Chuck Butler

The currency rally that stalled yesterday was back on last night… I have to tell you that I was up most of the night on Sunday and after getting poked and stuck at the doctor’s office yesterday, I went home, straight to my recliner and slept for the next five hours! Then I woke up, went to my computer and checked the overnight markets, and I saw the currencies had turned around, along with gold. So naturally, I began to scour the news to see what was going on.

No, Greece didn’t come to an agreement with private creditors. But the eurozone leaders did agree to accelerate the setup of a full-time 500-billion euro (EUR) rescue fund, and adopt the German-inspired deficit control treaty… This helped the euro rise…

Then there was this ditty, a simple twist of words that confused the markets into thinking something that was not assured… Greek Prime Minister Papademos said he “seeks” to reach a conclusion on talks with the troika in concert with the final agreement with private creditors “before the end of the week.” I saw it written that the markets obviously confused the meaning of “seeks” for “expects.” But the markets are never wrong, right? So this helped the euro rise, too…

And then finally, in keeping with the recent trend in Germany for stronger than expected data prints, German unemployment fell 34,000 in January (-10,000 was expected). This brings the German unemployment rate to its lowest level since the series began in 1992! WOW!

The eurozone unemployment is not so good, though… but that plays along with the whole story of Germany’s data versus the eurozone as a whole…

So the euro is back to 1.32 this morning, which means the Canadian dollar/loonie (CAD) is hugging parity to the dollar once again, and rhe Nordic currencies of Norway, Sweden and Denmark are all stronger this morning as well.

Gold has gained back the $11 it lost yesterday before the turnaround, with a $10 gain so far this morning. Commodities as a whole are stronger on the eurozone info… Everything from cocoa to precious metals has green numbers beside their values this morning… And we all know that having commodities on the rally tracks is good for the commodity currencies: Australia, New Zealand, Canada, South Africa, Brazil, Norway and a few others…

I see German Chancellor Angela Merkel is going to be visiting China… I do believe that she will be going to assure the Chinese that Germany is strong, and hope to get more commitment from the Chinese regarding bond buying. She might get somewhere, as long as she doesn’t do a Tim Geithner, and chastise the Chinese for their currency policy…

Speaking of China’s currency policy, I told you yesterday that the Chinese came back from holiday and immediately marked the renminbi (CNY) down versus the dollar. The renminbi was set to post its worst monthly loss in 18 years, before a turnaround last night. Following the Sunday night weakening of the renminbi, the Chinese allowed the renminbi to gain Monday night…

I can tell you what the Chinese were doing during most of January, folks… They were doing the same thing they did in 2008, when the financial meltdown hit the global markets… They sat on the renminbi and waited for the coast to clear before getting back to currency appreciation… Same thing here… The eurozone debacle was teetering on causing another global financial meltdown, so the Chinese just sat on their currency. But the news last night from the eurozone was better, so the renminbi gained in value, thus heading off the title of worst trading month ever!

The latest manufacturing index report will print tonight for China, and that report will be gone over with a fine-toothed comb, as investors and traders want confirmation that China’s economy is simply moderating and not collapsing… You know where I stand on that, and have stood for over two years now… I’m still here, and so is the Chinese economy!

While I’m talking about China, I might as well talk about one of my fave currencies, the Singapore dollar (SGD). There’s hardly ever news from Singapore, so I have to search through all kinds of articles to find a snippet on Singapore. We can call Singapore the best-kept secret. What I found this morning was mention of the S$ closing in on its 200-day moving average. Now, that’s something! Especially since the 200-day moving average was 1.2541 and the S$ flew right through it this morning, and is now 1.2510.

Here’s the thing that happened to the S$ last September when it reached 1.20 and change: It got ahead of the renminbi’s advance against the U.S. dollar. These two normally move in tandem. You can tell that by looking at their gains versus the dollar since July 2005, when the renminbi broke the peg to the dollar. Their gains are right on top of each other, around 28%.

So watch the S$. If the renminbi gets back on daily appreciation, then the S$ will move freely along with the renminbi. If the renminbi halts appreciation for some reason, the S$ will too. For, you see, these two countries are in competition for exports.

Speaking of China, there’s one more thing this morning. The World Trade Organization (WTO) ruled against China, and said that China must eliminate taxes and quotas on the export of nine industrial materials. This is a real blow to China, for now that the West has the WTO’s attention, I believe they will go for China’s throat and challenge other natural resources, including rare earth metals. (Remember last year when China halted rare earth metals to Japan?)

And India, the country that I took the woodshed for not addressing their rising inflation in time to prevent a currency sell-off, is seeing their move to reduce reserve ratios that I talked about last week come to the aid of the rupee (INR). The rupee has been on a tear since the announcement last week. It’s good to see, for this currency had gotten beaten badly around the head and shoulders.

The U.S. data cupboard sees some action today, with the S&P/Case-Shiller home price index for November. Home prices are expected to decrease at the smallest rate in some time but still decrease. We’ll also see the Chicago Purchasing Managers Index (manufacturing). And the consumer confidence hogwash, consumer confidence, is expected to rise by a large amount in January. As usual, we begin the year with lofty expectations of what the year has in store for us, only to see that drift away as the year moves along. The people surveyed for this confidence report must not have heard the Fed Reserve lower their forecasts for 2012 economic growth, or lay the groundwork for more quantitative easing.

Then there was this: Speaking of the Fed and their lowering their economic forecasts for 2012, I saw that The Economist had a note about the Fed leaving rates near zero could end up competing with Japan for record length. The Economist also had this to say about the Fed laying the groundwork for more quantitative easing: “Unemployment, now 8.5%, is seen edging below 8% only by the end of 2013. Inflation, meanwhile, will be at or below the new target of 2%. With unemployment too high and inflation still weak, more monetary stimulus is easily justified. Mr. Bernanke left the door open to that option. The odds are that he will walk through it.”

To recap, the currency/metals rally that got stalled out Monday morning regained its legs and got back on the rally tracks last night and this morning. The eurozone came to an agreement on the size (500 billion euros) of a permanent rescue fund and adopted the German-inspired deficit control treaty. Greece is still negotiating. The news from the eurozone was enough to get the markets feeling comfy-cozy with a rally for the risk assets. Commodities are all stronger, and gold gained back its loss from yesterday. A lot of data to sift through today. The final piece of data will be consumer confidence, and it is expected to be quite strong. Strange, I know.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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