U.K. Rate Hike Campers Take To The Streets

Today’s Pfennigfor your thoughts…

Good day, and a Tom terrific Tuesday to you!

Well, yesterday the U.S. dollar had the conn, for the most part, but not today. It’s not a complete reversal, but for the most part this morning, the currencies are either up a small bit or flat. I hate to think that this would be considered “better”, but it is.

Traders, Hedge Fund managers, and investors are still trying to make heads or tails out of the moves by China last week. I say, go on with life and move ahead, or as the Big Boss, Frank Trotter says, “Onward and Upward”. Just face the problem head on!

China devalued their currency 4.6% over 3 days, because their economy is in a weak economic cycle. Should they have done that? Probably not. But when your currency has gained nearly 35% in the past 10 years, and you think that taking away 4.6% will improve your exports, then I guess it made sense to them.

I say probably not because I’m against governments and Central Banks sticking their hands into the currency cookie jar, and acting like they know what they’re doing. Because they don’t!

But the renminbi was a “managed currency”, and now appears to be heading toward a new regime, and if it took a devaluation to get us there, then I’m OK with that!

The Big Boss, Frank Trotter, stopped by my office yesterday to talk. Usually it’s the other way around, and I have to first check to see if he’s on the phone, which is all the time it seems! We discussed a lot of things, but one topic we touched on was the plight of the euro.

And it got me thinking, after he left, that while the dollar seems to be in control of most of the currencies right now, its movement against the euro has been muted. So, I started doing some research and read that the number of buys are equal to the number of sells at 1.10.

So, that pretty much puts a floor, for now, on the euro vs. the dollar.  The one thing that I did come across though, brought a smile to my face.  And we’ll get to that right after these announcements.

HA!  Sounded like a TV show there for a second or two, eh?

Well, the thing that made me smile, was reading a research report that was talking about fundamentals being returned to the euro trading, now that Greece is in the rear view mirror (for 3 years at least!), and those fundamentals are the things I kept talking about in past years, as to why the euro was not falling out of bed.

Well, it eventually did fall out of bed, with Greece, and the European Central Bank (ECB) implementing Quantitative Easing (QE). What were the fundamentals? Ahhh, grasshopper, come sit, and let me tell you about Trade Surpluses.

The Eurozone has a Trade Surplus, and a Current Account Surplus, and the U.S. doesn’t on either data. The Eurozone Current Account, is the Trade Balance plus foreign direct investment, same with the U.S.  I’ve had disagreements with scholars over the years on this, so please hold back on your urge to teach me something. This is what I believe them to be, and so, we’ll go on.

The Eurozone Current Account Surplus, represents a better fundamental position than what we have in the U.S. and when you’re talking about two economies that are pretty much equal in size, that’s a very important fundamental.  So, there you have the euro/ dollar in a nutshell.

Yesterday morning, I said that the euro had dropped below 1.11 and thought it could recover back to that level, and it did! But the short term rally was cut short, and the euro eventually gave back the gains to the level it traded in the early morning.

The dollar’s selling in the middle of the day was brought on by the weaker Empire Manufacturing data. So, we might as well address that now.

Well, the U.S. Data Cupboard had some data yesterday, jut not any with “real importance”. First up was the Empire State Manufacturing Index (ESMI), which is a check  on the pulse of the NY region’s manufacturing.

This data swings more than a big band, and yesterday was no different, as the ESMI plunged to a negative index number of -14.92 from a 3.86 the previous month.

This negative print was the weakest print for the index since August 2009, and while I couldn’t really find anyone talking about this viewpoint, it’s not going to stop me from saying that I think the dollar strength probably played hell with this data.

The Chinese renminbi was allowed to appreciate again last night, but this time the appreciation was very small. I have to wonder if the Peoples Bank of China (PBOC) is simply adjusting the devaluation. I still think that the PBOC and the Chinese Gov’t will opt for more stimulus for the economy in the form of interest rate cuts and Reserve Requirement reductions. I like those more than devaluations!  But I have to question the Chinese leaders with all these measures.

It’s a weak economic cycle, all economies go through them, and it used to be an accepted thing by governments and Central Banks, but nowadays everyone thinks they know better and can keep the weak economic cycle from lasting too long, or avoiding them altogether. UGH!

The Reserve Bank of Australia (RBA) will print their last meeting minutes tonight, and I think they will be positive for the Aussie dollar (A$).  In Australia the past month, we’ve seen Consumer Confidence soar, and labor pick up. Maybe, just maybe, the RBA has cut rates enough at this point?

I know the economists out there are still calling for more rate cuts from the RBA later this year and into next year, but with the financial conditions remaining in accommodating fashion, I just don’t see why more rate cuts are necessary.  But none of my thoughts are helping the A$ these days..

I read this morning that the A$’s kissin’ cousin across the Tasman, the New Zealand dollar/kiwi saw a short squeeze overnight ahead of the dairy auction results, and this has led to a recovery of sorts in kiwi.  I would have to believe that this recovery will be short-lived since it was a short squeeze…

OK, I hear some of you saying to yourself, “that’s all fine, Chuck, but what the hell is a short squeeze?” It’s really simple Simon folks. When you have an asset like kiwi, dropping in price so much that the short positions in the currency begin to build to very large levels, but then the price pops up, and the short positions begin to get closed to limit their losses, and as more shorts get closed, the price rises more and more shorts have to be closed out, and so on.

I’ve talked about this before, but in case you missed class that day, or are a new reader, there you go!

One of the best performing currencies overnight is the British pound sterling. It seems the pound sterling traders were itching badly to run the price higher, and they got their opportunity when U.K. CPI (consumer inflation) inched higher to 0.1% year on year.  This brought out the rate hike campers once again, and they danced and celebrated in the streets.

Now I have to question what would bring them out given the 0.1% increase in inflation. Do they really believe that this is the stuff that rate hikes are made of? Apparently so, and it’s difficult to stand in front of this moving bus, but that’s what I’m going to do here.

Sure I like that pound sterling is gaining vs. the dollar, but in reality what’s behind it? That’s what I don’t like. And if I’ve said this once in the past year, I’ve said it 50 times, and that is, there will be no rate hike in the U.K. this year, and maybe not next year either!

The price of oil has dropped another dollar to the $41 handle this morning. The petrol currencies just keep getting chopped off at the knees by the falling oil price. And I don’t see this stopping any time soon… UGH!

The Norwegian krone, Brazilian real, Russian ruble, and Canadian dollar are the hardest hit by oil’s drop in price.

And then finally on the currencies, I read a report on Bloomberg this morning that an aide of Japanese Prime Minister, Abe, came out and said that the Japanese economy needs an economic injection of as much as 3.5 Trillion yen ($28 Billion) to shore up consumption and stave off further economic contraction.

Are you kidding me?

When does this madness in Japan stop? It’s been going on for two decades now. Yes, 1995, I recall the first budget stimulus packages that were implemented in Japan. And now two decades later, after trillions on trillions of stimulus, QE, zero interest rates, and anything else they could throw at the economy to help it, the Japanese leaders are still saying they need more stimulus.

I said this a couple of years ago, I meant it then and mean it even more now — Japan is a basket case.

Gold is up again this morning, after having a pretty decent day of trading yesterday. I heard/read yesterday that legendary investor Stanley Druckenmiller recently bought $300 million of the gold ETF and became the largest position in his portfolio

I also saw that withdrawals from the Shanghai Gold Exchange (SGE), that are a better indication of what China is taking into their Gold holdings, continue to be very strong, with 56 tonnes last week alone. WOW!  The total withdrawals for the year, so far, is 1,520 Tonnes, folks. So, you can’t tell me that demand for physical gold is waning.

The U.S. Data Cupboard has really been void of real data lately, with only Retail Sales, Industrial Production and Capacity Utilization last week, and nothing but the Empire regional manufacturing yesterday, and some housing data due today. A real void in terms of giving the markets direction. The Dog Days of Summer have hit the Data Cupboard too!

Well, you dear reader always are torn between two lovers. Yes, on one side you have the media which keeps telling you that all is right on the night with the economy, and on the other side you have me who keeps telling you that all is not right with the economy. Which one are you going to go to the ball with?

Well, maybe this report that I found on Ed Steer’s letter that was on Zerohedge.com this morning will get you to see things my way, and we can go out shopping for our gussied up clothes for the ball!

The government issued their monthly retail sales this past week and four of the biggest department store chains in the country announced their quarterly results.

The year over year retail sales increase of 2.4% is pitifully low in an economy that is supposedly in its sixth year of economic growth with a reported unemployment rate of only 5.3%.

If all of these jobs have been created, why aren’t retail sales booming?

The year to date numbers are even worse than the year over year numbers.

With consumer spending accounting for 70% of our GDP and real inflation running north of 5%, it’s pretty clear most Americans are experiencing a recession, despite the propaganda data circulated by the government and Fed.

You won’t hear CNBC, Bloomberg, The Wall Street Journal or any corporate mainstream media outlet reference the fact retail sales growth is at the exact same levels as when recession hit in 2008 and 2001. Their job is to regurgitate the message of economic recovery and confidence in the future, despite overwhelming evidence to the contrary.

Chuck again. Ready to go shopping? HA!  Any way. I think it’s important here that you know the real story behind the scenes. And while you’re at it you might want to sign up for Ed Steer’s letter.

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

Regards,

Chuck Butler
for The Daily Reckoning

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

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