Russia's Dollar De-Dollarization May Have Begun

And now… today’s Pfennig for your thoughts…

Good day, and a Tom terrific Tuesday to you!

So, the dollar was in complete control yesterday, as we talked about in the morning, and that scenario remained in place the rest of the day. This morning, things are mixed, with some winners and some losers vs. the dollar.  For instance, the euro is back above 1.08 this morning, after 3rd QTR GDP for the Eurozone printed at + 0.3%…  Nothing great, but for a region that has been in a recession, they could at least hold their collective heads up high, and say that at least it wasn’t negative, and with an improving manufacturing sector, stronger growth should be in the Eurozone’s future.

Maybe the European Central Bank (ECB) and its president, Mario Draghi, had a pre-release look at this data, which led them to back off the stimulus accelerator last week.  Makes sense to me, because Draghi sure did shock the markets with the watered down stimulus that was added, when everyone thought he was going to become “helicopter Mario”.  Can you imagine how foolish Draghi and the ECB would look this morning after a small, but positive, GDP figure prints, and they had gone full-tilt, all-in, the whole shootin’ match, and every other descriptor  on the stimulus last week?

Well, the Commodities of the world continue to drop in price, and while a lot of the drop in Commodities’ prices has been weathered by the Commodity Currencies from countries like Australia, New Zealand, S. Africa, and Canada this latest round of price drops have really begun to take a toll on the Commodity Currencies.

Iron Ore, for instance, continues to fall. Last month Iron Ore was $53, and today its $47. per metric ton that is. And a year ago, Iron Ore was $74. So, the drop has been quite ugly. In 2011 the price was $175! I’m told that $40 is a tipping point for Iron Ore producers/miners. they can’t make the math work at and below that level. And so, the pressure on the Commodity Currencies is beginning to add up.

The poor Canadian dollar/loonie, is getting hit on both sides. As a Petrol Currency, and as a Commodity Currency. And while I DO realize that oil is a commodity, I try to separate oil from the rest of the commodities, and let it be on its own. That way things don’t get skewered.

The Russian ruble is appreciating this morning, which is strange for the ruble given the latest drop in the price of Oil to a $37 handle. Lately, the Chinese renminbi and the Russian ruble have been linked up on more than one occasion, trading wise.  These two are such an odd couple, but having said that let’s look closer at what’s going on here.

Well, have you heard the news that Russia’s announcement last spring about their plan to de-dollarize the world, is getting some fuel for the fire?  In the 5 Minute Forecast yesterday, Dave Gonigam reported that Russia has plans to raise $1 billion in government debt next year with bonds denominated in Chinese renminbi.  Not dollars!   Uh-Oh. the de-dollarization is taking off.

Have you ever heard of the term “unintended consequences”?  Well, that’s what the sanctions that the U.S. placed on Russia last year and still remain in place are seeing, because it has pushed Russia to get chummy with China, and I wouldn’t be surprised one iota if China starts issuing government bonds denominated in rubles! Unintended consequences. they arise from just about every decision, that’s not thought out.

So, what? I hear some of you saying. So what if Russia denominates their bonds in renminbi and vice versa with Chinese issued bonds?  Ahhh grasshopper. Come, sit, learn.  These are bonds that used to be issued in dollars, which means the country issuing the bonds had to have a large sum of reserves in dollars so they could service the debt (pay interest), and so on.

This eliminates that need to hold large sums of dollar reserves.  And once, the rest of Asia sees what these two giants are doing, I can’t imagine that they won’t follow.  Well, that is except Japan, who holds very large sums of dollar denominated Treasuries and pinning their colors to the mast of China and Russia would be near suicide for Japan. But, then holding bonds that see their funding currency go to hell in a hand basket won’t be a fun day in the part either.

The CFA poll, that I told you about in the CFA morning briefing, is a new one, and this time they are asking of the countries including: the U.S., China, Russia, Germany, India, or other, which country will contribute the most to global economic growth in 2016? And so far, I think the country chosen to lead would surprise you. So far, India has garnered 37.1% of the vote, with China coming in second at 34..3%, and the U.S. way behind in 3rd place with 22.9% of the vote.

Very interesting don’t you think?  I mean these CFA’s are smart dudes, and know their stuff. And India comes out on top.  I guess these voters are still swayed by the Modi administration and his plans to unlock the Indian economy.  I’ve about given up the ghost on Modi, folks. But apparently not everyone agrees with me.

By the way, I voted for China.  And I hear you saying, but Chuck, China’s economic growth has fallen to below 7%…  Ahhh grasshopper. Again, come, sit, and learn. Let’s say you have two economies that currently grow around $10 billion. And one country has GDP of 2%, and the other had GDP of 6.9%, which one is going to be bigger in size at the end of the year? That’s right. Now apply that to China’s situation. pretty easy, peasy, eh?

Yesterday’s U.S. Data Cupboard did have a piece of data hidden behind the Heinz 57 sauce and it was the Fed’s preferred look at labor. And it’s called the Labor Market Conditions Index (LCMI), and in November the index drifted higher by 0.5% which was far below the expectations of a 1.5% increase, which was the same level as Rocktober. The 0.5% increase did mark the 7th consecutive month of gains in the index. But if I were the Fed I would be looking at this small rise curiously. And trying make heads or tails of it. Was it just a one-month downward blip, or is it the beginning of a downward spiral?

If I were a betting man, other than my dollar to a Krispy Kreme, I would think that this is going to end up being the latter of the two. The beginning of a downward spiral. But that’s just me, and I’m in no mood right now to debate it!

The Consumer Credit (read: debt) figure for Rocktober showed a figure of $15.98 billion, far below the previous month’s $28 billion, and the consensus of $20 billion. While I prefer to see this number come down, I can tell you the economists at the Fed aren’t liking this one bit, because it means that US. Consumers weren’t spending money.

So, I looked behind the Heinz 57, and the Frank’s Red Hot bottle, and still didn’t find anything in the Data Cupboard for today to speak of.   So, let’s move on.

Gold is flat to up a buck or two this morning. The shiny metal just can’t seem to find any wind for its sails. I really am tired of all this pushing and shoving in the price of gold.  So, do you mind if I sit this one out today?  Thank you! I appreciate that.

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


Chuck Butler
for The Daily Reckoning

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