RBA Proves They Are Not Prudent

Good day, and a Tom terrific Tuesday to you!

The Reserve Bank of Australia (RBA) dropped their recent return to Central Bank prudency, and went ahead and cut rates last light. The Aussie dollar (A$) is getting whacked, because A$ traders and analysts like me, had gotten snookered by the RBA’s recent non-moves, as being a return to being a prudent Central Bank.

I really thought that the RBA would remain calm and keep a steady hand on the interest rates wheel after the drop in first QTR CPI printed last week, so did the A$ traders who kept pushing the A$ higher by week’s end. But the RBA didn’t remain calm, they didn’t keep a steady hand at the interest rate wheel, and they didn’t maintain any of the A$ strength that had been so good to see lately.

It wasn’t that bad of a day/night for the A$ though. Yes, A$’s dropped by one full cent after the announcement, but it had risen by more than 1/2-cent heading into the rate decision meeting, so overall, from Friday’s close, the A$ is weaker by less than 1/2-cent this morning, but the full one cent move yesterday was ugly. Like the whole forest!

So, the RBA meeting was the key for volatility last night and it didn’t disappoint!

The other thing that had the potential for volatility overnight also didn’t disappoint, was the Mario Draghi speech I told you about yesterday. Recall that I thought with the euro trading close to 1.15 that Draghi would use that as an excuse to throw the euro under the bus. Well, he didn’t do that! And the euro soared in relief mode past 1.15 for the first time since last August. Draghi, who as you know, is the President of the European Central Bank (ECB), which had been taking some verbal shots from Germany’s Central Bank (The Bundesbank), decided to use his speaking time to defend the ECB’s moves, and fire back at his critics at the Bundesbank.

So, I don’t really care about this tempest in a teacup going on between the ECB and Bundesbank, what I really care about is the euro soaring a full cent in the past day, and this morning is knocking on the door to 1.16!  In my opinion, it all has to do with the fact that there was pressure building up to push the euro higher because it now appears that the U.S. Fed can’t and won’t hike rates any time soon, but there was this Sword of Damocles hanging over the euro in the form of the Mario Draghi speech. Once that was put to bed, the pressure cooker was allowed to let off some steam, and the euro pushed higher.

And the Japanese yen booked another night of gains vs. the dollar and now trades with a 105 handle. I ran across an article in the Bloomberg that got me smiling. Yesterday, I explained how when you use “real interest rates” that the U.S. already had negative rates. Well, this article, which can be found here, talks about how currency valuations used to be about fundamentals and the key fundamental was simply interest rate differences between two countries.

If one country had a positive interest rate differential vs. another country, the first country’s currency would be a better value. But today, currency valuation is more about using the “real rates”, interest rates adjusted for inflation. Then I read this quote from Societe Generale SA, “An extended span of central bank stimulus has left short term nominal rates especially sticky relative to longer-term real rates, and in the aftermath of liftoff from the Federal Reserve, U.S. real rates have been collapsing – a trend that explains the drop-off in the U.S. dollar.” 

Gold couldn’t hold the $1,300 level it traded just barely above yesterday morning, but it’s still within spittin’ distance of the $1,300 figure. The loss yesterday was minuscule, but enough to push the shiny metal back below the $1,300 figure. And that makes sense to me, as there has to be some resistance at $1,300, and the longer gold remains around $1,300 the better the chance it could rise above it and move even higher. 

There are some analysts out there that believe that $1,300 could be a top for gold at this time. I can tell you that historically, that when that type of talk come out, that an asset goes about proving the analysts wrong! I would think that this time could be one of those occasions given the momentum going on with gold. And silver, can’t forget silver! And while we’re talk about not forgetting about a metal, let’s not forget the moves higher in both platinum and palladium, as they’ve really ticked higher in recent moves.

The price of oil dropped yesterday, and overall it was a night of a small recovery for the dollar yesterday. I’ve told you before that when an asset like the dollar, is nearing the end of its strong trend, that it will have days when it looks like it can prolong the strong trend, but in reality it’s dead cat bounces. I’ve also explained that no cats were hurt, and that a dead cat bounce is just a market saying to describe something that otherwise has no explanation as to why it rebounded for a day.

The Chinese renminbi saw another small depreciation in the overnight fixing last night. First quarter GDP printed in China and was very disturbing to me, and should have been to the Chinese officials who believe that annual Chinese GDP will be 6.5% this year. The first quarter GDP annualized would only put GDP at 4.5%… Uh-Oh! Looks like the Chinese will opt for more stimulus, instead of backing off the accelerator like they did in the second quarter.

Yes, their PMI remained above 50 last month, but it’s hanging on by the skin of its teeth.  I had thought that China has seen the trough of their recession, and maybe they still have, but it’s going to take a lot longer for them to push their way out of this recession.

The recent good and strong moves by the Russian ruble were wiped out in one night’s trading last night. UGH! Oil drops and the ruble plunges. I used to think that the S. African rand was the most volatile currency, but it has had that title taken from it by the Russian ruble. Which is why it is imperative that only speculative money be used with rubles. You know, in your investment portfolio, you have a section for income, for growth, for stability, and for speculation. This is where you buy things that are speculative, and when you’re talking about currencies that would include: rubles, real, and rands.

And that’s so you, Chuck. you go from being as serious as a heart attack, to being as silly as a clown within the same paragraph! I know, I know, I try not to do that, but I just start typing and the next thing I know, I’m finished and it has gone that way.

The U.S. Data Cupboard yesterday had the ISM or PMI (manufacturing index) for April, and it printed as I expected it to print, not as strong as the March rebound. The April PMI was 50.8, vs. 51.5 in March and 51 consensus. The first print of the second quarter and it basically was flat. About the same that I can say for the economy – flat as a pancake.

Well, today’s Data Cupboard doesn’t have much for us. Two Fed speakers, Mester and Lockhart will speak and I have the same thought about this as I did yesterday, and that is I wonder if they will sing from the same song sheet.

Did you hear that Sports Authority filed for bankruptcy, and will close all 450 of its stores? Oh, and the company has $1 billion in debt. How’s the economy going to absorb that, those lost jobs, and distribution centers? I read that yesterday and then watched the news last night, and nary a word about this. Hmmm…

Oh, and one more piece from the data side of things. The NY Fed, announced yesterday that they were downgrading their forecast for second quarter GDP to 0.8% from their previous forecast of 1.2%. The NY Fed pointed to the recent negative prints from housing and manufacturing as the reasons for their downgrade.

Remember last year, me telling you about the problems with debt payments by Puerto Rico? And I told you that that it wasn’t going to end up nicely. Well, there was recent news yesterday that was picked up by Reuters, and now me. You can read the entire article hereAfter missing their debt payment, Puerto Rico is in talks with its creditors. Here’s your snippet: 

Puerto Rico’s Government Development Bank, the main funding source for the U.S. commonwealth’s public agencies, said it reached a tentative restructuring deal with some major creditors hours after declaring it would skip a $422 million debt payment.

The agreed framework is ‘a vital first step’ that needs both restructuring legislation from the U.S. federal government and participation from all of the GDB’s creditors in order to work, the bank said in the statement issued late on Sunday.

Puerto Rico overall faces $70 billion in debt, a staggering 45-percent poverty rate and a shrinking population as it enters the most dire stretch of its fiscal crisis. It owes another $1.9 billion on July 1 that Governor Alejandro Garcia Padilla says it cannot pay.

Both the government and the creditors, who call themselves the Ad Hoc Group and hold roughly $935 million of the GDB’s nearly $4 billion in bonds, said they would continue negotiations for another 30 days.

Chuck again. I don’t get this financing stuff that just keeps kicking cans down a road, knowing all too well that the receiver of the loan is never going to be able to pay it back. Makes no sense to me.  If you get to the point where you know the entity you loaned money to is not going to be able to pay you back, do you lend it more money?

That’s it for today. I’ll get out of your hair for today, and hope you have a Tom terrific Tuesday. Be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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