European Data Show Further Strength

Another busy day here at EverBank yesterday, but today promises to be a bit of a break. All of our visitors left late yesterday afternoon, and the systems which I have been testing are down for the next few days. The weather also looks like it has finally calmed down a bit after thunderstorms rolled through again yesterday afternoon. The markets probably won’t calm down, as we have a plethora of data releases today, along with further testimony from Bernanke and the release of the European stress tests.

Fed Chairman Ben Bernanke was on the TV’s here on the trading desk for most of the day yesterday. Big Ben was up on Capitol Hill to give his semiannual report on monetary policy and the economy, and didn’t paint a particularly rosy picture of the future of the US economy. While Fed officials plan for the exit, “we also recognize that the economic outlook remains unusually uncertain,” Bernanke told senators on the Banking Committee. These two words, “unusually uncertain,” sent shock waves through the markets. After all, less than four months ago, Bernanke was outlining how the Fed would be draining the liquidity from the banking system as the US economy looked to be expanding. Now he is warning the senators that the Fed is prepared to take additional policy actions as needed to stimulate the economy. “We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”

So where does that put the dollar? The currency desks took the greenback lower in trading after Bernanke’s comments, as any chance of a near-term interest rate increase were dashed. Bernanke and his compatriots are going to continue to ignore any worries about the long-term inflationary impact of their actions as they concentrate on getting the US economy back to “full utilization of productivity.” Currency traders know that Bernanke is running out of ammunition in his war against a double-dip. Interest rates are already near zero, and he has pumped as much liquidity as possible into the banking system.

The euro (EUR) got a boost from data again this morning. As I wrote earlier this week, the European data has consistently been surprising markets on the upside, and today’s data was no exception. European industrial orders unexpectedly increased in May amid signs the region’s debt crisis is easing. Industrial orders rose 3.8% from April, easily beating economists’ estimates of a drop of .1%. For the year, industrial orders jumped 22.7%.

Another report showed growth in Germany’s manufacturing and service industries unexpectedly accelerated in July. An index based on a survey of purchasing managers in German services industry rose to 57.3 from 54.8 last month. That is the highest in almost three years. The data point to a stronger than expected start to the third quarter. Obviously the eurozone is benefiting from the drop in the value of the euro (could this have been Merkel’s plan all along?).

While the data out of Europe continue to surprise on the upside, data here in the US look to disappoint. Today we will get the weekly jobs numbers here in the US, which are expected to show further increases to 445k claims. Later this morning, we will see existing home sales, which are expected to have dropped nearly 10% in June. Along with the housing data, we will get the leading indicators, which are expected to have fallen .3% in June after a .4% rise the month before.

None of this data to be released today in the US is positive, and the only hope for those looking for dollar strength is that the numbers are not as bad as what is expected.

The dollar index moved lower, and is approaching what some say is a “critical support” zone. Technical analysts over at JPMorgan Chase & Co. predict the index will tumble to around eighty if it weakens through the zone between 82 and 81.44. According to JPMorgan analyst Niall O’Connor, this zone represents a “sustained breakout” in April and the fifty percent retracement of the rally that began in November 2009. In the interview which appeared on Bloomberg, O’Connor said the dollar would consolidate for a few more weeks before extending lower. Neither Chuck nor I typically pay much attention to these technical indicators, but when the techies are saying the same thing as the fundamentals, it certainly makes a stronger case.

Mike Meyer printed off a story from Bloomberg yesterday afternoon that he thought I should share with the Pfennig readers. Chuck has had a pretty good record of being able to call the long-term trends of the currency markets, but always tries to remind readers that predicting the short-term moves are impossible. The article Mike wanted me to share with you quoted Jim O’Neill, the chief global economist at Goldman Sachs International, as saying, “Anybody who thinks they can get foreign exchange right all the time should be in a lunatic asylum.”

The story poked a bit of fun at the Goldman Sachs’ economist who has reversed his outlook for the euro twice in two months. Goldman now believes the dollar will weaken against the euro by January as US growth slows. In June, after the euro hit a four-year low, O’Neill said the dollar would surge to a seven-year high. According to the article, “The euro rallied the most this year, gaining 6.9% against the dollar, following Goldman’s June bearish call. After the bank switched its views July 14 to a bullish euro outlook, the currency surged for a day before bouncing back down.”

O’Neil worries about what the bank stress tests due out tomorrow will uncover, but he is still looking at fundamentals pushing the US dollar lower and boosting the euro.

Our own currency guru, Chuck Butler, is keeping an eye on the trading screens in Vancouver this week (he has Bloomberg on his laptop) and sent me the following to share with readers:

“So… What’s wrong with this statement that ran across the Bloomberg screens yesterday: ‘Yen rises as European stress tests, slowdown concerns boost safety demand.’?”

Give up? Oh, I know you know the answer! How in the world does the country with the largest debt become a “safe haven”?

The real McCoy when it comes to a “safe haven” is gold…

Here’s Ed Steer from his excellent newsletter on precious metals… “The Russian Central Bank’s gold holdings were updated for June… and they showed that they purchased another 200,000 ounces. Their total gold reserves now stand at 22.8 million troy ounces… which is 709.2 tonnes. So far this year, the RCB has purchased 2.1 million ounces for their reserves… and that’s a lot!”

And there was my answer to the question on Tuesday, when someone at the conference asked me why gold gained $10 that day…

Who will be the next central bank to step to the plate and knock the ball out of the park, with a large gold purchase?

OK… Big Ben Bernanke deep-sixed the currencies yesterday… Oh brother did he! Big Ben told lawmakers that the Fed Heads “remain prepared to eventually raise interest rates from almost zero and shrink a record balance sheet”…

Now… Why did that statement deep-six currencies? Well… all the world was beginning to believe my thoughts that I’ve repeated over and over again for months now, that the Fed would not be raising interest rates this year. So, then Big Ben says that the Fed remains prepared to raise them… That scared the bejeebers out of market makers, investors, etc.

But here’s the problem with that… He didn’t say WHEN!  Ok, Big Ben and the Fed Heads are good Boy Scouts… They are prepared! I would guess they have been prepared to raise rates for six months… Unfortunately, they can’t! And therefore, they won’t!

But that didn’t stop the markets from sending the risk assets to the woodshed on Wednesday…

The other thing that scared the markets was this “uncertainty” that Big Ben had about the future of the economy… So, once again, we’re rewarding the dollar for unforeseen problems… Makes as much sense as… Calling yen and dollars “safe havens!”

And finally, a story out of China said the People’s Bank of China will begin publishing a measure of the yuan’s (CNY) value “regularly” to help it manage the exchange rate against a basket of currencies, and not just the dollar. China announced a few years ago that it would be moving from the peg against the dollar to a peg against a basket, but never revealed what currencies were in the basket. Deputy Governor Hu Xiaolian said the nominal effective exchange rate publication would gradually become a reference for exchange rate adjustments. We have always assumed the basket was based on the amount of trade China does with its partners, but the specific currencies and weightings have never been revealed. This move is seen as a step toward making the weightings more transparent.

To recap… Bernanke deep-sixed the dollar with his “unusually uncertain” comment. Data out of Europe continue to surprise on the upside, Goldman’s top currency analyst throws in the towel, Chuck suggests investors look at gold as the true safe haven, and China may start to reveal what drives the value of their currency.

Chris Gaffney
for The Daily Reckoning