02/22/10 St. Louis, Missouri – Front and center this morning consumer prices rose 0.2% in January, equaling the increases in December and November. Market expectations going into the report had been for a slightly larger 0.3% rise. Core prices surprisingly fell 0.1% in January following the 0.1% rise recorded in December and the flat reading in November. On a year-over-year basis, the overall CPI index rose 2.6% in December.
That’s funny… I recall just the day before, seeing wholesale inflation running at an annualized rate of 16.8%… And consumer inflation is falling? THIS is why I say CPI is stupid, and not even worth printing any longer!
The “lemmings” in the markets followed CPI, and thought that they had overreacted to the wholesale inflation figure the previous day, and began to sell dollars and buy higher yielding assets. Sure… They got it right in the end, but the damage to the currencies the previous day, well… That’s water under the bridge, I guess.
Last night I was doing some reading and came across a story that caught my eye regarding the Aussie dollar (AUD)… It seems that Japanese Investment Trusts are in the process of raising the most money since 2008, which they use for investing in foreign assets. So… Look for these Japanese Investment Trusts to lean toward higher yielding currencies, and favoring Aussie dollars over the rest of the high yielders.
The report went on to say that Brazil would be the second destination of these funds…
The US dollar strength last week (if you take out the PPI print day) seemed to abate a bit… At one point last week the euro (EUR) was trading below 1.35, and has since recovered to 1.36… I don’t think the euro is out of the woods yet… In fact, I’m quite certain that it’s not even near the edge of the woods… But it’s always nice to see a bounce here and there when a currency has become everyone’s piñata!
A quick look this morning at the price of oil tells me quite a bit about why the Canadian dollar/loonie (CAD) is screaming higher again this morning. Oil is almost $80 this morning, and the loonie is more than 96-cents! Gold is also up this morning adding to Friday’s very nice gain, and is trading, as I type, at $1,122.90. I’ve said for so long now, that as gold and oil go, so goes the loonie… A key to trading it, I would have to believe!
I had a reader send mea reminder that there are currencies in the Eastern Bloc like Poland, Hungary, and Czech Republic, which I tend to forget to write about… Like I’ve said many times in the past… These three “euro wannabes” are tied to the euro’s tracks… And… As the euro goes, so go these three. Having said that, though, there is movement among these currencies versus the euro, and the stronger they can get, the better their conversion rate will be when they finally convert to the euro. And Poland seems to be the frontrunner of these three when it comes to gaining versus the euro…
In keeping with the discussion of the “euro wannabes” this morning… The Polish Central Bank’s Monetary Policy Council issued a report last week, saying, “the time for monetary policy tightening may be approaching.” So they’ve got that going for them!
I was also reading a report from a “think tank guy” that had an idea about what Greece should do… The writer had the idea that Greece should leave the euro, devalue the drachma (their old legacy currency and what they would need to go back to) by 25%, allow the cheaper drachma to work out the payment of debts, and then in a couple of years, join the euro again.
I was telling a reporter from The Wall Street Journal on Friday about my “slowest buffalo” theory for Greece… You know, the slowest buffalo gets killed, but it makes the herd faster? Well… Greece is the slowest buffalo… They get axed, and the rest of the European Union is stronger… Makes sense to me!
Back to reality with Greece for a minute… Today a delegation from the EC, ECB and IMF arrives in Athens to assess progress… I think Greece and the EU (European Union) are in dispute as to what Greece needs to do. If I were leading Greece, I would either listen to what the EU says… Or leave the euro… I wouldn’t stand there arguing with them!
I sure ran into a hornet’s nest with the inclusion of my friend, David Galland’s comments about the Tale of Two Americas… Folks… I just want you to think about this stuff that’s going on with our republic…
OK… Have you heard the latest regarding the decline of Chinese purchases of Treasuries? The latest report says that China has created Trusts in the UK and Hong Kong, and have switched their buying of Treasuries to these two trusts, so that it can’t be tracked… So, we don’t know for sure, but that’s the rumor going around right now… I really don’t know what to think… The Chinese said they were going to reduce their holdings… I have to think that this “story” about “trusts” has been made up, to keep people from thinking that China is really reducing their holdings of Treasuries… That’s my story and I’m sticking to it!
The data cupboard is pretty empty today, with only a couple of third tier manufacturing reports… Tomorrow, we get in high gear with the S&P/CaseShiller Home Price Index for December, and consumer confidence for this month.
I was thinking about the housing numbers last week. Remember when the TV media guys and girls got all lathered up about the 2.8% increase in Housing Starts? Well… Did anyone of these TV media people take a minute and say, “2.8% off the numbers from 2009 isn’t very good”? Obviously not… And yes, while 2.8% is better than a sharp stick in the eye, it’s based off of some atrocious numbers from 2009… So, it should have been taken with a grain of salt, eh?
OK… China allowed the renminbi (CNY) to gain the most in one day in a month of Sundays last night… I wouldn’t make too much of this until we seem more of these moves in the same direction.
Let’s get back to gold for a minute… Think about the resiliency of the shiny metal last week for a minute here… Gold had to deal with the IMF announcement of gold sales… It had to deal with PPI printing at 1.4%… It had to deal with the Fed’s Discount Rate Hike… And still, it ended the week about where it began!
Today’s price action could be a key to the remainder of the week, folks… You see, gold has bumped $1,125 a couple of times here recently only to fall back… It looks to me like gold could really put some wind in its sails if it could get to $1,125 and beyond.
Then there was this… The Bankers Association report shows possible signs that the foreclosure crisis that has gripped many of the nation’s housing markets is starting to ease. Again… You can only attract so many flies with honey… Before or the area runs out of flies! You can only foreclose on so many homes, before all the ones that need to be foreclosed on are completed… I don’t find solace in this report by the Bankers Association… But then that’s just me, I guess. I mean, really… I’m a happy person! Just one that likes to “tell it like it is”…
To recap… CPI printed on Friday and showed very little consumer inflation, which is just plain stupid! The markets took it as the Fed not needing to raise rates any time soon, and began to put on the risk trades, again. The loonie and Aussie dollars are the most sought after currencies this morning, but as with any currency any day, those things can change on a dime!
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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