RBA Leaves Rates Unchanged

And now… today’s Penning for your thoughts…

Good day. And a Tom terrific Tuesday to you!

Well, it certainly wasn’t safe in the currencies yesterday. What’s that? I thought you told us that the currencies were all rallying vs. the dollar in the Pfennig yesterday. Ahhh, I did tell you that, because when I was writing the Pfennig, that’s what was going on, but as the day went along, the currencies lost their luster, and by the end of the day, the dollar had wrestled the conn away from the currencies once again.  It certainly seems to be a case of “currencies by night, dollar by day”.

So, what turned everything around like that?  Ahhh grasshopper, I’m glad you asked! So, just for grins yesterday, I clicked on the world equity indices screen on the Bloomberg, and what to my wondering eye did appear?  A screen filled with green numbers!  Yes, every, and I mean every stock index listed on this screen around the world, was posting gains on the day.  Everybody is happy, happy, happy, that it now appears to even the  staunchest rate hike camper, that the economy can’t deal with a rate hike, so that means it’s party on Wayne, party on Garth!

So, what happened to the fear that Yellen was telling us that we should fear what’s coming by leaving rates unchanged?  That’s the funny thing with fear. Once you get over it, you wonder what the heck you were fearful of to start with! And that’s the deal in stocks right now, so it’s back to where I thought we would be once the Fed came clean on their no rate hike decision.

I actually welcome this scenario in a way.  You see, for a number of years, we had to deal with this “risk on”, “risk off” dookie where all the risk assets were traded together. But that has ended, for the most part, that is, and we’re back to the assets that should have different pricing mechanisms, and reflect different pricing inputs than other risk assets, like stocks, bonds, currencies, and commodities, then if that’s the case, I’m “all in”..

Well, we talked about the Reserve Bank of Australia (RBA) meeting that was to take place last night, last week, and I said that I didn’t expect the RBA to move rates. And that’s exactly what they decided to do last night, leave rates unchanged. Not only did the RBA leave rates unchanged, they had a few things to say about the economy and the region afterward.

The RBA said things like; “the economy suggests that a moderate expansion continues” and this: “The economic growth has been accompanied with somewhat stronger growth of employment”. That sure doesn’t sound like a Central Bank that’s thinking about cutting rates during the remainder of this year, now does it?

Sounds like a Central Bank that’s quite pleased that they held back and didn’t cut rates a couple of months ago, when the markets all were ganging up on the RBA to cut rates. But they didn’t, preferring to “wait-n-see” how their previous cuts were going to play out. The Aussie dollar (A$), which got caught up in the selling of the currencies yesterday, has taken this rate announcement and statement afterward and rallied back above 71-cents overnight.

Yesterday, I talked a lot about rate hikes and so on, and only mentioned a couple of currencies that were on the rally tracks. One of the more impressive moves by a currency the last two days has been in the Canadian dollar/loonie. Sure, the price of oil has traded above $46 for two consecutive days, but that’s not all that has the loonie moving higher again.

Basically, what’s going on here is that the markets are taking a flyer on the loonie, and Canada’s ability to show that they are rebounding in the exports arena. That Trade Data will print this morning, so the waiting will be over, but for the most part, I think the Canadian Trade Surplus will have shown that it widened in August, and that will support the gains the loonie has booked ahead of the data.

Let’s see now… the Polish Central Bank left rates unchanged overnight. the Bank of Japan (BOJ) meets tonight, and once again there are those banging on the BOJ’s door to up the ante in the stimulus game, but I’m sure the BOJ turns a deaf ear toward the doors.  And then on Thursday this week, the Bank of England (BOE) meets. Remember when a BOE meeting would have brought about a lot of anticipation of a rate hike, because that’s what BOE Gov. Carney had promised the markets a year earlier?  Well, anticipate no more. All the rate hike campers have gone home, put away their signs, and banners, for there is to be no rate hike here, and like the U.S. probably won’t be any rate hikes in either place until 2017!

I see that European Central Bank (ECB) President, Mario Draghi, will be speaking today. I sure hope he doesn’t see to it that he upsets the applecart here. The euro has been quite resilient in the face of a lot of ugly stuff (VW, refugees, etc. )  and I would like for him to keep it that way! The same holds true for the two Fed members that will speak today. They are viewed as doves, I hope they keep it that way!  You know me., a duck is a duck, and goose is a goose, and so on. Be what you are!  Always be yourself! The famous words of Mr. Wizard, have guided my life! HA! Hey! Don’t laugh too strongly, it’s pretty darn close to the truth!

Yesterday, the Russian ruble was the best performing currency. And this morning, it’s not. In fact, it’s gone from first to worst in one day! The good news is that the bad performance this morning isn’t completely wiping out the gain it made yesterday.  I read a report from a trader that called the ruble a “high beta currency”.

In other words, when the Emerging Markets rally, the ruble is front and center, and when the Emerging Markets sell off, the ruble is also front and center. As I said above the price of oil is still above $46, so I would have to say that the selling in the ruble today is tied to a technical correction, given the size of the gain yesterday.  Yeah, that’s it, that’s the ticket! HA!

Well the accomplishments of the Chinese economy, and renminbi just keep piling up. According to SWIFT (the foreign wire system everyone uses, and stands for: Society for Worldwide Interbank Financial Telecommunications) the renminbi has moved ahead of Japan’s yen, to become the fourth most-used currency for global payments!

So, let’s track this progress. In Rocktober, 2010, the renminbi was the 35th most used currency. In Rocktober 2013, it had moved to 12th place, and here we are 2 years later it is now the 4th most used currency for global payments!  So, under the radar, China has crashed the SDR club, knocking out Japan.

The U.S. Data Cupboard had a couple of things for us yesterday, nothing earth-shattering in the least bit, but still some things to look at!  One of them was the U.S. Servicing PMI, which I normally don’t get too involved with, which is kind of strange, given that many years ago I said that we had gone from a Manufacturing Country to a Servicing Country and our servicing sucked!

But the markets really put their focus on the Manufacturing PMI, and for that reason, so do I. But the Servicing Index is still important. And in September it slipped from 59 to 56.9. Hmmm. Still well above the 50 level, but quite a curious slip, eh?

In addition. the U.S. Data Cupboard had the Fed’s preferred indicator of the labor picture in the U.S. which is called the Labor Market Conditions Index (LMCI) and the LMCI was unchanged in September, which was not a good indicator that the employment growth is continuing.  And to make matters worse, The August number had previously showed a 2.1 points increase, but. was revised downward to just a 1.2 increase in the index.  Uh-Oh!

Today’s Data Cupboard will have August Trade Deficit. I’m going to tell you this now, so you’ll listen to me later, and that is the Trade Deficit is going to show a HUGE widening, and no one, and I  mean no one outside of me, is going to associate the monthly Trade Deficit widening to, the strength in the dollar. It’s unwarranted, this dollar strength,  and to me it’s unsustainable, I don’t care what the economists, and traders are saying. They’re all wrong, and they just don’t know it yet!

To follow that statement up. Yesterday my friends, Dave & Addison, over at the 5 Minute Forecast, highlighted an article in the Economist magazine, that talked about dollar strength. Let’s listen in:

For 70 years, the dollar has been the superpower of the financial and monetary system. The costs of dollar dominance are starting to outweigh the benefits.

You can read the whole article in the Economist, if that’s your bag. I’ll wait until the Big Boss, Frank Trotter, is finished with his Economist and passes it on to me, before I read the whole article, but I’m sure that it probably talks about things that I’ll want to read about, to see if I have already written them! HA!  Seriously, I’m looking forward to the Big Boss is finished with it!

Gold is up $3 this morning. nothing to write home about, and a small amount that can be wiped out easily with paper trades. Palladium, which had been on the rally tracks for a long time, finally saw some profit taking yesterday, once the dollar buying began, but is back on the rally tracks today. I have to say that I really thought my coming out and talking about why I own gold in the Pfennig last week, would have generated more responses.

And then I came across a conversation that my guitar playing friend, and investment analyst, extraordinaire, Steve Sjuggerud had in his Daily Wealth newsletter yesterday with legendary gold investors, Rudi Fronk. Let’s listen in:

Gold is to value what a yard is to length or a pound is to weight. a universally accepted measure, a numeraire. Very recently, gold’s role as the ultimate measure of value has been forced into the shadows, but it will re-emerge when investors recognize that the inability to print it makes it far more reliable than paper currencies and the governments that back them.

Before I head to the Big Finish today, I came across this yesterday, and just had to comment on it. In the Radiohead song “Karma Police”, they sing about how “this is what you get, when you mess with us”, and those words kept playing in my head when I was reading this article regarding how Prosecutors in Italy were preparing cases against S&P, Fitch and a handful of their employees for their roles in 2011 and 2012 rating decisions.

The cases won’t be heard until February, 2016, so, everyone will have forgotten about them by then.  But I found this quite interesting, as these two ratings agencies had made deep cuts in the credit ratings of Italy, and Italy says that the steep downgrades were responsible for undermining confidence in Italy’s 2 trillion euro public debt, which nearly pushed the country toward the kind of disaster that engulfed Greece.

Well, maybe you’ll get a laugh out of this like I did. I first saw this yesterday from the GATA folks, then Ed Steer had it in his letter this morning, and finally you can find it in USA Today here, and here are the snippets:

‘I think there was a reasonably good chance that, barring stabilization of the financial system, that we could have gone into a 1930s-style depression,’ he says now in an interview with USA TODAY. ‘The panic that hit us was enormous – I think the worst in U.S. history.’

With publication of his memoir, The Courage to Act, on Tuesday by W.W. Norton & Co., Bernanke has some thoughts about what went right and what went wrong. For one thing, he says that more corporate executives should have gone to jail for their misdeeds. The Justice Department and other law-enforcement agencies focused on indicting or threatening to indict financial firms, he notes, ‘but it would have been my preference to have more investigation of individual action, since obviously everything what went wrong or was illegal was done by some individual, not by an abstract firm.’

He also offers a detailed rebuttal to critics who argue the government could and should have done more to rescue Lehman Brothers from bankruptcy in the worst weekend of a tumultuous time. ‘We were very, very determined not to let it collapse,’ he says. ‘But we were out of bullets at that point.’

Chuck again. Wondering now what I meant by “getting a laugh out of this?”  Well, you’ll have to figure that one out for yourself! Sorry!

That’s it for today. I hope you have a Tom terrific Tuesday!

Regards,

Chuck Butler
for The Daily Reckoning

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