U.S. Treasury Department Lays Down the Currency Law

For over a quarter-century now, the US Treasury Department has released a formulaic report on the currency policy and practices of key economies on a semi-annual basis. On occasion, it has hauled up a trading partner as a ‘currency manipulator’ and proceeded to jawbone that partner to appreciate its currency and shrink its bilateral trade surplus. This was the case with South Korea and Taiwan in 1988 and then again in 1992 with China and Taiwan.

CFTC: Gross Futures Positions Show Significant Shifts

In the first week of June, which featured both the largely uneventful ECB meeting, and the surprisingly weak US jobs data through the first couple sessions this week saw speculators make several significant adjustments to their positions.

Overall, the adjustment was in favor of the US dollar and US Treasuries. Of note, the dollar tended to weaken in the spot market over in the CFTC Commitment of Traders reporting week ending June 7.   After the end of the report period, the dollar recovered. 

Is Gold Back?

It wasn't so long ago that some of the more famous investor gurus were shrugging off gold as nothing more than shiny trinkets with no investment value. They were wrong. This safe haven is back, the recovery is clear, and there have been some very big changes of heart.

The biggest gold producers in the world have seen their share prices double this year. Not only are gold prices soaring, but producers are cutting costs and slimming down debt as they pave the way for gold to return to the top of the favored commodities list.

Collateral Currency Damage from Poorly Timed Rate Hikes

Renewed allegations of “currency manipulation” in the US-China bilateral agenda have less to do with the Chinese renminbi than US election politics and the Fed’s anticipated rate hikes.

Even before the start of the eighth and final Strategic and Economic Dialogue (S&ED) of the Obama administration, the issue of the exchange rate is back on the agenda.

Intervention or Valuation Change?

News that Switzerland's reserves rose to a new record high of CHF602.1 bln in May from CHF587.9 bln in April spurred talk that the SNB has been intervening covertly.  One media account cited one trader that terms the intervention as "massive."

We are skeptical.  Given the massive holdings of foreign currencies, we suspect that the swing in valuation likely accounts for an apparent increase in reserves.  The reserves are reported in Swiss francs and it fell against both the euro and the dollar in May. 

Speculators are Ho-Hum Prior to Key Events

Even recognizing a holiday-short week, speculative position adjustments were minor in the days before the ECB meeting and the US jobs report.  There were no gross position adjustments that met the 10k contract threshold.

The largest gross position adjustment was the liquidation of 7.8k gross long yen contracts.  This leave 47.0k long contracts, which is the second largest gross long speculative position after the euro where the speculative gross long position stood at 98.2k contracts (after increasing by 4.3k contracts in the reporting week ending May 31.

Data, So Far Mixed, Confuses the Currency Picture

The US dollar is trading with a heavier bias to start the month of June.  Weaker stocks and firmer bonds has seen the yen rise the most, while sterling's losses have been extended after an ICM telephone survey showed a small lead for those favoring Brexit. 

Options Market Stressing over a Brexit

Many market participants began talking as if it were nearly a done deal that the UK will vote to stay in the EU.  It is as if Winston Churchill's witticism that Americans can be counted on to do the right thing after they have exhausted the alternatives really applied to the UK. 

We noted that despite sterling's higher trend, the options market, where contingent risk is best expressed, was still showing high levels of stress and uncertainty. Insurance against Brexitis still being sought and investors were paying up for it. 

CFTC: Where did the Aussie Dollar and Yen Longs Go?

There were only two significant speculative position adjustments in the latest CFTC reporting week ending May 24.  Speculators liquidated 31.4k gross long yen contracts, leaving the bulls with 54.8k contracts.  It is the largest weekly adjustment since last September.

Speculators have not been particularly keen to pick a yen top.  The gross short position rose by 5.5k contracts to 32.7k, and only 2k contracts on the month, while the yen has weakened 3.5% in the spot market 

Finding the True Measure of Gold

Many investors still think about gold as if it were money.  Economists identify three functions of money: store of value, means of exchange, and a unit of account.  It can be a store of value, but the price fluctuates compared with other forms of money, or other commodities, like oil or silver.

Some argue that it is a store of value because of the limited supply, but that argument applies to many other goods, including commodities and real estate (which Mark Twain said you have to invest in because they have stopped making it).