

1) The new mining law has passed its first reading. It now spends a week in committee before going to the second debate. If it passes debate two (which should happen before the end of December, but relax and smell flowers if it doesn't happen til January, yeah?) then it just needs the Congresillo rubber-stamps and its a done deal. Were you warned and did you have the time to take advantage? Yes you were. The good news is that there's plenty more to come. If you want a copy of the 3mega 88 page Spanish language PDF that was debated in the assembly, send me a mail; I don't see why I should be the only one to suffer ;-)

2) Correa isn't dropping the dollar. Bloomie (via Stephan Kueffner, who along with Alonso Soto at Reuters Ecuador does a good job in covering the country) notes in a Radio MUFN soundbite yesterday, Correa said, "It would be stupidity to drop the dollar under these circumstances."

Where does that leave Alberto Ramos of Goldman Sachs and his "I would not make a bet that we will have dollarization in three to five years?". Well, it just highlights what a hedged and non-commital statement it was in the first place. Certainly far more wishy-washy than the screaming "Ecuador May Be Forced to Scrap Dollar After Default" headline slapped on top of the story. The authors? Oh wow! Lester "ring the usual suspects" Pimentel and Matthew "balance is for suckers" Walter. Tell 'em what they want to hear, boyz........



PS: thanks once again to reader DMMwatcher, who is keeping tabs on the mining law's passage far more closely than me and gave the headsup about the first passage yesterday afternoon. He shows me up as the slacker that I am, but I'm grateful all the same :-). And with a handle like his he's probably be a bit richer after this week's market action, too :-)

Dollar, Dogma and Dinero Dorado

Some enjoyable e-mail banter between your humble scribe and Biiwii Gary (one of those few people that are good at reading charts as mentioned this morning). He tried reminding me that I'm a dollar bull and I said "aha! not no more!" and he said "you can't change opinions!! That's cheating!!!" and I said "don't care" and stuff to that effect etc etc.

.

But there is a serious point worth sharing here; with respect to the strong dollar I previously said give me reasons to prove me wrong and I'll happily admit it. The Fed just gave us all the most enormous reason to hate the dollar yesterday, so i go with JM Keynes when he said;

"When the fact change I change my mind. What do you do, Sir?"

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The virtual ZIRP unveiled by Bennyboy yesterday gives MONETARY reasons to like all assets. Things like traded commondities have the other part of the equation to factor in, i.e. end demand. You can see the difference in the way that e.g. copper (a true commod) and e.g. gold (a true asset) have reacted in the last couple of days.

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A fun part of the mix is silver. As pointed out in a recent post, Silver decoupled from tracking gold and started following the broad markets like a faithful dog. Or in other words it moved from its Dr Jekyll asset personality to its Mr Hyde industrial commodity personality. Silver could be the acid test to gauge whether this asset rally has real legs. But remember; there really is nothing new under the sun.