The other side of the currency wars…

  • Big Australian
  • Bigger Australian
  • Big American
  • Big Europe

From the Economic Times:

Warning US President Donald Trump to desist from initiating “trade wars” or acting on his poll pledges of hiking tariffs against Chinese goods and declaring Beijing as currency manipulator, China today said that both countries will suffer from such moves.

Trade warscurrency wars…it’s the same thing.

All you need to know is that the currency wars continue. And, as an investor, it’s important to know where these wars are happening, in what form, and how you can strike at them in an effort to clock up profits.

But here’s the thing: It’s a mistake to think that currency wars only involve direct input from governments and central banks.

Currency wars have many indirect impacts, too. Sometimes in places you least expect. We’ll explore that below…

Markets

Overnight, the Dow Jones Industrial Average gained 112.86 points, or 0.57%.

The S&P 500 added 14.87 points, or 0.66%.

In Europe, the Euro Stoxx 50 index closed up by 8.49 points, for a 0.26% gain. Meanwhile, the FTSE 100 fell 0.01%, and Germany’s DAX index gained 0.43%.

In Asian markets, Japan’s Nikkei 225 index is up 204.35 points, or 1.09%. China’s CSI 300 is up 0.1%.

In Australia, the S&P/ASX 200 is up 24.6 points, or 0.44%.

On the commodities markets, West Texas Intermediate crude oil is US$52.98 per barrel. Brent crude is US$55.28 per barrel.

Gold is trading for US$1,208.93 (AU$1,601.69) per troy ounce. Silver is US$17.06 (AU$22.60) per troy ounce.

The Aussie dollar is worth 75.48 US cents.

Big Australian

Bloomberg reports:

‘[Australian wheat] output in 12 months that started Oct. 1 will jump to 33m tons from 24.5m a year earlier, USDA’s Foreign Agricultural Service says in report posted Tuesday on website.

The USDA Foreign Agricultural Services suggests that better weather conditions are ‘expected to support almost record production.

We have no doubt that better weather helps crops. That strikes us as a no-brainer.

But it’s also important to understand that the wheat price, along with every other commodity, has been deeply affected by the global currency wars.

Check out the chart below. The white line is the near-dated futures contract for wheat. The orange line is the US Dollar Index:



chart image

Source: Bloomberg
Click to enlarge


You can see that there is an almost perfect inverse correlation between them.

As the US dollar rises, the wheat price falls. As the US dollar falls, the wheat price goes up.

There’s a simple reason for that. Yes, seasonality affects the wheat price. Yes, supply and demand affects the wheat price. But the value of the US dollar affects it too.

And of course, the US dollar is the biggest player in the global currency wars. So it’s only natural that, as the currency wars play out, the US dollar will move, and that will move the price of commodities — including wheat.

The interesting aspect to this chart is where the US dollar and wheat price will move next. Is this a momentum play, whereby the wheat price will continue to rise in line with its recent rally?

Or is this a reversal play, where the wheat price will turnabout and fall, following the recent gains?

According to the latest research from our premium macroeconomic trading service, Currency Wars Trader:

When inflation is expected to increase, the price of wheat climbs higher. When the inflation outlook is low, wheat falls.

So, what’s the directional play here? Long or short?

Naturally, we can’t reveal that, as it’s for Currency Wars Trader subscribers only. But we can give you a clue.

Today, Bloomberg reports:

Australia’s core consumer prices rose less than forecast in the final three months of last year. The currency dropped.

Overall, economists had expected the quarterly consumer price index (CPI) to rise 0.7%. It actually rose just 0.5%. Economists expected the annual CPI to be 1.6%. It actually rose 1.5%.

So again, what does that mean? Wheat up or wheat down?

Subscribers to Currency Wars Trader know exactly what it means. And they also know all about the two other trades that make up our ‘Big Australian Short’ investment case.

For details, if you haven’t seen them yet, go here.

Bigger Australian

Another winner, or victim, of the global currency wars is the Aussie resources sector.

While the rampant US dollar had pushed commodity prices down, some commodity prices have rebounded (notably iron ore and oil), and this has helped push share prices of the big miners higher.

For instance, BHP Billiton Ltd [ASX:BHP] is up 95% since it hit a multi-year low in January last year:



chart image

Source: Bloomberg
Click to enlarge


It’s a stunning reversal. At the time at which BHP hit rock-bottom, the iron ore price was on the slide. Some folks thought it could fall to US$20 or US$30 per tonne.

At the same time, there was the real potential for the BHP share price to fall into the single digits. That would have been stunning, considering it hit a record high above $46 in May 2008…just before the world’s markets crashed.

There have been similar and larger gains for the two other major iron ore producers, Rio Tinto Ltd [ASX:RIO] and Fortescue Metals Group Ltd [ASX:FMG].

But now, after five straight years of falling revenues, and a big loss for BHP, the forecast is for the company’s revenues to increase this year, and for a return to profit.

According to estimates compiled by Bloomberg, BHP’s revenues will rise from US$30.9 billion last year, to US$38.9 billion this year. Net income will rise from a US$6.4 billion loss last year, to a US$6.7 billion profit this year.

While this may be considered a new boom for the resources sector, there’s an equal argument to say that the market simply overreacted on the downside, and is either just now returning to ‘fair value’ (if such a thing really exists), or that it’s in danger of moving into overvalued territory.

Either way, it sounds like a potential profit opportunity to us. It’s just a matter of picking the direction, and picking the right stock. Easy!

No, of course it’s not easy. But our Currency Wars Trader analysts have done their darnedest to work it all out for their subscribers.

They’ve picked a stock, and they’ve picked the direction. If they’re right, it could result in big gains as the Aussie and world markets move into the next phase of the currency wars. Details here.

Big American

From Bloomberg:

President Donald Trump’s pick for budget director, Mick Mulvaney, said Tuesday the nearly $20 trillion national debt needs to be “addressed sooner rather than later” and that he would push Trump to break his campaign promises and cut Social Security and Medicare.

When it comes to the US national debt, it’s almost impossible to predict what Trump will do.

Trump’s claims during the election campaign about the stock market being a ‘big fat ugly bubble’ would suggest that he wants interest rates to go up, and debt to fall.

But Trump has also said that he wants to ‘Make America Great Again’. That was his campaign slogan. And to do so, the plan would involve spending billions and trillions of dollars of private and public money on new infrastructure.

As much as Republicans may like to think that they, and Trump, will be fiscally conservative, our bet is that they, and he, will be fiscally profligate.

The Republicans will soon control all three branches of government. They currently control the executive and the legislative. And once Trump selects a new Supreme Court justice, they will control the judicial branch, too.

Once that happens, is there anything to stop them doing as they wish? In order to keep spending, the Republicans only need control over Congress (legislative) and the presidency (executive).

When the US ‘debt ceiling’ expires in March, does it seem likely that they’ll retain the ceiling at the current level? No, of course not.

What other reason is there for politicians to seek power other than to exercise the power once they have it?

Very few people have ever turned their back on power voluntarily, without the comfort of a handsome pension and benefits for life.

It was what made George Washington’s decision to not seek re-election after his second term all the more remarkable. At that time, people were used to kings and queens and dictators coming to power and then staying in power until they died (either by natural or unnatural causes).

But after his second term, Washington walked away to return to his property at Mount Vernon, Virginia. This was seen as such a symbolic gesture that no US president had been successful in achieving a third term until Franklin Delano Roosevelt in 1944.

The 22nd amendment of the US Constitution imposed term limits to make sure no president could seek a third term.

Anyway, this is the first time in years that Republicans have had complete control. So to think that they’ll do anything other than make the most of it, by spending up big, is wishful thinking.

America’s big debt is set to get bigger.

Big Europe

The smug Financial Times couldn’t be happier. The UK Supreme Court has ruled that Parliament must have the final say on the Article 50 process to leave the European Union.

Although, to be fair, the arguments over this are tinged with hypocrisy and irony on both sides.

Those who voted to leave the EU and restore sovereignty to Parliament have argued that Parliament shouldn’t, or doesn’t, need to vote on invoking Article 50.

Those who voted to stay in the EU, and therefore maintain Parliament’s diluted influence over UK affairs, have argued that Parliament must have a vote on invoking Article 50.

As for our take on this? We maintain our view that whatever the British people want and the Parliament decides, the EU and the Deep State will never allow the UK to leave.

Once in, always in.

Cheers,
Kris