Weak U.S. Data Sends the Dollar Down the Slippery Slope

And now… today’s Pfenning for your thoughts…

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

Well, the U.S. Data Cupboard pretty much played out like I thought it would yesterday, with U.S. Retail Sales disappointing once again, rising just 0.1% and printing negative -0.3% without cars. And this data just ripped through the dollar’s suit of armor.

I’ll have more on the other data that printed yesterday later in the letter, but for now, to start off the day, we need to talk about this disappointing Retail Sales number that sent the dollar to the woodshed.

The markets saw this disappointing Retail Sales and decided that the economy is too soft for a rate hike (nice of them to join the rest of us, eh?), and  soon the currency traders were doing the old flip-flop on the dollar.

You see, as I’ve told you for the last year, the dollar was getting all kinds of love from the markets and economists because they all took what the Fed said about rate hikes in 2015, and swallowed it hook, line and sinker. They bought dollars like there was no tomorrow, and to stand in front of this bus was not a wise thing to do.

So, I told you all that we needed to batten down the hatches, and if we did anything it was to look for bargain basement prices to add to positions.  And that it would last probably until the end of summer.

So, is this dollar strength finally coming to an end?  Well, that’s difficult to say, because you still have some Fed members and markets guys believing in the tooth fairy, I mean  the idea that the Fed will hike rates this year. And any time we see or hear comments that relate to that idea, the dollar will get a brief stay on its execution.

This morning, for instance, the euro is a bit weaker and giving back some of the ground it gained yesterday when it climbed to 1.1480.  The European Central Bank (ECB) policy maker Nowotny told people last night that “the ECB is clearly missing its inflation target.”  That got the euro traders nervous about jacking up the euro’s price when ECB president Draghi could come out at next week’s ECB meeting and up the ante on stimulus.

But still, look at the climb that the euro has had recently. Pretty impressive, but let me remind you, it’s all about dollar weakness.

Yesterday, I told you about how the Aussie dollar (A$) was giving back some of the ground it had recently gained because Westpac raised their mortgage rates, and the markets panicked and thought this would be a prelude to The Reserve Bank of Australia (RBA) rate hike, which in normal times would be good for a currency, but in today’s world of “if you don’t have ZIRP, you’re out of touch with reality” that would not be good.

But as I said yesterday, hopefully calmer heads will prevail, and after looking under the hood at the Westpac announcement it really was nothing, and caused a tempest in a teacup. So, the A$ is back on the rally tracks,  and is well into the 73-cents handle this morning.

The Chinese renminbi, after spending two days in the woodshed, finally saw some love last night and appreciated by a smallish amount. Yesterday, I was all ga-ga over China’s announcement to issue a government bond denominated in renminbi outside of China in London.  But I’ve let something slip past me for two days now! UGH!

Thanks to a dear reader that kept sending me an email asking me about this new development in China.  Well, here we go!  China launched a cross-border interbank payment system, called the China International Payment System (CIPS) on October 13th.  The system will provide capital settlement and clearing services for cross-border renminbi/yuan transactions for financial institutions in China and abroad.

So, do you know what the implementation of this payment system does for China? Yes, that’s right. It once again increases the use of the renminbi/yuan globally!  And don’t think for one minute that China just did this on a whim. They did this to coincide with their announcement last month that it would open up its renminbi/yuan denominated bond market to two international commercial banks.

Now, they have a system to make the payments without having to go through Hong Kong, London or Singapore.

Big News folks. And another step in the right direction for the Chinese…

There were two Fed members yesterday that decided that it was time to come clean and talk about how they doubt there will be  rate hike this year.  So, it’s time to put away the rate hike banners and flags. Time to put away all those quotes on how the U.S. economy is going great, and ready for more rate hikes, and it’s time to get rid of all those dollars that have been bought because investors thought interest rates are going higher.

Well, make that two consecutive days that New Zealand has received good news, and the New Zealand dollar/kiwi has responded favorably!  Last night it was the ANZ Bank Consumer Confidence Index for this month that saw a rise in the index number from 110.8 to 114.9! WOW! And kiwi is up nearly 1 full cent this morning.

Now, let’s talk about Consumer Confidence a minute. I’ve always said that these reports don’t really stop bad things from happening, you know the “risks” that are always out there, but it does give an economy more resiliency to the bad things.  So, there you are!

One of the stronger, stealth-like moves that I keep coming back to recently, belongs to the Brazilian real.  Ever since the Brazilian authorities announced that they had enough to impeach Brazilian President Dilma Rousseff, the real has reacted favorable. No, it’s not all about whether or not the President that has caused so many problems in Brazil with her policies, stays or goes, but it does have a lot to do with the currency’s performance.

Of course the real has fallen so far down the deep, dark, abyss that these strong stealth-like upward moves, are just the real digging itself out of the abyss.  The real doesn’t even see the light yet, it’s so deep, but if it keeps making these strong stealth-like moves, maybe they’ll see a twinkle.

In the Daily Reckoning yesterday, they were talking about something that is outside of my expertise in currencies and that is Technical/Chartists stuff. Sure I understand a lot of it, but I never use it when looking at a currency’s fundamentals. But this talk got my attention as it talked about how the dollar index had just traded through a “death cross”.

Here’s what the DR had to say about that:

In the mumbo jumbo of technical analysis, a death cross occurs when an asset’s short-term moving average falls below its long-term moving average. In the case at bar, the dollar’s 50-day moving average has crossed below its 200-day moving average. And that, evidently, augurs ill for our beloved greenback.

And Zerohedge.com added that “Three of the last four times that the 50-day moving average crossed below the 200-day moving average, the USD index tumbled significantly”.

Well now, that certainly was interesting, wasn’t it? But technical stuff has to be driven by fundamentals, they are the reason an asset enters a trend, and the reason it will exit the trend, not the technicals..

With all this dollar weakness going on, even the Japanese yen is taking part in a rally vs. the dollar, as the yen has dropped below 119. I even saw a blurb on the Bloomberg yesterday that the Japanese trader that famous for some of his calls on markets and economies, thinks that the dollar is going to get so weak, that yen will rally to 100.

Now, that’s really going out on a limb folks. I don’t see that for yen at all. And the Japanese officials won’t sit idly by and watch yen rally that strongly either!  So, let’s temper this a bit and say that IF the dollar strength that started in July of 2014, is running out of steam, then yen might be able to rally a bit. But will be held back based on its own fundamentals, which as I’ve said over and over again, that this dance is gonna be a drag. No wait! I’ve said over and over again that Japan’s fundamentals are a basket case…

The price of oil is still stuck with a $46 handle this morning.  I have to say that I’m so impressed with the Canadian dollar’s (loonie) ability to rally with the price of oil remaining in a tight range. Canada will be having an election in a couple of days (10/19) , and I heard one of my fave economists/analysts, David Rosenberg, comment on the election, saying that, “voters are torn over a need for change and the appeal of stability.”

Right now, the liberals hold a lead in the polls, and the only thing that I’ll say about that point is that historically, according to Bloomberg, that if the liberals win, it’s good for Canadian stocks, which would carry over to the loonie.

And don’t look now but the bond guys are not buying the Fed rate hike stuff any longer. The yield on the U.S. Treasury 10-year has fallen to 2%, and it won’t take many more days like yesterday when the data in the U.S. was just awful to move the 10-year yield lower than 2%.

Speaking of data. The U.S. Data Cupboard yesterday was something. What, I don’t know, but it was something! HA! Seriously though, there was a lot to look at regarding data prints, so we might as well get to them, eh?

We already went through the disappointing Retail Sales. But that’s not all! If you call now, we’ll send you not one, but two data prints!   UGH! First on the docket is PPI (Wholesale Inflation) and here the Fed had to be grabbing their stomachs at the same time for the pain was tough.  PPI for September fell -0.5% vs. August and annualized it fell -1.1%! And then to back up the idea that companies have no pricing strength, that we talked about yesterday, the Business Inventories for August showed inventories flat as a pancake.

Now, this is one of those data prints that can be viewed a couple different ways.  you could say, that this is a good thing because now companies can gear up for the next round of demand without all the backlogged inventory. Or, you could say that this proves that companies are fearful of adding to inventory, because of the economy’s soft underbelly.  I’ll take what’s behind door number two, Monty.

There was something else that I think was important to keep in the back of our collective minds and that in the Fed’s Beige Book, the Fed members actually mentioned a couple of times in their reports that the strong dollar was a headwind for the economy. Here’s the thing to keep thinking about, and that is, the Fed knows how to weaken the dollar, and if that’s an obstacle to their wanting to hike rates, then problem taken care of.  That’s how I see it any way.

And today’s Data Cupboard has the stupid CPI for September, and another day’s delayed Monthly Budget Statement. That marks the second delay of this report, which leads me to believe that the government’s bean counters are still massaging the numbers. The Philly Fed Index prints today too, which is one that the markets usually pay attention to. Unfortunately it is forecast to be a negative number for September. So, the dollar won’t find any shelter from today’s Data Cupboard, folks.

And the price of gold is basically flat this morning but has been up a buck or two at times while I write. The thing that I’ve noticed lately with gold is that it trades stronger/better in during the New York trading session.  That’s something that is quite weird to me, in that in recent years, the price of gold has gotten hammered during N.Y. Trading. We all know why it happened at that time, and that makes this more recent trend of booking gains during that time even more curious.

I know, curiosity killed the cat, (no animals were hurt here it’s just a saying) so I should let the sleeping dogs here alone.  But I can’t help but think that this recent trend is telling us something. Like that gold is ready to resume its, what was thought to be a defeated, assault on the dollar.  But that’s just me, and my opinion, which could be wrong.

I’m one of those that look at something like gold and ask the question of  why isn’t its price stronger, given the physical demand on the metal. And when it does rise in price, I think that everything is as it should be. Anyway… here’s the question of the day: is the next stop for gold. $1,200?

Before I head to the Big Finish today, I wanted to drag something out from the back of the closet that holds the things that Chuck says, and then everyone forgets about. And to me, this is going to be showing up very soon now: a Liquidity Crunch.  This lack of liquidity will begin in High-yield (junk) Corporate Bonds, and then begin to show up elsewhere.

Shoot Rudy, even by guitar playing friend, and investment analyst extraordinaire was talking about this in his Daily Wealth letter yesterday. Let’s listen to what Steve Sjuggerud had to say:

It could happen next week. or next month. Wall Street is already sending warning signals about the next financial cataclysm. Analysts are using phrases like ‘liquidity crunch’ and ‘crisis situation.’ I’m talking about the impending crisis in high-yield (‘junk’) corporate bonds.

I remember talking to a trader friend of mine last year, and telling her all about my thought that there would be a liquidity crisis in the next year, and she wanted to know how will we know it’s starting, and I told her that it will first show up in bonds. I didn’t know then it would be the High Yielders, but here we go!

On that note, I’m going to tell you that I hope you have a tub thumpin’ Thursday!

Regards,

Chuck Butler
for The Daily Reckoning

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