Late last week, traders, investors, hedge jockeys and the rest all switched horses in the middle of the stream — by bailing out of the risk assets of currencies and metals that they had bought — and pushed the prices higher earlier in the week. Gold got slammed big-time, so I guess there’s no reason to fear the uncertainty in the world today. Israel and Iran are saber rattling, countries all over the world are shifting out of their long-standing agreements to price oil trade in dollars, China continues to take baby steps toward removing the dollar as the reserve currency in the world and the beat goes on. So I guess there’s nothing to fear about the uncertainty in the world today. Alfred E. Neuman, where are you?
As far as I’m concerned, all this does is give all of those wanting to buy at cheaper levels the opportunity to do so! In the past, when we saw these huge drops in the price of gold, it quickly turned around. Of course, we don’t know that will happen here, but given my years of watching these things, there’s a good possibility, but then I could be wrong.
So I left last Wednesday to the news that the European Central Bank (ECB) LTRO was greater in size than was expected, which meant more eurozone banks needed cash, which I thought would hurt the euro (EUR), but at first glance, it didn’t, and the markets were thinking the “more was better.” But that all changed later that day. And then the rout was on. So my initial call that any amount over 500 billion in loans would cause problems for the euro eventually won out.
But the selling didn’t stop on Wednesday afternoon, or all day Thursday or all day Friday. The euro has shown some ability to rally overnight to 1.32, but then quickly falls below the figure. So there are no legs for the Big Dog, and if there are no legs for the Big Dog, well, all the other currencies are stuck in the mud, too.
Overnight, China issued a communique outlining their desire to lower their target for economic growth. China had dropped their target GDP level to 7.5% down from 8%. This 7.5% level is the lowest goal that the Chinese have targeted since 2004. And just as in 2003 and 2010, the Chicken Littles are out in force calling for a “weak Chinese economy,” because they dropped their target from 8% to 7.5%. The US would be doing back flips if they could have GDP one-half of China’s lower target!
So I think you probably see the audacity of this, but hey! The markets are never wrong, right? China also announced that they will seek an inflation rate of 4% this year, which is pretty aggressive but most of all highlights the “moderation” of the Chinese economy, as Chinese officials work toward shifting the focus of the GDP makeup to a more domestic-driven economy.
I think that we’ll continue to see the Asian economies move to a more-regional economy, and not be so concerned with having the weakest currency to win the exports race. By having a regional economy, they could insulate themselves from the slowing down of the US and Europe. But this regional economy has long been something I thought the Asian countries would do, it’s just taking them longer to get around to doing this than I originally thought! UGH!
With the Chicken Littles all running about in China, you probably know how the Aussie dollar (AUD) responded to this craziness. Yes, it got sold. Remember a week or so ago, I told you how I believed the Japanese housewives were back, selling yen (JPY) and buying Aussie dollars? Well, with the bleeding in the yen stopped right now, and the A$ weaker, one would have to think that this round of Japanese housewives putting on carry trades has come to an end.
The Reserve Bank of Australia (RBA) will meet tonight (tomorrow for them), and I don’t think RBA Gov. Glenn Stevens will opt to move rates lower at this meeting. If the global economy continues to take hits like the Chinese announcement, I would think that the RBA would change their current view and cut rates. But that would happen later this year — not now — at least that’s how I see it!
When I left last week, the Canadian dollar/loonie (CAD) was playing catch-up to the other petrol currencies, which had rallied alongside the rise in the price of oil. The price of oil has dropped from its lofty levels of last week, but the loonie continues to remain above parity to the US dollar. For now at least. Remember, it was late to the party held by the petrol currencies, and is probably going to be leaving late. The Bank of Canada (BOC) meets this week, but don’t expect anything here. BOC Gov. Mark Carney has what I’ve referred to right now as a “bunker mentality.” And even though economic data suggest he should raise rates, he has bunkered down to escape the shrapnel flying around from the US and the eurozone.
The price of oil is still high, though, nearly $106 this morning. So all “drops” are not really “drops.” I refer back to the Chinese announcement and the “drop” of the price of oil from $108 last week to $106 this week.
And as an aside, they certainly are in love with the price of their oil in Florida! I paid over $4 a gallon this past weekend. These higher prices of gas are not going to help the nascent recovery in the US, that’s for sure!
Speaking of the US, the Federal Reserve’s FOMC meeting happens next week. It’s not like we don’t hear from the Fed heads in between their meetings every six weeks. So we know that a small group of Fed heads are against the zero interest rates continuing and that a small group of Fed heads would like to see more bond buying (QE). So with all this difference that’s so wide you could drive a Mack Truck through it, things come down to Big Ben Bernanke. It’s his vehicle to drive.
The US data cupboard has only the ISM nonmanufacturing index (service) and January factory orders to print this morning. One thing I did see last Thursday morning was that the US ISM manufacturing index for February printed lower than expected, at 52.4, which is still above the line in the sand at 50, but weaker. And I didn’t see one article about how this indicates that the US economy is going to weaken, as we saw when China’s ISM printed weaker late last month.
Before we had to the Big Finish, I want to bring to your attention that this Thursday, we’ll go through another white-knuckle event in the eurozone. This is the day that private-sector investors have to accept or reject the Greek debt swap proposed last week. Here is the skinny on that debt swap: For every 100 euros on nominal bonds, investors have been offered 31.5 euros of new Greek bonds, 15 euros of cash/EFSF bonds and a GDP warrant. If you were a Greek bondholder, wouldn’t you take something rather than nothing? I know I would.
And you know how I’m always telling you that you shouldn’t pay any attention to the stupid CPI that reports consumer inflation, but only after a myriad of hedonic adjustments. I tell you to check out John Williams’ accounting of inflation at Shadowstats.com but now there’s a new sheriff. The not-for-profit research group at the American Institute for Economic Research of (AIER) believes on a year-on-year basis prices are up 8%.
Now, that’s more like what I feel and what the common person feels when they buy food, gasoline, child care, prescription drugs, telephone service, baseball tickets, movie tickets, and the list goes on.
So why does the government prefer to go through all the fire hoops to give us CPI that’s not worth the paper they print it on? 1. If CPI were higher, the Fed wouldn’t be able to manipulate rates at zero. 2. If CPI were higher, the government would have to pay more to seniors receiving payments. 3. If CPI were higher, the government wouldn’t be able to tell us that everything is OK, go out and spend. There are more reasons, but these are the broad strokes.
Then there were more baby steps are being taken by China to gain a wider distribution of the renminbi/yuan (CNY). I saw this announcement from China in Ed Steer’s letter: “Bank of China Ltd., one of China’s “big four” state-owned lenders, formed a tie-up with the world’s largest futures exchange operator on Wednesday, through which the two parties will explore yuan settlement and clearing opportunities for commodities.
“The cooperation agreement provides for trading in contracts related to oil, interest rates, grains and gold.
“The pact includes a settlement and clearance membership in the derivatives marketplace CME Inc., and an application from Bank of China (Hong Kong) Ltd. to become an offshore yuan settlement bank for CME, which is almost complete, said Si Xinchun, deputy general manager of the bank’s corporate banking unit.”
To recap: We start the week with the currencies and metals much lower in value versus the dollar than they were before midweek last week. China has announced that they lowered their GDP target to 7.5% from 8%, which has sent the global growth currencies for a ride on the slippery slope. The price of oil remains high at nearly $106. US manufacturing was weaker in Feb, and there will be a host of central bank meetings this week.
for The Daily Reckoning
Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.
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