Chuck Butler

Well… Friday quickly turned around regarding the currencies and metals rally, and sent them to the woodshed… Stocks also retreated, thus making it a triumvirate of risk assets getting sold… That makes it a Risk Off day… Apparently, the slower-than-expected (but still 8.1%) GDP in China really scared the bejeebers out of the stock jockeys, and once the selling began there it carried over to the currencies and metals.

Personally… I think that we’ll find that the first quarter GDP for China will represent a low-water mark for Chinese economic growth… But that’s just me… I could be wrong… But, thinking what I’m thinking about China’s GDP going forward, makes me think that the Aussie dollar (AUD) will be well underpinned by China…

You know… All the talk last week was about the Reserve Bank of Australia (RBA) to cut rates at their next meeting in May… But did you hear that ANZ Bank actually hiked their mortgage rates last week? Hmmm… Maybe the RBA will cut rates next month, and maybe they won’t! If they do, I believe the rate cut will have been priced in the Aussie dollars… And if they don’t, then watch out, the Aussie dollar will be running loose!

I say that because, as I’ve explained in the past, when a rate cut is priced in, that means there have been lots of shorts in the currency that have been entered, as investors look for weakness with a rate cut… But if the rate cut doesn’t materialize, then all those shorts get covered, which means the Aussie dollar gets bought…

I would have to think, though, that with all the talk the RBA has given toward the future of rates, that they will do the dirty deed… Dirty Deeds done dirt cheap…

Did you see what the Japanese had to say after their cabinet meeting late last week? Get this… The Japanese government. issued a statement outlining their intention to beat deflation. Hmmm… Now? The Japanese are going to go after deflation now? What’s it been… 20 years that deflation has cast its net over the Japanese economy, and the government is going to go after deflation now?

Personally… I see this as just window dressing… Curb appeal… They are just trying to let the markets know that they are going to attempt to inject inflation in the economy, so that maybe, just maybe, the markets will sell yen (JPY)… You see, in my opinion, there’s no way the Japanese can inject inflation as long as the yen is so strong… I’ve told you for years now, that a strong currency goes a long way in fighting inflation… And unless the Japanese can figure a way to weaken their currency to say 125… They are up the creek without a paddle…

There was some BIG NEWS from China this past weekend… The People’s Bank of China announced this past weekend that it will enlarge the USD/CNY trading band to +/- 1%, from +/- 0.5% previously in place. This means the daily moves in renminbi (CNY) can be wider… It’s just another step, folks, to gaining wider distribution of their currency, for the Chinese know all too well that by allowing greater moves, it will gain more buyers and sellers…

I was surprised when I saw the news story, because I had the understanding that when the peg to the dollar was dropped in July of 2005, that the daily band was +/- 0.3%… I read where the increase to +/- 0.5% came in May 2007… Ok… That explains why I didn’t have that in my brain… I had other things on my mind in May of 2007…

So… I think this news from China plays well with my earlier thought that the first quarter GDP was the low water mark for the economy this year… The Chinese obviously believe the economy will expand at a faster clip going forward, and they want their currency stronger to combat the accompanying inflation…

The euro (EUR) briefly dipped below 1.30 overnight for the first time in two months… But immediately rebounded and has remained above 1.30 the remainder of the overnight markets and through half of the European market… I believe that the initial downturn in the single unit was caused by a story in The Wall Street Journal that had a headline that said, “Downgrades Loom for European Banks”…

So… Here’s what happened… The story seemed to have information that no one else did, but when read, it was simply the author’s opinion, and offered no facts… So, the euro got sold, but once somebody took the time to read the story, the rebound was in…

I guess more important to the markets is the fate of Spain, and further of Italy… Solvency concerns are like the Sword of Damocles hanging over the euro these days… And we’re only talking about the “Club Med” peripheral countries, and the Eurozone leaders need to address this up front and center, before the negativity begins to become the norm.

Remember the LTRO’s (Long Term Recovery Operations)? The LTRO’s were loans that the European Central Bank (ECB) made to inject liquidity… Well, the ECB is going to have to go back to the well here, folks, and prove to the markets that liquidity is in place… The ECB also needs to provide further easing, and all this would go a long way in showing the markets that Spain is solvent…

Of course rate cuts will hurt the euro’s value… But that should only be temporary, until the markets feel better about Spain, and Italy… There are 300 billion euros that are yet to be used by the ECB, folks… I would think that to be enough liquidity for both Spain and Italy…

I don’t like any of this… But, it is what it is, and we have to deal with ways to keep countries from defaulting… Because one default will beget another and so on…

OK… Onto other things… The New Zealand dollar/kiwi (NZD) really took it on the chin last Friday… Going into the day, kiwi had reached 83-cents! But, once the China GDP number printed, the Aussie dollar wasn’t the only currency to weaken… And since kiwi had really outperformed its kissin’ cousin across the Tasman it got sold at a quicker pace than the Aussie dollar…

A reader from New Zealand sent me a note last week, and said that it looked like the Reserve Bank of New Zealand (RBNZ) was ready to remove the emergency rate cuts made last year after two devastating earthquakes hit the two island nation… If that thought was bought by the markets then that explains kiwi at 83-cents… The problem with the thought is that the rest of the world is cutting rates again… So, unless you want all the attention and a currency that gets driven higher in value, you had better put those rate hikes in your back pocket for now… For we all know that RBNZ Gov. Bollard is no fan of a strong kiwi!

In Sweden this morning, the government lowered its forecasts for economic growth… That’s not a good thing, but at least they recognize it and don’t try to paint pretty pictures with the data like our Fed Heads do…

Speaking of Fed Heads… St. Louis Fed Head, James Bullard, he of at least a couple of sound bites, will be speaking today. He’ll be speaking on monetary policy and the economy right here in St. Louis…

And the Fed’s balance sheet must be ballooning again… The 10-year Treasury’s yield is back below 2%… Just a month ago it was soaring higher to 2.38%… I would bet a dollar to a Krispy Kreme, that the Fed came in then, and hasn’t stopped buying since!

Here in the US we will see the color of March retail sales data this morning… The BHI (Butler Household Index) tells me that retail sales, while positive, will be much weaker than February’s +1.1%… I did my best to spur March retail sales while in Florida… But, I truly believe that the high gas prices are beginning to pinch US consumers… So, while March’s retail sales will be positive, they will not be what makes an economy like the US move forward…

I read a story this weekend about unemployment here in the US and yes, we continue to see individuals leaving the work force, thus allowing the unemployment rate to fall, according to the Bureau of Labor Statistics (BLS)… But this researcher found that, looking at the employment-to-population ratio and the unemployment rate, somehow last year these two de-coupled… Hmmm… The employment-to-population ratio rate remains at 10.5%, while according to the BLS, the unemployment rate has fallen to 8.2%… This can’t be, folks… It’s that simple…

So… This is data that proves the BLS is simply doing their best to make things look good… Long time readers know of my lack of affection for the BLS, so this revelation in the data doesn’t surprise me one iota… Not one iota, folks… I’ve told you for years now that the BLS uses smoke and mirrors…

Then There Was This… For all those that don’t believe that gold and silver keep up with inflation… A reader sent me a picture from a gas station in Montana… The gas station had a sign that said, “Gasoline 20-cents A Gallon… If paid with pre 1964 dimes, quarters, halfs or dollar coins.” That about says it all there, eh?

I always go back to friend, Bill Bonner’s qualification of gold… Saying that 100 years ago, a man could buy a good suit of clothes with a 1 oz. gold coin… The same can be said today…

To recap… The Chinese slower growth really deep-sixed the risk assets on Friday and in the Asian markets last night. The euro briefly dipped below 1.30 on a story headline in the WSJ that was found to not have facts but instead opinion… China announced a wider trading band for the renminbi, and Japan is NOW going to get tough with deflation… And retail sales print today.

Chuck Butler

for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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