Chuck Butler

The currency/risk on rally was quite strong yesterday, all day long! However, in the overnight markets, we’ve seen some profit taking, and reassessing of what they were doing, like pushing the euro to above 1.30. I say that because there’s still no agreement with Greece and the private creditors… I keep hearing and reading analysts, talking about how the Greece problem is unsolvable… OK… maybe it is… but if that’s true, then what about Illinois? Or California?

Why aren’t these same analysts looking at what’s going on here? Do they have blinders on? Or have they become fixated on what they claimed would happen, and until that happens (Greek defaults), they can’t think of anything else?

Sure, Illinois and California, along with a handful of other states that are so deep in the red ink they are barely keeping their heads above water, have the federal government to bail them out, right? Well… not so fast, Tim! According to Sen. Jim DeMint of South Carolina, the Republicans have a three-part plan to deal with the likes of these states swimming in red ink…

1.    Create a legal process to allow states to renegotiate debts and union contracts like a bankruptcy.
2.    FORBID a congressional bailout of the states.
3.    FORBID the Fed to buy states’ debt.

Sounds like the states are in the same mess that Greece, Portugal, Ireland and the rest of the lot are in to me… But I’m sure someone with more gray matter than me will point out to me the things I got wrong here. They always do!

And… I’m not saying that Greece won’t default… I don’t see how they pay back their debts… but then I don’t see how we as a country pay back our debts!

OK… there was some good data from the eurozone this morning… After recent months that pointed to manufacturing contracting in the eurozone, the flash PMI’s (manufacturing index) shows a recovery this month from 48.3 to 50.4… Yes, it’s only one month, and one data print doesn’t indicate a recovery, just as one swallow doesn’t indicate summer is here… But… as I always say… better to have a strong number than a weak one!

Speaking of a weak number, though… the good sign for manufacturing was offset by a weak industrial orders print… November saw industrial orders fall 2.7% from October… But remember… going into the end of the year, things were looking pretty bleak in the eurozone. They have since taken baby steps to stabilization, as shown with the flash PMI today…

Well… the end of an era just might happen tonight (Wednesday for Japan) when Japan is expected to print its first annual trade deficit since 1980! And most Japanese analysts are saying that if the yen remains strong and global demand weak, Japan could run trade deficits for years to come. WOW! Say it ain’t so, Joe!

Pretty interesting stuff from Japan… I still believe the yen (JPY) is overvalued, given what Japan has to offer investmentwise… And if Japan does print an annual trade deficit, I would think that it would be the straw that broke the Bank of Japan’s (BOJ) intervention silence… I would look for the BOJ to come in with both guns blazin’, selling yen in an attempt to weaken the currency…

You see… the countries like China, Singapore, Indonesia, South Korea and others can beat Japan when it come to cost of product because their wage scales are much smaller… So it comes down to currency costs… And the yen has gotten so far out of whack with what’s going on with the other Asian exporting countries…

Speaking of China… Happy New Year… there was an interesting report from China overnight that was issued by an analyst at Moody’s… The analyst believes that “China’s ability to slow nonbank financing growth to its current pace is helpful to the prospects of a soft landing in the economy and development that diminishes our concerns about systemic risk.”

So… another person who believes along with me that there will be moderation of the Chinese economy, not collapse…

And keeping in the Asian region, I come across a story out of India this morning, that the Reserve Bank of India (RBI) surprised the markets by reducing their cash reserve ratio to 5.5% from 6%… You may recall me telling you that when China reduced their reserve ratio, it was the same as a rate cut, and so too it carries the same water here… And the markets, with their strange and twisted mentality, are still rewarding currencies from countries that promote growth, so… the Indian rupee (INR) is on the rally track this morning… Just a month ago, on Dec. 15, the rupee fell to 54.30… it has recently recovered nicely, and with today’s gains, the rupee is sitting just above the 50 handle…

Yesterday, I told you that India and Iran had signed currency swap agreements on their trade of oil to remove the use of U.S. dollars… Then I saw a story that said that India was going to pay Iran for their oil in gold… Now, that’s a twist… and something I think the Indian government will rethink going forward. That is, if it’s true…

So… did you see where Europe joined the U.S. in banning Iranian oil? I think this is pretty much a symbolic move, as most of Europe’s oil comes from Russia… But the thought that it was banned did push oil higher for the first time in four days… And when the price of oil goes higher, so does the value of the petrol currencies… you know, the usual suspects… Norway (NOK), Canada (CAD), Russia (RUB), the U.K. (GBP), Mexico (MXN), Brazil (BRL) and others…

I mentioned Norway… The price action was so typical yesterday… The euro gains a yard and the krone gains 50 yards… The Norwegian central bank, the Riksbank, is sniffing around at a rate cut, so the rewards for promoting growth are in play again here.

OK… I received quite a few notes from readers yesterday telling me that part of the silver move on Friday (that I said silver was playing catch-up with gold) came from the new Sprott Physical Silver Trust (PSLV) buying silver future…

OK, but I still believe that a lot of catch-up has to be made by silver… Silver guru Ted Butler had this to say the other day: “Considering the technical cleanout we’ve just experienced in both gold and silver over the past few months and the proximity of some key moving averages above current prices in each that threaten to be penetrated, it is not hard to envision strong price rallies. Of course, we are still discussing markets that are manipulated in price, so we must be prepared for anything. The best preparation is not to borrow or deploy margin.”

Are the bond bears waking up? They’ve been hibernating way too long… But in the past week, I’ve watched not only U.S. Treasury yields rise, but also U.K. gilt yields rise, and German bund yields rise… OK, all these moves are small, but I found it interesting that it wasn’t just one market that saw bond yields rise in the past week…

I checked with one of my Treasury gurus, and he tells me that 2.05% yield in the 10-year Treasury is a key resistance… Well, guess what? The 10-year is at 2.05% this morning… I’ll keep my eye on this to see if more slippage occurs today… But the bond bears, or vigilantes, are late to the party…

Then there was this… The Boston Bruins hockey team visited the White House yesterday to put a final cap on their Stanley Cup win last spring… And there was someone missing… it was Tim Thomas, the goalie… and here’s the rest of the story…

Goaltender Tim Thomas, one of only two Americans from the 2011 Stanley Cup team, decided not to join his teammates.

Thomas posted the following statement on his Facebook page at 6 p.m. EST:

“I believe the federal government has grown out of control, threatening the     rights, liberties and property of the people. This is being done at the executive,     legislative and judicial levels. This is in direct opposition to the Constitution and     the Founding Fathers’ vision for the     federal government.

“Because I believe this, today, I exercised my right as a free citizen and     did not     visit the White House. This was not about politics or party, as in my     opinion, both parties are responsible for the situation we are in as a country. This     was about a choice I had to make as an INDIVIDUAL.

“This is the only public statement I will be making on this topic.


Chuck again… Interesting… but even with that kind of mind frame, wouldn’t you want to visit the White House just to take in all the history? Apparently not… But at least he tried to take a position on what’s going on, and maybe bring it to people that would not normally see this…

To recap… The currency rally that went on all day yesterday ran out of steam in the overnight markets, but the slippage hasn’t been too bad. Greece is still in negotiations on its debt, but what about Illinois, California and the rest of the red ink swimmers? Why not media coverage of these problem states? India reduced their reserve ratio, and the rupee rallied. And Japan might just be printing their first annual trade deficit since 1980!

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.

  • gman

    “So… another person who believes along with me that there will be moderation of the Chinese economy, not collapse…”

    oh good grief.

    if the chinese economy “moderates” then 600 million peasants who can no longer get their piece of the pie will riot. the chinese communist party will lose its mandate from heaven. we’ll see how much of that “moderated” economy is LEFT after that.

    not everything is about money changing hands.

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