June 11 was a hairy day in all markets. Trouble rose on all sides as several dynamics caused a ripple across the currency market.
For starters, oil shot up to an all-time high above $146 a barrel on news that Israel could strike Iran for firing test missiles that have the ability to reach them.
So this alone was enough to start the stock market opening out on a negative tone. (After all, a 10 percent move in oil typically translates into a 1 percent move in the euro.)
But one of the Fed officials, William Poole, had already popped off and said that “Freddie Mac is insolvent under fair value accounting rules. The company owed $5.2 billion more than its assets were worth in the first quarter.”
Then Poole went on to attack Fannie Mae saying that “Fannie Mae’s liabilities may exceed assets next quarter.”
Boy, with a Fed like that, who needs enemies, huh? After all, Congress created Freddie Mac and then later on Fannie Mac in 1970 to promote home buying in the U.S.
Now with the home market already struggling, it’s like Poole was trying to put the nail in the coffin for these two.
Here’s the only problem. They own or guarantee almost one half of the $12 trillion of home loans in the U.S.
Poole’s comments alone caused a panic to start, and these two stocks dropped about 50 percent in value in early trading on Friday on about 400 million shares traded (which is almost more than 20 times the typical trading volume).
With these stocks being priced between $5 and $10 presently, there’s not much room left to for them to fall before they would be not only delisted from the exchange, but more importantly, insolvent.
There were a lot of comments that came out June 11 that attempted to reassure the market about these two companies. However, if they went insolvent, the government would have to take them over. If that happened, the public shareholders of both of these companies would likely lose all of their investments.
Yeah a host of people got in line to stand up for these two. Treasury Secretary Henry Paulson said “the government is supporting the two largest buyers of U.S. home loans in their current form.” (Meaning that he wanted to see them stay publicly traded companies. So he was trying to put the shareholders at rest.)
Paulson went on to add that “the government has no plans to take over Freddie and Fannie.”
Then Fannie Mae went on record as saying that it had plenty of liquidity.
Then a Citigroup analyst, Bradley Ball, recommended that their clients buy the stocks saying that the slide was based off of fear.
Even Senate Banking Committee Chairman Christopher Dodd came out in support of Fannie Mae stating that “borrowing from the Federal Reserve may be an option.”
All of this did help a bit at the moment as the stocks jumped off of their 17-year lows. But they’re only $5 to $10 stocks even still. So they’re still in a vulnerable state for sure.
So how did all of this affect currencies? Well the U.S. dollar slid off big time. In fact, it came within one cent of an all-time low vs. the euro. The EUR/USD is near 1.60 once again.
The Australian dollar hit a multi-year high against the dollar that same day. The EUR/JPY hit a “never seen before” high against the yen. And the Swiss franc was up across the board, no matter what you paired it against.
So money is flowing away from the buck once again and into gold, Swiss francs, euro, and the Aussie dollar currently.
This will likely only continue as long as this shaky phase in the financial markets is still in vogue.
Gold and the Swiss franc really benefit when things are shaky and uncertain. Money will run to them in a heartbeat in those times.
The euro benefits because it’s the ultimate anti-dollar. So when money runs away from the dollar in particular, one of the first places it runs to is the euro because it’s the next most liquid currency out there.
The Aussie dollar is simply benefiting from strong fundamentals that have held up probably better than any major industrialized economy out there. So in shaky times you seek out stability more than ever…and right now, the “land down under” has just that.
So expect these trends to continue as long as the world stays in this shape.
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