11/24/10 St. Louis, Missouri – The dollar bulls really are having their way with the currencies, which is so weird given the fact that just two weeks ago, the negativity toward the dollar was running at a level I had not seen before… And then it turned on a dime… Here’s the skinny on this as I see it…
The negativity grew so strong toward the dollar that it simply reached an oversold level…short term that is… So, traders began to look around and noticed that the short-term profits they could book were tremendous… Then the excuse came along to buy back dollars and take those profits, and it came in the form of Irish debt problems… No… These problems in Ireland weren’t new to the markets… Remember the PIIGS, or GIIPS as I changed the name to? Well, one of those “I’s” belonged to Ireland… But, the media jumped all over the Ireland problems and the next thing we know, is it is December 2009 all over again… But this time Ireland replaces Greece…
Eventually, we’ll get back to the underlying weak dollar trend, but until then, currency owners, of which I am one, have to deal with the dollar bulls prancing and dancing in the streets, and being obnoxious to the point that you simply begin to ignore them!
The reason I say that eventually we’ll get back to the underlying weak dollar trend, is that there has been no fundamental change in the deficit picture, that put the dollar in the weak trend in 2002…
Yesterday I told you that it was strange that gold was weaker, given the geopolitical stuff going on in North and South Korea? Well, it didn’t take the US markets very long to realize that gold should be moving higher on news like that, and the shiny metal quickly erased its losses and moved higher on the day… Strange day, though… Gold was up $10, and Silver down 30-cents… Strange days indeed…
Gold is edging higher again this morning, and this time silver is coming along…
The overstuffed US data cupboard was able to loosen a belt notch, like most of us will have to do tomorrow… Some data printed in the US thus relieving the data cupboard of its overstuffing this week.
US Existing Home Sales for October took a turn for the worse, falling 2.2%, and putting a real damper on the previous month’s originally posted 10% rise… Overall resale activity remains depressed and this month’s pace of sales represents the third lowest in the series since records for total sales (both single and multiple-unit home types) began in 1999.
Third quarter GDP saw its second reading revised upward from 2% to 2.5%… I grow more skeptical of these GDP numbers all the time, folks… It took me a while, years ago, to figure out why I was always suspicious of the CPI data… And eventually I’ll find the skeleton in the closet here that proves these numbers are all trumped up! It could very well be an exercise in inventory building that pushes GDP like this… The news wires say that “increased consumer spending” pushed GDP higher… Hmmm… 23% unemployed… 43 million on food stamps… And we’re spending like crazy? I don’t buy it!
The PCE (Personal Consumption) data was stronger than expected, and that’s where I guess the government gets the idea that consumer spending was stronger…
Of course, let’s all keep in mind, that these numbers printing today are being compared to numbers a year ago, when we were mired in recession…
And then we had the FOMC meeting minutes… Federal Reserve officials downgraded their assessment of the US economy at their last meeting three weeks ago as they debated the benefits and costs of quantitative easing to support the recovery. Minutes of the Fed’s latest policy-setting meeting on November 2-3, showed that officials expect the economy to grow at a moderate pace next year, which is a nice way of saying that they lowered their growth forecasts, with unemployment staying disappointingly high and inflation uncomfortably low… And what I found interesting was that votes were divided… At least someone at the FOMC was thinking straight!
Well… The data prints in the US yesterday weren’t the only ones for the markets to view… Canada had two very interesting data prints… First, Canadian CPI rose a greater-than-expected 0.4% in the month… and Canadian retail sales rose 0.6% in September following an upwardly revised 0.7% (previously reported as 0.5%) increase in August. These are two very important pieces of data to the Bank of Canada, for the recent trend in economic data has been one of weaker/softer prints… The Bank of Canada (BOC) was ready a couple of months ago to raise interest rates again, but had to put that rate hike on the back burner with the softer data that was printing… But now, the BOC is back to square one, and if the data continues to be stronger, then we could see the BOC come back to the rate hike table.
The Canadian dollar/loonie (CAD) is stronger this morning on those data prints, and it’s the first good run the loonie has seen in the past week.
One of the people “in charge” – who normally says things that I agree with – Angela Merkel, Germany’s Chancellor, really threw a cat amongst the pigeons for the euro (EUR), yesterday… Merkel decided to tell an audience that “the euro is in [an] exceptionally serious situation”… Now… Germany was the main force for the creation of the European Union and the euro… So to hear Germany’s Chancellor say something like that, scared the bejeebers out of euro holders, and the single unit currency got taken to the woodshed… And has remained there through the overnight and morning sessions.
It does look like the European Union (EU) and the IMF will give Ireland an 85 billion-euro aid package, or “bailout” if you prefer to call it what it is! Now, back in late spring of this year, when Greece was finally given an aid package, the rally in the euro was ON! We’ll have to wait-n-see if the euro can generate a rally on this Irish news… It will be difficult to do the next three days, given that the volumes on US trading desks are thin today and Friday, with markets closing early, and totally closed here in the US tomorrow…
There is news like the strong manufacturing for the Eurozone that we talked about yesterday, and today’s news that German Gross Domestic Product expanded 0.7% in the third quarter compared with the second quarter. The government’s council of economic advisers said GDP is on track to expand 3.7% this year, the highest rate since 1991… And there is further news this morning that German Business Climate, as measured by the think tank IFO, beat expectations and posted a very strong number… Could be springboards for a euro rally… But only if the markets are interested in fundamentals and data.
The Aussie dollar (AUD) is bucking the trend of US dollar strength this morning, showing resiliency in its ability to gain with all this US dollar strength. The Aussie dollar’s fuel is coming from the thoughts that Ireland will get a bailout, which, if it happens, could get global growth back on track… So, traders that aren’t afraid of the big bad wolf (US dollar) are being courageous and going out on a limb here… And I commend them for that!
I was reading a story online last night that really struck a nerve with me, and made me sit up and say, “Now that makes sense”! The story was about how, after corporations here in the US cut back on their labor forces, they went out and figured out how to continue making profits without those employees… The government calls this “productivity”… You know that I call this nothing more than each person having to work harder and longer… But, apparently, it is more than that, and with these corporations booking profits, with wider margins, they have little incentive whatsoever to hire back those employees that were cut in the past two years.
Then there was this… OK… Maybe I didn’t explain myself very well yesterday… When I was talking about the new TSA pat-down procedures, I NEVER said that I approved of them! I said that I’ve been patted down for three years, now, through every security checkpoint, so it didn’t bother me… I didn’t say it was OK for anyone else! Geez Louise, the things that people believe they read into what I say! I simply tried to point out that this was something that happens every time in life… We go too far one way, try to correct that, and go too far the other way…
To recap… The dollar continues to pile on versus the euro and the euro alternatives, while the Aussie dollar and loonie attempt to stage rallies versus the dollar. Gold rallied $10 yesterday, and is inching up this morning. The FOMC meeting minutes were interesting in that the Fed Heads stated that they believe economic growth will be moderate next year, with high unemployment remaining a problem. German GDP and IFO surprised to the upside this morning, but the euro’s short-term movement is in the hands of those giving Ireland a bailout.
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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