Chuck Butler

What looked like a workable situation for Greece and private creditors has taken a turn that has the euro (EUR) vulnerable again this morning. It’s not as if the situation is unworkable. It’s just that they are struggling to come to an agreement, and since it’s not as smooth as Jiffy, then the Chicken Littles come out of the crowds… But then, quite frankly, I have been surprised by the strength the euro has displayed this week. The euro has always shown resiliency, but as I’ve said a couple of times now this year… I wouldn’t be surprised to see it fall to 1.18 and then rebound to 1.40… But we have 49 more weeks to go in 2012. There’s a lot of give and take here, so buckle up, yes, that’s right: Click it or ticket…

One of the worst-performing currencies overnight is the Chinese Renminbi (CNY)… The Chinese have weakened the renminbi in response to some weak manufacturing data… For the third consecutive month, it looks like China’s manufacturing index will weaken, according to HSBC. In addition, the Chinese central bank injected funds into the banking system last night, which tells me that another reduction of the reserve requirements is on the way, which is like a rate cut for banks…

I had an adviser guy send me a note yesterday telling me how wrong I am about China, and that their whole system is about to collapse… I tell you this so that you see I don’t just write about stuff that agrees with what I say! However, in this case, I’ll just point to the scoreboard, and point out that economists have been saying this same thing for over three years… and there’s been no collapse yet. And that’s because I don’t think the Chinese will allow that to happen. Remember, they are still at root a communist country, and they control the purse strings…

The Chinese Lunar New Year, the Year of the Dragon, will begin on Monday, Jan. 23… Last year was the Year of the Rabbit, which was supposed to signal peacefulness and recuperation. Failed miserably at that, eh? So if we had all that volatility and craziness in the Year of the Rabbit, imagine what the Year of the Dragon holds for us! YIKES!

But then, I told you right out of the starting blocks this year would be even more volatile than last, so we have that going for us!

The price of oil slipped back below $100 yesterday, and the thoughts of the Canadian dollar/loonie (CAD) had of climbing back to parity were wiped out. To show you just how strong the pull on the loonie that oil has… yesterday, we saw that Canadian manufacturing sales rose a solid 2% in November, rebounding nicely from the 0.6% drop in October. One would think that this kind of strong data would have underpinned the loonie, as it climbed well into the 99-cent handle, but then the price of oil slipped, as did the loonie…

With the Bank of Canada (BOC) experiencing a bout of “bunker mentality” (I’ve explained this before), keeping the dust covers on any rate hikes, oil is the only crutch for the loonie. So if you believe that the price of oil is going to slip further, then loonies won’t be your bag. But if you think oil is going to go higher and higher, then loonies are your bag!

On a sidebar… last May, at the EverBank/Sovereign Society global currency summit conference, one of the speakers there — and I won’t name names — said that the price of oil was going to plummet to $45. So you see, people have all kinds of ideas about the price of oil… I just say that should all things remain as is, the demand for oil will continue to increase. And we all know what demand does to the price of an asset… (except when we are talking about the price manipulators in gold and silver!). However, should the center not hold in Europe and they crash and burn, one of China’s main markets (they export more to the eurozone than the U.S.) would be gone, and the whole global thing would unravel… Then demand would have already circled the bowl…

And then another thing that will weigh in on the oil price direction… what’s going on with Iran… I told you yesterday that I just finished the book by James Rickards, Currency Wars. Well, then my friend Dennis sent me a note from Rickards, who says, “The war with Iran has begun.”

OK… I’m not going to talk about whether we should go to war with Iran or not… my point here is that any type of problem like that is going to weigh in on the price of oil…

Other assets that a problem like that is going to weigh in on are the prices of gold and silver)… I say that and then look over at one the four screens I have on my desk and see that gold is down $11 this morning… So apparently, the war is still a thought… Whew!

Enough of that! See how things just get in my head and the next thing you know I’m typing them!

The Aussie dollar (AUD) held the $1.04 level most of the day yesterday, slipping below it briefly a couple of times throughout the trading session. Barring any unforeseen craziness in the currencies this morning… The A$ is set to post its fifth weekly gain versus the U.S. dollar. The eurozone problems, which on the outside would seem to be far removed from the goings-on in Australia, continue to dictate how well or badly the A$ performs. But as I’ve said here, and in the monthly newsletter (Review & Focus), I truly believe the eurozone will stabilize a bit in 2012, and with the A$ posting five consecutive weeks of gains versus the dollar, one would think that the eurozone stabilization just might be beginning…

But then the struggles of Greece this week and their ability to work a deal with private creditors could throw these baby steps of stabilization into reverse in a heartbeat! So once again with the well-made plans of mice and men…

If I were a betting man, I would bet a Krispy Kreme to a dollar that the Greek things gets all buttoned up this weekend or early Monday ahead of next week’s eurozone ECOFIN (Economic and Financial Affairs Council) meeting.

Someone asked me yesterday if I had any thoughts on the weakness seen recently in the Japanese yen (JPY)… I replied that eurozone stability removes the need for the so-called safe haven of yen… Same reason we’ve seen some weakness in gold the past two days.

And here’s something to think about before I get to the data, and then the Big Finish… The sovereign debt crisis of the eurozone hasn’t caused a panic of capital flight from the region… According to JPMorgan Chase, the eurozone saw net portfolio inflows of 2.4 billion euros during November.

Knowing this data now, it tells the guys at JPMorgan Chase that the euro’s decline in November wasn’t due strictly to outright selling of the euro, but instead to investors selling euros to hedge their positions… Knowing that investors didn’t rush out of the currency and instead saw net positive flows into the region is a very good sign…

The stupid CPI data printed yesterday showed we had no inflation in December… and that the year-on-year inflation increased 3%. Hmmm… I had this argument — well, not an argument, a disagreement — with one of my favorite economists about CPI… I just don’t understand why the Fed uses this data… it has been so cooked and massaged for years now that no one even recognizes it. Here’s an example of what I’m talking about… Do the CPI people even take into consideration that while a box of cereal costs the same today as last year, the actual size of the box of cereal has decreased? So you get less for the price… There’s a laundry list of things wrong with CPI, folks. But the Fed uses it… doesn’t that tell you something? Ha!

The initial jobless claims, which were revised upward to 402,000 the previous week, saw only 352,000 claims filed (or so they say) last week. That’s the lowest number in about the time it takes to go through high school! I would say college, but so many kids, mine included, have decided to stretch it out to five years. That’s OK… they got a good education and have good jobs doing what they wanted to do… not many kids can say that…

So maybe the jobs data is about to get better? I’m from Missouri, so you’ll have to show me…

The Philly Fed Index (business outlook pulse) was much weaker than expected in December. The index printed at 7.3, when 10.3 was expected.

And today, we get existing home sales, which are expected to be good, given the reduced prices…

Then there was this… I realized — too late yesterday morning — that I had really left a huge piece out of the Pfennig… UGH! You see, sometimes I get a chance in the afternoon or evening to read and put down some thoughts on the activities of the day. That way, I don’t forget the next day… But then I forgot to go back and get my notes! UGH! So here’s what I was going to say yesterday, but am saying it today!

Don’t look now, but the U.S. Treasury is dipping into the federal pension fund in an attempt to make an end run around the debt limit… Hmmm… Well, we shouldn’t be too alarmed by this. The last thing the government wants in an election year is another debt ceiling debacle like we had last summer… So by dipping into the pension fund, the government is able to keep from hitting the ceiling. Now, this isn’t the first time the government has done this. The fund has seen the government’s hands in the cookie jar six times in the past 20 years…

And this isn’t the only fund that is seeing the government tap to avoid the debt ceiling… This is all creative accounting, eh? I know the pensions get paid back, with borrowed dollars when the debt ceiling is raised… But what happens one day when the debt ceiling can’t get raised? Uh-oh!

To recap… the currencies remained bid yesterday throughout most of the trading session, and have carried over to this morning. The A$ could be posting a fifth week of gains versus the dollar, and Japanese yen has weakened a bit on the feeling that a so-called safe-haven currency is no longer needed. Manufacturing could be posting another month of weakness in China, and the Chinese respond by weakening the renminbi by a large margin.

Chuck Butler

for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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