China Stockpiles Commodities

As much as I dislike having to say so, because I told you this might happen… The currencies have given back some major ground versus the dollar since Friday morning. It’s all tied to the fact that the euphoria going around the markets the previous week regarding stocks and the U.S. economy, came to a screeching halt last week. I pleaded and begged for the currencies to break this link to stocks, but it wouldn’t/didn’t happen and voila! What we have here is a failure to break the link, and now that there’s a falling demand for stocks, currencies have tanked too… UGH!

Not that I’m cheering for currencies to go one way or the other, what I’m rooting for is a return to fundamentals… And apparently, that did not happen!

The proverbial straw to break the stock rally’s back was the color of Industrial Production on Friday… Not that Industrial Production is that big of a piece of data… It just got added on to all the other bad data that acted like a shot of round-up on all those so-called green shoots! For the record, Industrial Production declined 0.5% in April, and March’s already bad figure was revised downward to -1.7%… So… The “glass is half full” crowd, would say, “Hey! The pace of decline has slowed; this is an indication of a bottom!” Unfortunately, that’s not how the market participants saw it… You have to think outside the box here, and recall all of the announced shutdowns that will be coming down the pike. I fully expect this data to reverse itself and go deeper into the tank.

We also saw the “stupid” CPI (inflation) number on Friday… CPI fell 0.7% versus a year earlier, which on the outside screams “deflation”! But… That’s not what I see… I see a CPI that’s dominated by food and energy, and we all know that energy prices have plummeted from last year. So, to me, this is strictly price deflation of energy, and not overall deflation that would include a contraction of money supply. (Like that’s going to happen any time soon!) No… And I’m sure there are few readers that will beg to differ with me on this, as they already do every time I mention inflation, but… This data continues to suggest the risk of deflation remains remote, since the drops are still mostly centered in energy and energy-related products.

So… If we’ve gone back to the black cloud over risk assets that existed July ’08 through February ’09, that means you can see Japanese yen (JPY) as the lone wolf rallying major currency. Recall what I told you on Friday about the opposition party in Japan, calling for a boycott of U.S. Treasuries denominated in dollars… Imagine there’s no rift between the two, It isn’t hard to do, China and Japan getting together for currency cooperation… Hmmm… Makes you shiver, eh? Anyway… The yen, is back on the rally tracks and trading this morning with a 95 handle.

But wait! What’s that I see? Is it a White Knight for risk assets?

Another Asian currency that I talk about occasionally, the Indian rupee (INR), has been through the spin cycle a few times in the past year. Just when the rupee looks like it’s on a run, it gets sent back to the spin cycle and comes out looking quite wrinkled… But… We might be seeing a change… This past weekend, India held an election, and the Congress Party-led alliance chalked up a decisive victory. This is the party, led by Prime Minister Singh, that is pro-growth and pro-economic reform. And the news of the decisive victory sent the Indian stocks soaring… Along with the rupee, that’s now trading with a 47 handle for the first time in 5 months! So… The rupee has it all going on today, eh?

This news from India, helped turn the stocks around in Japan overnight, and that’s a good thing! If stocks can maintain this momentum, that’s a good thing for risk assets… But… I’m being pessimistic here. I just don’t see how the Indian stock market euphoria can outweigh the bad data here in the United States… But… I guess we’ll have to wait-n-see, eh?

I was reading an article in the Wall Street Journal this weekend, and this caught my eye… “Economists Say Full Recovery to Take at Least 3 Years”. I bet they didn’t make Mssrs Obama and Bernanke happy with that call! Here’s a snippet of the story from the Wall Street Journal… “Economists in the latest Wall Street Journal survey see an end to the recession by August, but say it will take years to eat up the slack created by the downturn. Nearly half of the economists said it will take three to four years to close the output gap, while more than a quarter say it will take five to six years. The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months.”

Some time ago, I told you that I believed the Chinese were stockpiling commodities… They knew they would need them, and it sure seemed like a better investment than buying more dollar denominated assets. Well, the Royal Bank of Canada (RBC) just issued a report that agrees with my earlier statement! Let’s see what RBC had to say… “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline. It’s part of an overall desire to decrease its exposure to dollar assets.”

That’s been a reoccurring theme here lately, hasn’t it? I’ve spent a ton of time writing about China and their new found diversification bone… I’ve told you about all this here, and if you are a subscriber to my monthly “paid” subscriber newsletter, The Currency Capitalist, well, you’re probably growing tired of hearing about China… You see I really have to tell you, that it all gets so intense, from my experience… This is BIG NEWS!

We have a holiday in Canada today… Victoria Day… I had a reader question why I talked about Australia more than Canada… Hmmm, I said… I did talk about Canada twice last week! But he’s right, I do talk about Australia more, and that’s because the story right now is China coming out of the economic doldrums before any other country, and demanding more raw materials from Australia… Now, if the price of oil were to soar to $75 or higher, than I’d be talking about the “juiced” Canadian economy more and more once again.

Before I left for Las Vegas I had talked about the “rift” going on in the European Central Bank (ECB) well, ECB President, Trichet hasn’t done anything on the outside to calm the waters there. Bundesbank (Germany’s central bank) President, Axel Weber – a very outspoken voice against quantitative easing – probably stirred up the hot blood again overnight… Let’s listen in on Mr. Weber… “The ECB has done enough to help the economy and shouldn’t consider further measures unless things get a lot worse.” And he went on to say… “The ECB doesn’t see the risk of a broad credit crunch or deflation in the euro area.”

I’m sure his opposition in Italy, Spain, Ireland – to name a few – will take offense to those statements, and we’ll get the “rift” going again, which won’t be a good thing for the euro (EUR) to have to deal with.

The data cupboard is fairly empty this week, and for sure void of any major data until Thursday, when the Weekly Initial Jobless Claims, Leading Indicators, and Philly Fed Index all print. So… Not too much to deal with every day, which can lead to some strange currency moves. It just depends on the overall bias of whether to sell dollars or buy them. We’ll get a feeling for that today.

Well… If stocks are going back into the sell gear, then look for gold to push higher. Which is what it’s doing right now, at $930.