Did the Dollar Get Shanghaied?

And now… today’s Pfennig for your thoughts…

Good day, and a tub thumpin’ Thursday to you!

The Janet Yellen effect on the dollar continues this morning, and has brought out some very interesting opinions and ideas as to why this sudden change of heart has occurred with Janet Yellen. And I’m going to spend some time on the main idea sweeping through the markets these days. But first, let’s review what happened yesterday, and in the overnight markets.

The dollar attempted to rebound overnight, but that rebound has quickly faded, and the currencies are back on top of the dollar this morning. The turnarounds in Aussie dollars (A$) and New Zealand dollars/kiwi, were quite impressive, as these two currencies saw the brunt of the green/peachback’ s attempt to rebound. But the U.S. dollar rebound couldn’t hold, and these two currencies, A$ and kiwi, came storming back! The U.S. dollar was up about 1/3-cent at one point overnight, but not any longer!

And gold has decided to join the currencies in their rally vs. the dollar, with the shiny metal up $9 this morning. There are some things going on around the world today and tonight, but in reality, the markets are all setting up for tomorrow’s Jobs Jamboree. I really don’t care about what the BLS puts out as a jobs creation report any longer, it’s all hedonic adjustments and surveys that can be altered. But the markets are still allowing the BLS to pull the wool over their collective eyes.

It’s not that I think I’m smarter than anyone else, but can’t the markets see what the BLS is doing here? And if they can’t, why can’t they? Do they refuse to believe that they would be buffaloed? Ahhh, that’s it! The markets can’t believe that anyone or any institution would be smarter than the markets that they could fool them. That’s it, that’s the ticket!

The Eurozone aggregate Flash CPI for March printed this morning at -0.1% vs. -0.2% in February, and the annual CPI printed at 1.0%. Still very weak, data especially given the bump up in CPI that we saw yesterday that printed in Germany, the Eurozone’s largest economy. But has this slowed down the euro from making advances against the dollar? Hardly! European Central Bank (ECB) President, Mario Draghi, has to be spending his night counting flowers on the wall, and pretending that the euro strength doesn’t bother him at all. Playing solitaire until dawn with a deck of 51, smoking cigarettes and watching Captain Kangaroo. And all the while the euro refuses to stumble like Draghi would love to see.

You see, these Central Bankers have all gone down this rabbit hole, of believing that a weak currency promotes growth. The problem for this thinking is that when everybody is doing the same thing, there are no gains in the economy, because it’s a wash.  So, as I used to tell me kids when they would tell me that everyone else was doing something that sounded risky to me, “but don’t you want to be better than everyone else?” I would love for a Central Banker to go against the tide and say, “yes! I do want my currency to be better than everyone else’s.” Now THAT would be news!

Has Canada decided that it wants to be the country that says they no longer want to be with the “weaken your currency crowd”? I don’t think so. But rather, I believe they’ve just decided to stop fighting loonie strength. I talked to you yesterday about how the loonie had enjoyed a very strong month of March. And yesterday, the Canadian Finance Minister, Morneau, told an audience that the loonie was at an “appropriate” level after the bump higher in oil prices.

The price of oil has slipped again, but remains in the range that we talked about earlier this week, so no real panic in the markets from this slippage at this point, which is a good thing!

The Chinese will see both the Manufacturing and Services components of the PMI tonight, and I expect the manufacturing sector to see a bump higher in the Index number. No great shakes here, nothing to really see, so just move along, for these are not the droids we’re looking for. And the renminbi saw another larger than the average bear appreciation in the fixing overnight, marking two consecutive large appreciations that has taken the renminbi to a level it hasn’t seen in over three months having last been around 6.46 on 12/16/15. Of course that was prior to the devaluation that the Chinese threw at the renminbi in January of this year. But looky there, the renminbi has recovered back to a level it held before the devaluation. Patience is a virtue, they say…

After the Chinese devaluation in January I was really downtrodden on the where I thought the Chinese were taking the renminbi, but at that time I also told you that I thought the Chinese did that in response to the U.S. Fed’s rate hike in December. And since then  the rate hike talk in the U.S. has dissipated, thus allowing the Chinese to back of the depreciations that were taking place daily. Of course since I just said all this, the Chinese will probably announce a devaluation tonight of the renminbi! HA! That would be my luck!

I also pointed out back in January that the Singapore dollar (S$) had depreciated faster than the renminbi, and that these two had historically (since 7/05) traded in tandem. So, I said then that the S$ either needed to catch up with the renminbi, or the renminbi needed to fade to the S$’s level for them to get back in tandem. I thought at that time that with the devaluation, that the Chinese would probably allow the renminbi to fade to the S$’s value and then they would get back in tandem. But since January the S$ is up over 5% (5.30%)  and the renminbi is flat, now that it has recovered the ground lost in the devaluation. So, it appears that the S$ is playing catch up. Interesting, eh?

The U.S. Data Cupboard only had the ADP Employment Change for March, the precursor to the Jobs Jamboree tomorrow, yesterday, and it printed with a 200,000 jobs created in March, and revised downward their Feb number from 215,000 to 204,000. I’ve said this before but between the ADP report and the BLS report, I would rather the markets watched the ADP report. In our special world, tax filings would be counted. But that’s another story…

Today’s Data Cupboard just has some fluff of two regional PMI’s (Milwaukee and Chicago), the usual Initial Jobless Claims that print weekly, and the Bloomberg Consumer Comfort index, nothing here that would move the markets away from taking liberties on the dollar today.

I mentioned gold above, so I won’t go back over that but instead let me talk to you about Platinum. Yesterday I talked about how platinum had risen by $30 in a day, while gold gained $20. A dear reader sent me a note letting me know that he has personally followed platinum for many years, and reminded me that historically Platinum has traded 30% higher than gold, because the supply of platinum is 1/10th of gold. I wasn’t aware of that, and see, even your Pfennig scribe learns something new every day!

I’m going to talk about the ideas that are spreading around the currency markets right now, and this will be my FWIW today. First, my friend, and huge Cub fan, Dennis Miller sent me a link to a story that he thought was interesting that was in the Business insider, that talked about a “deal” that the G20 countries made in Shanghai a few weeks ago, to weaken the dollar. I told him that I had heard some rumblings about this, but wasn’t going to get into it unless more people began talking about it. And then later in the day, MarketWatch sent me their daily email and in it was an article about the dollar getting Shanghaied.

So, did the G20 countries come to an agreement to weaken the dollar, a la the Plaza Accord in 1985? We might not ever know, but a little voice is telling me that this is exactly what happened, and the proof is in the pudding, for since then, the Fed left rates unchanged, when they had pretty much told us prior to March that they would hike rates at their March meeting.

Then we’ve seen Janet Yellen go all dovish on us, after being so upbeat about the economy a month ago. And the dollar since Feb 26-27 G20 meeting in Shanghai the dollar has lost over 4% to the euro (which certainly has its own set of problems!) , over 7% to the A$, and rand, over 11% to the real, and so on.  And the renminbi? It has gained back 1.78%..

So for all you that love to think about back room deals and stuff like that here are the links to the Business Insider article and the MarketWatch article.

So, what do you think?  Well, here’s what I think. I think they did agree on something, was it an all-out attack of the dollar? Probably not, just an adjustment in the dollar strength, to get the rest of the world feeling better about things. The problem with these things is that how do you stop them once traders are on board with getting the dollar weaker? I don’t think the old Robert Rubin trick of repeating a phrase will work any longer. For those of you who didn’t follow this stuff back in the 90’s. Robert Rubin was the Treasury Sec. that used the phrase, “a strong dollar is in the best interests of the U.S.” as a way to put the fear in traders’ minds that the U.S. could intervene and cause them to take huge losses should they continue to short the dollar.

If this is all true, then the dollar’s five-year reign will have come to an end. Hmmm… I wrote in the world famous Review & Focus which can now be found and read by everyone on the EverBank website by clicking here, that I believed the strong dollar trend would end this year, but I never imagined that it would happen this quickly. So, I would tread water carefully here, for we’re not sure that this “deal” is the real McCoy, nor do we know that it has staying power.

And with that thought, I’ll let you go today, and hope you have a tub thumpin’ Thursday, and be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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