A Data Cupboard Workout

Rather than beat around the bush this morning, Chris left me this note from Friday’s price action, so let’s go to the Friday round up and then onto today! Here’s Chris…

“The currency markets were fairly calm Friday morning, but at around 9:00 the dollar index fell off a cliff! The big data released this morning was second quarter GDP, which showed only a 1% contraction versus an expected 1.5% contraction. But the first quarter’s number was revised down to 6.4% from the original report of 5.5%. I guess traders needed some time to digest the information, as the report came out at 7:30 but the dollar didn’t start its freefall until just after 9:00. But when they finally decided to take the dollar lower, the move was pretty dramatic with the euro (EUR) moving up a 1.5 cents in about 2 1/2 hours. The markets settled down around noon, and traded sideways until the close.”

So… My time away was much like the “old days” – where you could almost make trades based on the fact that “when Chuck was away, the currencies rallied…”

OK… So as I turn on the currency screens this morning, I see that the euro is trading up towards 1.43, and the Aussie dollar (AUD) is trading with an 84-cent handle! So, those are some good-looking numbers for the currencies. The GDP data that Chris talked about above, was interesting in that it gave the risk takers some rope… Yes, that old saying about getting enough rope to hang yourself, comes to mind here. Not that the risk takers will hang themselves, but to illustrate that they have some room to take risk assets higher.

When you look at the proxy currency for commodities and global growth (the Aussie dollar), and the fact that it’s trading at the highest level we’ve seen this year, you’ve got to think that the traders (and others), are thinking that the worst of the global recession is in the rear view mirror. Now, I think that’s a little like putting the horse before the cart, as we just don’t have enough data that hasn’t been massaged and cooked to prove that we’re coming out of the global recession… But hey! If the traders, hedge funds dudes, and currency participants want to play Sly Stone, and take currencies higher, then I suggest we not stand in front of that bus!

One of my fave economists, Nouriel Roubini, believes that “there is now potentially light a the end of the tunnel.” And… That “Commodity prices may extend their rally into 2010 as the global recession abates.”

Now… That’s a horse of a different color, eh? When someone like Nouriel Roubini, who was one of the first to call out the collapse of the global economies, sees a potential light, then the markets sit up and take notes. And begin to buy at cheaper levels, just in case that light is the sun… And not the light of a runaway train heading straight for us!

Well… Somehow, US stocks essentially made it through the earnings reports season unscathed. Pretty amazing if you ask me, but I never claimed to be a stock jockey, so that pretty much explains my inaccurate prognostications that second quarter earnings would be a real drag on stock values… Which scared the bejeebers out of me, for stocks, currencies and commodities have been all rolled up in a great big “risk assets” ball for months now, and if stock values were going to get taken to the woodshed then so would currencies and commodities… But that didn’t happen… Hmmmm…

OK, with the earnings season basically over, we can get back to watching regular data that makes more sense to me… And this WILL be a week that’s cock-full-o-data, beginning with the ISM Index (manufacturing) for July today, along with Vehicle Sales. Tomorrow we’ll see the color of two of my faves, Personal Income and Spending. Wednesday is the ADP Challenger employment report for July… Thursday, we’ll get Central Banks meetings in the UK and Eurozone. And Friday is the BIG KAHUNA, as the Jobs Jamboree for July gets printed. Right now, the economists surveyed are looking for a HUGE drop in job losses for July. June’s BLS massaged number of 467,000 job losses is being forecast to drop to 325,000.

I’ll believe that when I see it, although it would be nice if that was the “real” number, eh?

If job losses drop by that much in July, it would certainly keep the fire burning for thought that the global recession is recovering, and that would certainly keep the fire burning for currencies and commodities!

Well… Don’t look now, but pound sterling (GBP) is the best performing currency overnight! The pound is 1.6840, with a bullet! Stranger things have happened in currencies over the years, but this is one that really moves to the top 10… The U.K. with all their problems, and sterling is still posting a better than 15% gain versus the dollar in 2009… Like I said, stranger things have happened, but this one really is a puzzle. Riddle me this Batman… How can a currency from a country that is deep in debt, has interest rates near zero, has a housing problem not unlike that in the US, has political problems, and has implemented quantitative easing, post a +15% gain?

Ours is not to question why or how… Just know that the calls for the greater use of SDRs (Special Drawing Rights) by China is probably a good reason, for the SDRs would contain sterling…

Speaking of SDRs, and the IMF issuing them… Recall when the current President called for greater authority for the IMF? Well, I’m reading a book right now, that will put shivers down your spine regarding all of this, and it was written about ten years ago! The name of the book is The Creature From Jekyll Island… The “creature” is the Federal Reserve System, and what it was created to do is not the stuff you learned in economics 101. This book is over 500 pages, so it’s a long one… But well worth the read, especially to those who don’t believe we’re being driven to socialism.

OK… Enough of that! I’m really trying to steer clear of that stuff, for I’ve had to deal with quite a few people that just want to shove stuff in front of me that I’m not going to read! Of course this in response to my direction before I went on vacation… But that’s all behind me now… It’s on to the perils of deficit spending, and… How to protect yourself from the eventual devaluing of the dollar due to the deficit spending!

Back to Australia… The Reserve Bank of Australia (RBA) meets tonight, and while I don’t expect the RBA to raise rates, I do expect them to move from an easing bias to neutral, which in essence would be very much like a rate hike! And… Would really stoke the fire burning for the Aussie dollar… Especially if in their Monetary Policy statement, the RBA upgrades their growth forecasts… For if they do that, that’s just like telling the markets that rates are going higher here before they go back down.

I heard – but did not see obviously since I was not around any TVs, laptops, or cell phones last week – that there was a woman who finally took the media to the woodshed for their mamby pamby ways of dealing with the news, and playing patsy with the politicians, etc. Michelle Malkin is her name… And I give her kudos for calling into question the credibility of the media and in this case NBC… (Yes, I hold a grudge, BIG TIME, and NBC/CNBC).

I saw the euro hit 1.43 a minute or so ago, but immediately fell back below the figure. I would expect this to repeat itself a few times before finally moving over 1.43… If not, then look for a fall back… But right now, the bias seems to be to sell dollars.

The Daily Reckoning