The ECB, and Draghi Have the Spotlight

And now… today’s Pfenning for your thoughts…

Good day, and a tub Thumpin’ Thursday to you!

Well, recall last month when all the anticipation was geared toward the FOMC meeting and how the markets basically stopped to hear that the Fed had kept rates unchanged? We’re seeing part two of that scenario today with the European Central Bank (ECB) meeting, where the markets are dying to know what ECB President, Mario Draghi, is going to say and do.

The markets have sent a warning shot across the bow of the ECB, letting Captain Draghi know that if he doesn’t at the very least sound dovish, but preferably announce that he has increased the size of the ECB’s Quantitative Easing / Q/E program, then they are going to begin to push the currency appreciation envelope with the euro. Oh-heaven no! Oh, the Humanity!  Not that! Please, don’t let that happen, the euro going higher?  We can’t deal with that! Please, oh Please, no!

Strange as it sounds, it’s true. The ECB doesn’t want to see the euro stronger right now. Exports throughout the Eurozone have been picking up, manufacturing is stronger across the board, and inflation is inching higher. Makes you wonder why the markets would be playing hard ball here for more stimulus doesn’t it?

Sounds to me as though the economy is in recovery mode, and to go back to the well here and add more stimulus would be a push that could really upset the applecart. You know Too Much of Something is not good.  So. that’s what has the markets’ attention this morning, and by the time I finish this letter, and get it back from the reviewers, we’ll know what Draghi’s decision was. I’ve pinned my colors to the mast of the ship that says he doesn’t do or say anything dovish.

But that’s not what the markets have mind this morning, as they have already marked down the euro 1/4 cent  ahead of the meeting. The markets think Draghi will succumb to their warning shot across his bow.

The Best Performer overnight is the New Zealand dollar/kiwi. The stars seem to be aligning for kiwi, but there’s a boogey man outside the door. Don’t look! That’s typical of a horror movie, the person being haunted or hunted knows they shouldn’t go into the room, look in the box, whatever, but they do it any way!

Well, in the case of Kiwi, the boogey man I’m talking about is the Reserve Bank of New Zealand (RBNZ) who will meet next week, and by all accounts in the markets, they believe the RBNZ will make one final cut to their Official Cash Rate (OCR). Now, that could initially kick kiwi with some force, and that’s why I say, “don’t look”. Because if you look toward that, you won’t be able to enjoy the rally that kiwi has been booking nearly every day since the RBNZ last met on September 9, and cut rates.

Of course you could take the point of view that if the RBNZ does cut rates next week, but comes and says, that’s it, no more rate cuts, then that could signal that the next move in rates would be up, and that would be a good sign for kiwi.

I read on the Bloomberg this morning a comment from a currency strategist from Mizuho Securities who thinks that the stars are aligning for kiwi and the currency could be heading toward 72-cents by year end.  Ahem. buddy, you do know that kiwi is in the 67-cent handle right now, right?  That’s a pretty bullish comment I would say, and don’t forget I always tell you that you have to take these forecasts by the traders and strategists cautiously because they could be “talking their book”.

In other words, they are “long kiwi” and need other investors to drive the price higher for them to book a gain.  But I don’t have a dog in this hunt, and I think kiwi is one of the better positioned currencies these days that could take a run at a higher level. But that’s just my opinion and I could be wrong.

The Chinese renminbi saw depreciation last night, but not like the moves we’ve seen both way the last couple of nights. No, last night was much more “in line” with what is normal.

I was doing some research/reading this morning — what else is there to do when you can’t sleep? — and I came across something that made me smile, which is difficult for me to do right now, with my face all distorted.  But I smiled nonetheless when I saw a report that talked about how China’s leaders are ready to announce that 2020 will be the end of their currency controls, and at that time they will fully integrate with global financial markets.

Now why on earth would that make you smile, Chuck? Well, you see, back in 2010, I gave the first of many presentations on this subject, at the Orlando Money Show, where I talked about how I believed that China was taking strides to push their currency to be the next reserve currency of the world, and that I believed that by the end of the decade we would see China making these moves to secure that.

Well, 2020 is the end of “this decade”. So, there I was, it was in the wee hours of the night, and I was smiling like the Cheshire Cat, because, as Hannibal Smith always said, “I love it when a plan comes together”.

Recently I’ve told you about how the Brazilian real had rallied after hitting an all-time low in September, and the rally was all about the news that the Brazilian president, Dilma Rousseff, would get impeached.  Now, I know that’s no “real fundamental” to move a currency, but given the beatings that the real had taken in the past couple of years, I was ready to accept any rally.

Well, now, things have been put on hold. And there are three ways things could go in Brazil with politics right now: 1. Impeach Rousseff 2. Don’t impeach Rousseff and she hangs on until the next elections in 2018 and 3. The courts throw out the last election’s results based on campaign irregularities.  That would mean new elections would be held, and given Rousseff’s problems, and that would end up being the same as impeaching her.

So, there’s one outlier here and that is if she holds on, which won’t be good for the real.  Her political scandals and all the investigations into her administration, have the markets scared of going all-in with the real.

So, I said all that, to say that the real’s recent rally may not be ready for prime time, until the political mess in Brazil gets worked out.  Now, see Chuck, wouldn’t it have been much easier if you had just said that, and not gone through all that explanation? I guess so, but. Where would the dear readers get all the background info? Ahhh. OK. No worries.

Well, you know how I’m always harping about why the U.S. Trade Deficit is so bad, but no one wants to talk about it, and that is because the stronger dollar is causing it. Well, for all you out there that know the GDP Calculation, you already know that net exports can be a plus or minus to GDP, and with it being a widening deficit, it’s a drag on GDP.

I read this morning that the net exports drag on GDP this year will be -0.7%…  And, 0.5% of the drag will be from the stronger dollar. So, I don’t make this stuff up folks, I said it was a big part of the Trade Deficit widening and this gives my thought credence. Oh, and guess when this drag on GDP started..  The middle of 2014. That’s right, and when did the dollar begin this mini-rally?  July 2014.

The Pound sterling is also shining brightly this morning, as the U.K. printed their September Retail Sales data and it looked better than any Retail Sales report had looked since December 2013, rising 1.9% vs. August.  That beat the forecasts for a 1.5% rise, and when you beat the forecasts your currency usually gets to have a day to bask in the sun.

And this report came just as the markets were getting used to thinking that the Bank of England (BOE) wouldn’t be raising interest rates until 2017!  Well, I’ll remind them that one swallow doesn’t make a summer, and one strong report doesn’t make a strong economy. So, curb the enthusiasm fellows. Sure go out and play and whoop it up today, but remember, one strong report doesn’t make a strong economy that would warrant a rate hike.

And one currency that I just don’t see enough stuff on to talk about much, the Mexican peso, is really rambunctious this morning..  But things are so bad regarding information on pesos, that the most recent story online is from two days ago and it talks about how the pesos was extending its drop!  The rally this morning is not oil driven, as the price of oil is still stuck around $45 and change. So, there’s something here folks, and I won’t stop looking until I find something!

The U.S. Data Cupboard finally begins to get restocked today, but none of the data that will print will be 1st tier, or market moving. We will see data on Existing Home Sales, and the usual Weekly Initial Jobless Claims, but other than that, it’s chicken scratch for data today, but at least the restocking has begun!  So, once again, the dollar will be directionless from data. That is unless the ECB and Mario Draghi, throws a cat among the pigeons this morning.

And gold is flat once again this morning. The shiny metal was flat yesterday morning but then proceeded to lose about $8 on the day. There was some news from gold researcher guru, Koos Jansen on Chinese Shanghai Gold Exchange withdrawals, so I’ll head there for a minute, but first, you’ll need to recall the piece I had a week or so ago, where I had Koos Jansen explain why he believes SGE withdrawals are equal to additions to Chinese gold holdings/reserves.  Alrighty then, got it?

OK, now let’s go see what Koos has to say this morning on the website, which by the way he gives you a chance to re-read his explanation on SGE Gold withdrawals in case you forgot.

Year to date withdrawals from the vaults of the Shanghai Gold Exchange (SGE) came in at a staggering 1,958 tonnes on 25 September 2015 – a record high – according to data released by the SGE on Friday. In week 38, which runs from 21 September until 25 September, 66 tonnes of gold were withdrawn from the vaults. The weak price of gold throughout 2015 and the crashing Chinese stock market has stimulated the Chinese people to purchase gold in great quantities.

The thing that really baffles me about China, is that continue to misrepresent the true amount of gold that they hold to the World Gold Council. Recall that China told the world a couple of months ago that they would going forward, give their monthly additions to their gold holdings. Well in September they announce that they had added 14.9 tonnes of gold.  But look at the data that Koos Jansen has above. In just one week of September, 66 tonnes were withdrawn from the SGE.

Hmmm… makes you wonder,  and not who wrote the book of love!

Well, I guess I should dawdle here, because the ECB decision is due any minute now. What’s a few minutes, Chuck? Just sit back drink some water and wait for the announcement. No wait! The actual press conference with Draghi will be held in an hour, so just because the ECB leaves rates unchanged, which they just announced. So, I’ll move along here, get this to the reviewers, and then onto you dear reader. We’ll talk about what Draghi had to saytomorrow!

And with that thought, it’s time to go. But first I want to send you on your way to having a Tub Thumpin’ Thursday!

Regards,

Chuck Butler
for The Daily Reckoning

P.S. Be sure to sign up for The Daily Reckoning — a free and entertaining look at the world of finance and politics. The articles you find here on our website are only a snippet of what you receive in The Daily Reckoning email edition. Click here now to sign up for FREE to see what you’re missing.