The Fed Does The Old Texas Two-Step...

Today’s Pfennigfor your thoughts…

Good day, and a Tub Thumpin’ Thursday to you! The Marshall Tucker Bank greeted me this morning with their song: Can’t You See.  And that’s exactly what I want to say to the markets & media this morning!  The Fed did the old two-step, which I’ll explain in a minute.

Front and center this morning, the dollar is getting sold like tickets would have been sold had the Beatles ever reunited for a concert. I want to say “I told you so” so badly, but I think it would be in bad taste. But I did tell you many months ago, that there would be no rate hike in June despite what the Fed’s “forward guidance” was telling the markets and media who swallow that “forward guidance” hook, line and sinker!

Of course they ran up the value of the dollar vs. the currencies and metals, and I do believe I said that by June, the Fed would be changing their tune about a stronger economy.  So, let’s see what the Fed did have to say yesterday that sent the dollar down the slippery slope.

I didn’t know the Fed’s FOMC were dancers, for they sure did the old Texas Two-Step yesterday. First they lowered their forecast for economic growth… but then to keep everyone from jumping ship on the dollar, they said that they see two rate hikes still for 2015. Well, we’re six months into 2015, and no rate hike yet. Only 6 months left, and they surely wouldn’t spoil the party once we get to the Christmas shopping season would they?

Yes, the Fed said that they foresee a year-end Fed Funds Rate of 0.625%, which works out as two rate hikes of 25 basis points (1/4%).  But now that I’ve dug my heels in on no rate hikes in 2015 –and I’ve gotten big headed regarding the no rate hike call for June– I’m going to say that the only way the Fed hikes once in 2015 is that they are losing credibility and they need to save face with the markets.

So, when I came in this morning and turned on the currency screens, the euro was sitting at a 1.1400. Wow, I said to myself, but as I begin to get into the letter this morning, the euro has given up a bit and now is trading just below 1.14.

But I don’t think that takes the shine off the single unit this morning.

My colleague, Aaron Stevenson, stopped me as I walked by his desk yesterday –one of the few times I felt like getting up from my chair in my office– and asked me if there was going to be an agreement soon with Greece. I told him the same thing I’ve been saying all along here; that an agreement will be ironed out probably in the 11th hour, at the end of this month, to kick the can down the road for the Greeks, and keep the Eurozone as a whole, which will take the heavy load that the euro has been carrying around for the last 6 months away.

Earlier this week, I told you that the agreement could come as early as today. But that didn’t materialize, and the Eurozone’s LTRO (Long Term Refinancing Operation) went off without a hitch, with a dip lower in the funding needs of the Eurozone banks. That could be a good sign for the economy, and it could be just rounding errors, we’ll have to see with the next round of LTRO.

The Swiss National Bank (SNB) left rates unchanged this morning, but SNB Gov. Jordan didn’t miss an opportunity to take a shot at the franc’s value, which he said he saw the franc at a lower value going forward.

Hmmm…

That would make me think he has something up his sleeve, and that would make me very nervous if I were a franc trader. But remember, the markets have deeper pockets than the SNB. So, we’ll see who wins this battle. But if you subscribe to my theory as to what goes on the rest of the year with the dollar, then you would put your money on the markets and not the SNB.

The Aussie dollar (A$) is winning back its lost ground yesterday, bringing the two-day performance to a flat position. The A$ got back on the rally tracks because the Fed isn’t going anywhere with their rates, and neither is the Reserve Bank of Australia (RBA), so the positive rate differential that the A$ enjoys over the dollar will remain in place. Unfortunately, kiwi isn’t in the same boat as the A$…

The Reserve Bank of New Zealand, (RBNZ) surprised the markets with a rate cut last week, and kiwi hasn’t seen the light of day since. Last night and this morning is no different, in that 1st QTR GDP disappointed by only rising 0.2% vs. the last quarter of 2014, and 2.6% year on year, which was weaker than the RBNZ expected, and so the selling of kiwi continued overnight.

Norway’s Norges Bank threw a grenade in from left field overnight, with their 25 basis points rate cut. This cut was pretty much expected, but then the past 3 Norges Bank meetings were expected to cut rates, so I was pretty much thinking that the Norges Bank would bypass a rate cut this time too. But that was not to be. And with that rate cut, the krone joins kiwi as the few currencies that are not rallying today vs. the dollar.

The rate cut wasn’t the only stab the Norges Bank inflicted on the krone, as the Norges Bank issued a statement following the rate cut, and said that more rate cuts could be on the way. A Pretty strong statement from a Central Bank that has a housing bubble on their hands, and not the kind of move that I would think the Norges Bank would be a part of. But, life is strange.

The Chinese renminbi / yuan was allowed a nice strong appreciation overnight, and now the renminbi looks like it’s close to moving below 6.11 (it stands at 6.1126 this morning).

I see where my friend, John Mauldin, is dissing renminbi again. He recently wrote in his new book, A Great Leap Forward, that when the Chinese allow the renminbi to float, that the currency will not appreciate further, but instead go down in value quickly. He then goes on to repeat something that I’ve heard for a couple of years now, that the Chinese will devalue the renminbi to preserve their weaker exports.

Hmmm… Strong words, I would say.

Not that I’m arguing with John on this, but I would just point out that for years now, very smart people have been saying bad things about China, and none of them have come to pass. I sat on a panel in Florida a few years ago, with a guy named Gordon Chang, who was an expert on China, and he said then that China’s economy would collapse very soon.

Hmmm… I’m not trying to make anyone look bad here, but rather that most of the naysayer stuff that people have called for in China hasn’t really come to pass. So keep that in mind.

I would take a different view on China and the renminbi, and most of you longtime readers know where I stand on the renminbi, but I thought I would let the very well respected analyst, Louis-Vincent Gave tell you that he believes that Beijing prefers a strong renminbi going forward, and that China knows how to have a strong currency and make it instrumental in boosting demand for China’s exports.

Time to go a different direction this morning.

I saw some very interesting data yesterday that wasn’t connected to the FOMC. So, since I was in search of things other than FOMC related, I checked this data out to find that both Russia and China continue to cut their U.S. Treasury holdings.

Russia has cut their U.S. Treasury holdings by over 40% in the past year, and has moved from 12th place on the list of countries’ holdings of Treasuries, to 22nd place. For those of you keeping score at home $116.4 Billion in Treasuries were held a year ago by Russia, and a year later their Treasury holdings have dropped to $66.5 Billion.  YIKES!

But that’s not all. China is also cutting their exposure to U.S. Treasuries.  Also, it was revealed recently that the mysterious “Belgium” buyers of Treasuries was actually a “front” for China. But now those purchases of Treasuries have turned around to sells, and in the last two months, China has cut $120 Billion from their Treasury holdings.

So what does this mean folks?

Well, it just brings the Fed back into the bond buying business, IF they can’t find enough buyers to take up the auctions of Treasuries, OR the yields must rise to attract buyers.  But, that’s a catch 22 to me.  If the Fed has to push interest rates higher to attract buyers, that will be offset by the buying that keeps rates down.

This is what happens when you are so deep into debt, and it has to be financed you give up control of your destiny.  And now Russia and China want to see just how strong the Fed’s commitment to buying bonds is.

Gold finally got some wind for its sails overnight. The FOMC decision to not hike rates returned to favor gold once again, for the deposits in the U.S. banks don’t really earn any interest to speak of. And, since neither does gold, the shiny metal wins the battle with zero interest accounts, and gold finds itself within spitting distance of $1,200 this morning, presently trading at $1,198.

I received an email from the GATA folks overnight, and the subject line says “Deutsche Bank Trader admits manipulation of markets by Central Banks.”  Oh well, good Pfennig pfodder, as I get laughed at by so many people here about my theory about Central Banks manipulating gold and silver, like they do interest rates right now. It’s always good to have others with me on this.

The U.S. data cupboard is chock-full-o-data today. It all starts with the stupid CPI (consumer inflation) report for May, which is expected to remain under the Fed’s target of 2% and print at 1.8%. But this is not the droid (inflation report) that the Fed looks at anyway.

As I explained to you yesterday, the Fed prefers the PCE, which earlier this month printed at just 1.2%… still a long way from the Fed’s preferred target of 2%.

We’ll also see the 1st QTR current account deficit, the usual initial jobless claims, the Philly Fed business optimism report, and finally, the leading index for June — which, by the way, is expected to be much lower than the May print of 0.7%, with expectations at 0.4%.

Going the wrong way for sure! Hey, don’t you get a ticket for going the wrong way?

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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