China Still Finding Ways to Gain Wider Renminbi Distribution

Yesterday, I told you the currencies were range trading, with the euro (EUR) better bid, after Friday’s Jobs Jamboree crock… Well, about mid-morning, we received word that German Chancellor, Angela Merkel, and French President Sarkozy, had reached an agreement on how to handle rogue Eurozone members going forward. They ironed out a new Eurozone Treaty, which will be presented to the Head of the Eurozone on Wednesday, and then on for a vote on Friday… This news was well received by the markets, and they happily marked up the euro, with the other currencies following along.

But then along came S&P… Just about time that everyone thought it might be safe to stick their toes into the euro’s waters once again… S&P issued a warning to Germany and the five other AAA members of the Eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil.

Folks… These verbal warnings very seldom just fade away… In fact, later on Monday S&P announced that they were putting Germany, France, Holland, Austria, Finland and Luxembourg on “credit watch negative”… These types of “watches” are usually followed by a downgrade… And that news sunk the euro’s gains on the day…

So… What was good for the goose, wasn’t good for the gander… I know you all remember last summer when S&P downgraded the US, and the markets shrugged it off, as if it meant nothing… But mention downgrade of Germany, and the euro gets sold… Hmmm… Makes you wonder, if… It’s all in the “plan” to divert dollar weakness long enough for the US to continue to deficit spend, before the attention reverts back here…

Well, it’s either that, or… (And I’m sure this is it) the dollar is the reserve currency of the world, and the euro isn’t… And quite frankly, the euro should have gotten sold, on news like that! So… We have that going for us today!

The resilient euro has pared those losses though, this morning… And is back above the 1.34 handle, after sliding through it on the downside yesterday afternoon. But the move is small so far this morning.

The rest of the currencies, as I said, felt the pinch of the S&P announcement… The Reserve Bank of Australia, (RBA) did cut rates 25 Basis Points (BPS) or 1/4% last night, as I had said I thought they would. Their internal rate is now 4.25%… If the Eurozone problems continue through 2012, then given what the RBA had to say afterward, I would think there’s another 50 Basis Points (1/2%) of rate cuts coming in 2012.

The RBA’s Governor Stevens had this to say after the rate announcement… “Financing conditions have become much more difficult, especially in Europe. This together with the precautionary behavior by firms and households, means that the likelihood of a further material slowing in global growth has increased.”

So… Yesterday, I told you how the word on the street was that the markets had already priced in a rate cut, so the selling of Aussie dollars (AUD) would be muted when the rate announcement was made… But the Aussie dollar did lose some ground… Partly because of the RBA statement afterward, which — if it led me to believe more rate cuts are coming, should the Eurozone problems persist in 2012 — then the rest of the markets got the message too… And the other part because of the downgrade possibility in the Eurozone.

I read an analyst’s piece on the Aussie dollar yesterday that was not very flattering… It was the first one I’ve read about the Aussie dollar that called for an end to the gains in Aussie dollars. Just a week ago I read a well-known analyst’s report and he was adamant that the Aussie dollar was the place to be… So… The analyst that dissed the Aussie dollar, did so because he believes that China is about to shut down, and therefore, their need of raw materials from Australia will diminish…

Well… I’ve got to say that it was good to see there could really be a two-way market for Aussie dollars… People selling and people buying… Now that’s a healthy market! I guess the other thing I would say, is that as I’ve said over and over again, this dance is gonna be a drag, no wait! I’ve said over and over again that you have to question people who make statements about China, unless they are there on the ground… For, haven’t we heard that China’s economy was going to collapse for two years now? Yes… We have… So… I guess what I’m saying here is that we should tread carefully… Keep an eye on China, for China is the key master for the Aussie dollar going forward.

I forgot to tell you yesterday that the Reserve Bank of New Zealand (RBNZ), is also going to meet to discuss rates this week (tomorrow)… I expect the RBNZ to leave their rate powder dry… If so, the RBNZ will join South Korea, the UK and Indonesia as countries with central banks that left rates unchanged this week… (The UK are doing bond buying so in reality they have cut rates too, just not their official rate)

Asia has a real dilemma as they attempt to balance their growth with inflation… So far, so good… Asia continues to attempt to keep a defense shield up to protect them from the fallout of the Eurozone… and so far, so good…

Yesterday, I talked glowingly about Canada, and how they were the remaining G-10 nation with a tightening bias… Well, that will get tested today, as the Bank of Canada (BOC) will meet… However, you don’t think I would have gone out on a limb like I did yesterday with Canada, if I thought they would debase their currency two days later, do you? I didn’t think so. And with that, I’ll say that the BOC leaves rates unchanged today, and then BOC Governor Carney will attempt to balance the fact that recent data has been stronger than the BOC forecast, with the slowing global growth prospects… If he navigates through those waters, then the Canadian dollar/loonie should be well underpinned going forward.

I forgot to talk about gold (and silver) yesterday… Except in the “Then There Was This” portion, when I talked about the price manipulators wanting to strike dead the position limits law. Well… The shiny metals just can’t seem to catch any sustained wind for their sails lately. They might rally a day here and there, but sell off the other days… I don’t for one minute believe this is the capitulation that precedes a major sell off…

I say that because demand for the shiny metals remains strong… I know this first hand, as the demand for both metals in both forms holding or delivery are still in demand here on our metals trading desk. My friend, Jeff Clark, of Big Gold, recently wrote: “The answer is simple: save in Gold. The dollars you keep in money market accounts will steadily lose value year after year. In fact, monies deposited into a simple savings account in 2000, have lost an incredible 25% of their purchasing power since then. “

The Chinese renminbi (CNY) is still refraining from gaining versus the dollar… This little game the Chinese play whenever they are visited by a US representative, has gone on too long as far as I’m concerned. But then, why not? The Chinese can play this game and tick off US lawmakers as long as they see the benefits of the game.

Speaking of the renminbi… I came across something the other day, that really made my brain begin to think…and this is how I tied it together. First of all… I’ve told you all about all the things the Chinese are currently doing to gain a wider distribution of their currency, in baby steps toward their eventual goal of having the reserve currency of the world… OK… We’ve done that… But here’s a new one to add to the list… The Chicago Mercantile Exchange (CME), the commodities trading and clearing group announced the other day that it will accept yuan (renminbi) as collateral on its commodities exchanges…

So… Chalk up another step taken by the Chinese to get their currency a wider distribution…

And in yet another case of realizing you should close the barn door, when you see the cows all over the fields… The US Commodity Futures Trading Commission (CFTC) unanimously approved a rule that further limits how Futures & Commodities brokerages can use customer funds. “This rule is important, but I might say the agency will look at additional ways to enhance customer protections,” said Chairman Gary Gensler. Regulators are considering several proposals to toughen oversight after MF Global Holdings collapsed.

On a side bar… Chris Gaffney was telling me about an interview with CFTC member, Bart Chilton yesterday, in which Mr. Chilton explained how the existing futures trades that were on the books were getting closed out first, before any funds can be disbursed… He was doing that to make certain the rest of the brokerages didn’t collapse too… But those people that had cash in that firm are left out in the cold… And you wonder why commodities for centuries have been considered very risky… Also makes me wonder why people weren’t lined up at our door, to buy the Commodities MarketSafe CD we offered a few years ago… Hey, maybe you don’t make anything in the end, but… You didn’t lose anything either, because the CDs were 100% principal protected… I used to ask audiences to see a show of hands of people that would like to invest in commodities… Then I would ask to see a show of hands of people that would like to invest in commodities and have no principal risk… I would then tell everyone in the audience, because they all raised their hands, that they could come to our booth and obtain an application, or go online for one! But, I still shake my head at the people who didn’t do that…

Then there was this… Dear reader, Alexandra, sent me this quote from French President Nicolas Sarkozy… “I want to tell French people that France and Germany totally oppose euro bonds because it isn’t at all a solution in this crisis,” Sarkozy said. “What a strange idea to put European debts in the same pot.”

Hmmm… Makes you scratch your head, doesn’t it? Now, I’m not for a Eurozone bond, but from the beginning, I’ve said that the way they could have cut off all these problems at the pass, was to throw all the debt by all 15 Eurozone members in a pot, and issue one bond… For, in theory, that’s what the markets were doing by pricing Greek debt, mere basis points more than German bonds… And, then my final thought on this is always that… These countries gave up their sovereignty when the joined the euro, and scraped their legacy currency… So what’s the hang-up on a Eurozone bond?

To recap… Eurozone leaders, Merkel and Sarkozy ironed out a new treaty that would put tougher penalties on rogue members that allow their deficit spending to get out of hand going forward, yesterday. They will present it to the head of the Eurozone tomorrow, and vote on it on Friday. This news was well received by the markets and the euro gained, bringing the other currencies along for the ride… That is until S&P threw a cat among the pigeons with the announcement of credit watch downgrades for the five AAA-rated members of the Eurozone… The euro is attempting to pare the losses this morning. The RBA cut rates and made a very strong statement leading the markets to believe more rate cuts are coming, should the Eurozone problems continue in 2012.

Chuck Butler
for The Daily Reckoning