Chuck Butler

Well, the two-day currency rally ran out of steam yesterday afternoon, and soon the selling (most likely profit taking) began, and the euro (EUR) lost the 1.31 figure, and the Aussie dollar (AUD) lost the $1.04 figure. The risk sentiment has lost its vigor, and we begin this Friday morning with a bias to buy dollars. Why? Oh, I could go on for days about why not. But, it’s the markets, and fickle traders have short attention spans, and are easily influenced by stupid pet tricks!

I want to take a few minutes this morning to talk about the Chinese renminbi/yuan (CNY). As renminbi holders know, or if you keep score at home using the currency round-up, the renminbi had been “locked down” with any movement, and any movements we saw were to the weaker side of the ledger. I explained that it was similar to 2008 when the financial meltdown hit, the Chinese held the renminbi steady for 1 & 1/2 years, till June 2009. So, this time the Chinese held the renminbi steady until there were signs that the Chinese economy had bottomed in the second quarter.

With those signs confirmed, the Chinese government began allowing the renminbi to gain versus the dollar once again. For the past month (mid-Sept to now) the renminbi has gained over 1%… And since mid-July when the renminbi hit its 2012 low at 6.3964, the currency has gained 2.25%… So, the Chinese officials must feel very confident that the economy has bottomed and is on its way back to leading the world in economic growth. There has been a return of hot money flows into China, and with the currency appreciating, it indicates to me that Chinese officials are OK with this.

And also, don’t forget the games that people play. They even play them in China. The renminbi could be getting stronger versus the dollar ahead of the US elections, so that when a candidate wants to bang on them for their currency manipulation, (which hasn’t been officially been called that) the Chinese can smile and point to the 2.25% appreciation in the past 3 months.

But more importantly, to me, is something that I told you a long time ago, and that is that the Chinese are working diligently to rebalance their economy from strictly exporting to domestic demand. And this currency appreciation leads to that, folks. It makes Chinese exports more expensive, and brings imports in at cheaper prices, thus rebalancing the economy, and helping the domestic demand.

Will the pace of appreciation continue? I doubt it. There are just too many questions about the global growth engines of the US and Eurozone hanging over China’s decision to allow further appreciation. But, hey! Maybe the Chinese will surprise me! That would be a great surprise, eh?

Ok… See, I told you it would take a few minutes to get through the update on China. But before I go, let me remind you that the Chinese continue to hoard gold, mined and imported. As I told you over a year ago, it is my belief that the when the Chinese are ready to float the renminbi, they will back it with gold. Probably not 100% backing, but any backing would make the renminbi the most attractive currency in the world, immediately. Can you say “new reserve currency of the world”? I knew you could!

One of the writers over at another investment letter recently wrote about how Russia too, is hoarding gold, and that it wouldn’t be unbelievable to see Russia back the ruble (RUB) with gold at the same time China did. Pretty interesting thought, and one I hadn’t thought about. But you can see them doing this, right? For Russia, as a part of the BRICS, has been quite vocal about ending the dollar’s reign at being the reserve currency of the world.

But none of that is going to happen right here, right now, so we have time to prepare, right?

Today. Canada will print their latest Consumer Inflation (CPI). This report will be key in either giving Bank of Canada (BOC) Governor Carney a slap on the back, or a slap to his face. Recall that earlier this week his dovish comments led to Canadian dollar/loonie (CAD) weakness. A weak CPI print today could push the loonie lower even further that what we’ve seen this week. A stronger-than-expected (+0.3%) print could erase those dovish thoughts from earlier this week, and provide an underpinning to the loonie. So watch for that today.

The loss of the strong risk sentiment pushed the Aussie dollar back below $1.04, but at this point of the morning, the Aussie dollar is holding its own above the 200-day moving average (DMA) of $1.0345. The other day we were talking about it rising above the 200 DMA, and today we’re talking about it holding above it. Crazy volatility. But, barring any major move from here, lower, the Aussie dollar will end the week up from last Friday’s figure.

And so it is with most of the currencies today. They aren’t as pretty as they were yesterday, but they are prettier than they were last week! And day-to-day stuff is what drives me crazy. I like long trends, and explain all the charts and everything else. Of course trends can’t be one-way streets, and can have volatility, but for the most part, a trend is your friend. Over the years, I’ve had quite a few readers ask me why I wrote a daily letter, when I tell people that the long-term trend is more important than the day-to-day stuff. I tell them that every day represents the end of a long trend for someone, it just depends on when they bought! And besides, what else would I do with my time if I didn’t get up hours before the rooster crows, to write? HA!

There’s always something to talk about. And today it was what was on my mind regarding China. There’s also the daily economic data, which, as I told you the other day, I don’t believe any of, these days. Remember last week when the government was jumping up and down and waving the “all-clear flag” because the Weekly Initial Jobless Claims fell what was reported to be 39,000 (but revised to 27,000 this week)? Remember? The TV cable news people for the most part, took that number, and swallowed it, hook, line and sinker. But wasn’t it curious that such a large number of claims fell in a week without a holiday? Of course it was!

So… I told you on Monday this week that the difference last week was that California either didn’t file their claims or didn’t file all of them. So, guess what happened with the Weekly Jobless Claims from last week? They bounced 46,000 to 388,000 (from last week’s 342,000)!!!!!! OK… My conspiracy blood is boiling this morning on this stuff. If someone hadn’t asked the question, or been curious about the drop the previous week, the government could have gone ahead and kept the Jobless Claims down this week. And guess what also coincides with this week’s numbers? The October payroll employment survey. Now, the government wouldn’t be fudging the numbers lower to make them look better than they are, would they? Like I said, my conspiracy blood is boiling on this… and yours should too!

Truth be told, the economy is still muddling along at a very slow pace, and adding jobs at an even slower pace. I have a slide I use in presentations that shows this gigantic turtle with the title “economy”, and two guys riding the turtle, and one guy says, “This says the recovery is slowing down” and the other guy responds, “How can they tell?” Laugh, laugh, I thought I’d die, it seems so funny to me! Well. The cartoon is funny, not the economy. Who could laugh about that?

The other day, US New Home Starts were a moon shot higher in numbers. Pretty amazing to me. But then, I haven’t seen the breakdown yet. The most recent gains in housing starts have been in multi-family units. But something that doesn’t make sense to me is that while housing starts are soaring, mortgage applications are falling through the floor. (They fell 4.2% so far this month). But, again, it’s data. I don’t believe any of it any longer.

US leading indicators were up 0.6% in September, erasing the -0.4% decline in August… Again, the leading indicators reversed just like that? Isn’t that difficult to believe?

Boy, I’m in a feisty mood this morning! I did get caught up on rest yesterday, so maybe that’s what has me so feisty this morning! And that brings me to the Big Finish, which today are some quotes by one of my fave writers/analysts, Richard Russell. He’s feeling a little feisty too. So, let’s go to the Big Finish!

Then There Was This… From King World News, the well-respected writer/analyst, the great, Richard Russell…

“In the end, I don’t think Bernanke is doing us any lasting favors. Nor do I think the institution of the Federal Reserve is doing us any favors. My kids and your kids and grandkids will curse the day when the Federal Reserve was secretly made master of the US monetary system.

“It’s a crying shame that we have only one way to protect ourselves from the predations of the Fed. That way is to own real money — gold. If they could have their way, the Fed would outlaw gold. From the Fed’s own standpoint, they have already done the next best thing — that is to subject gold to shameful taxes. As the ancient Chinese sage said, “This too shall pass.”

Chuck again. Thanks to Richard Russell… He’s talking about his kids and grandkids, like I always do, and feel badly that they will have less freedom, much higher taxes, and the inability to live like their parents and grandparents did. It’s the debt, people.

To recap. The risk sentiment faded yesterday after two days of the currencies rallying versus the dollar. There wasn’t any one thing to turn the risk sentiment sour yesterday, so maybe it was all profit taking? Chuck spends an inordinate amount of time talking about China this morning, and even adds a ditty about Russia. Jobless Claims correct last week’s drop, so where are the happy government people now? And Canadian consumer inflation (due to print this morning) could be what drives the loonie in one direction today.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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