10/01/10 St. Louis, Missouri – The data cupboard’s results ended up being a bit better than expected, not by leaps and bounds, but certainly not the bottom of the barrel!
The first revision of second quarter GDP was nudged upward to 1.7% from 1.6%… Personal Consumption was 2.2% versus 2% last month, the Weekly Initial Jobless Claims fell by 16,000, and the Chicago Manufacturing Index was 60.4 from 56.7, a very nice increase I must say!
But that didn’t stop the dollar selling… Well, maybe for about a 3 hour period yesterday, the dollar rallied, but that was soon put to bed, and the currency rally was back on…
And then overnight, the risk campers were spreading out all over the world, as China’s Manufacturing Index rose. The risk on trading is in full force this morning because of China’s report… So with no further adieu, here’s the skinny!
Overnight, China reported that their Purchasing Managers’ Index (PMI), which tracks manufacturing, just like the PMI here in the US, had gained in September, rising from 51.7 to 53.8… (remember any number above 50 equals expansion) And the risk taking took off!
And of course, any time there’s good economic data from China, the Aussie dollar (A$) gets bought like funnel cakes at a state fair! And that’s exactly what happened overnight!
I have to say that, with this data from China, that I’m going to think more about the Reserve Bank of Australia (RBA) raising interest rates at their meeting next week. Before the Chinese report, the call for a rate hike was about 50-50… But now, I would have to say that we’re 2/3rds on our way to another rate hike in Australia next week!
So… Add the increased prospects of a rate hike in Australia to the news that Chinese manufacturing increased in September, and mix them all up still nice and smooth, and you’ll have a rally in the A$!
But the Big mover and shaker overnight was the euro… Don’t look now, but the euro is trading with a 1.37 handle! And all those naysayers that just a few months ago, were crowing about a breakup of the Eurozone and a collapse of the euro, are no where to be found… In their place are now guys calling for strong moves higher in the euro… I know a guy that called for a multi-year strong dollar rally back in 2008, and then when that didn’t happen, he called for another one just 6 months ago… Now, I’m not here to ridicule any one, but COME ON! With all that’s going on with our unsustainable way of deficit spending here in the US it just seems to be a lay-up to think the dollar has a tough row to hoe for some time to come…
Someone asked me yesterday, why I didn’t refer to the euro as the Big Dog any longer, and should the A$ take the euro’s place as the Big Dog? Hmmmm… Not unless the A$ takes over as the offset currency to the dollar. Yes, that title held by the euro, was in jeopardy 6 months ago, but no longer… And the Big Dog has returned to lead the pack of non-euro currencies versus the dollar! And now, I see a currency trading company said that the euro will reach 1.50 by the end of December! WOW! These are the same guys that said back in July that the euro would gain 6% in the next two months… So, I guess we should pay attention to what they have to say, eh?
The euro rally was boosted by the risk taking that was going on overnight, but what really got the euro going versus the dollar were some Fed Head speeches… Hold on to your hat here, because the Fed Heads were talking about inflation being too low, and the return of Quantitative Easing (QE). So… With the lead-in, the data cupboard will play a big part in today’s trading.
Remember when Big Al Greenspan had an axe to grind for the Personal Consumption data? Well, what he really watched was the Personal Consumption Expenditure (PCE) Deflator, which is an index that tracks the prices in PCE… August’s PCE Deflator prints today, and is expected to be 1.5%… I would say that the Fed would react big time should the index print weaker than 1.5%… And any Fed reaction is bad for the dollar…
But then, maybe PCE was like Puff The Magic Dragon, and when Big Al Greenspan went away, the PCE dragon ceased his fearless roar. His head was bent in sorrow, green scales fell like rain, Puff no longer went to play along the cherry lane. Without his life-long friend, puff could not be brave, So puff that mighty dragon sadly slipped into his cave…
So… While we’re talking about US data (yes, we were back a paragraph before I got silly)… The Data Cupboard is overflowing with data today for us! Right out of the starters blocks this morning, we have two of my fave data prints, Personal Income and Spending. Then the PCE data, and a serving of U. of Michigan Consumer Confidence. Then to finish off our data meal, we’ll see Construction Spending, and Vehicle Sales…
So, lots to deal with today, but in the end, the dollar selling will remain in tact, and the dollar will close out the 3rd QTR with one of its worst performing quarters of all time!
Ok… At the top I mentioned the Fantastico Friday that precious metals were having… Gold is up $8 to $1,316 and Silver has maintained $22… A lot of people are wondering if it is worth it to buy Gold at this lofty level… All I can say is that there was another group that was worried about buying Gold at $1,000, and then another group that worried about buying Gold at $1,100, then $1,200…
You have to ask yourself this question… Do you think the dollar is going to continue to weaken for some time to come? (please remember that a trend is not a One-Way street, and we could have volatility (dollar strength) for short periods of time)
If you answered yes, then buying Gold should be considered as wealth protection, at any price… And if you’re on board with the dollar weakness, but still are balking at $1,300 Gold, then you should consider Silver… Hey! Silver is more than just an investment metal, it’s also an industrial metal, so the demand for Silver comes from two groups of buyers… Wink, wink…
And remember yesterday when I said… “and the Brazilian real looks like it could trade below 1.70 for the first time since last November!” Well, as I always say… I love it when a plan comes together! And so it was with Brazilian real, which took my call and ran with it all the way to 1.6866! WOW! Talk about a move!
Now… Here’s where the rubber meets the road folks, will the Brazilian Central Bank step in again, to stem the real’s rise, or have they spent their last Billion dollars doing so, or… Most likely, they’ve seen that intervention doesn’t work! But, if the Brazilian Central Bank does muster up the nerve to intervene again, we could see the real back off this lofty 1.68 handle…
And as the members of the House go back to campaign and attempt to salvage their political careers, they have in their back pocket a measure to place tariffs on Chinese imports… But, as they get in their chauffeured limos, they will probably hear that last night, Japan’s Prime Minister, Kan, told the press that he’s “prepared to resume selling the country’s currency to prevent it from strengthening.” He also called on the Bank of Japan to do more to fight deflation…
Yes, there right out in the open, the Japanese PM said he’s going to manipulate his currency weaker versus the dollar… And yet, our representatives are going after China…
Again… Nov. 2nd… Take the trash out! These guys are driving us over a cliff! We can see it, but they can’t!
And… Before I head to the Big Finish, I noticed this morning that the price of Oil is back to $80… The dollar is getting hit from 3 corners… Currencies, precious metals, and Oil…
Then there was this… Did you know that it only takes 38 states to convene a Constitutional Convention? I was in meetings with the my “other” job colleagues the other day, and I was explaining this Constitutional Convention to them… So far Governors of 35 states have filed suite against the Federal Gov’t. for imposing unlawful burdens on them. Here’s what I would like to see… I would love for a Constitutional Convention to convene, and repeal 1913… Repeal the agencies… And a host of other things…
It is… We the People… Right? Then We the People should decide what bills, amendments, etc. we want…
Ok… Maybe that’s all wishful thinking…
To recap… Chinese manufacturing gained ground in September, and that brought even more risk takers out to play. The euro got a boost from the Chinese data, but also from the Fed Heads who all talked about how low inflation was, and the need to do something about it, which means more QE. And the A$ also saw buying after the Chinese data. The US data cupboard is overflowing with data today to end the month and quarter, that has seen the currencies & precious metals kick sand in the dollar’s face.
Chuck Butler
for The Daily Reckoning
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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