Attempting Another Run at the Dollar

Good day, and a Tom Terrific Tuesday to you! The fingers are still pretty sore, but the feeling in the tips of the fingers has returned, so I’ve got that going for me! It was like the “old days” here yesterday for me, — a very long day. After my doctor’s appointment, I returned to finish the job I had left, which normally my longtime colleague Jen picks up and takes care of. But Jen is on vacation, so there was no one left to do it but little old me! HA! Little old me… now, that’s funny.

I’m going to start this morning off with an observation that I made yesterday. The price of gold was up $5 most of the day, and then right at the New York close, it got hammered and ended down $10 on the day. I shake my head in disgust at what’s going on here and once again ask where is the CFTC? Well, I know the answer to that question.

The currencies ran out of steam versus the dollar yesterday, but they are lining up in the starting blocks again this morning for another run at the dollar. Even the beaten and beleaguered euro (EUR) is seeing some buying this morning. So I guess I had better see what’s behind this attempted run at the dollar this morning. So hold on a minute and I’ll be back before you know it!

See, that didn’t take too long, did it? HA! Everything I see regarding the euro should have pushed the single unit lower. German investor confidence as measured by the think tank ZEW fell for a fourth month at the latest reading taken just last week. The report, which attempts to predict economic developments six months in advance, fell to -25.5, from -19.6 last month.

In addition, the eurozone GDP for the second quarter revealed a contraction of the economy as a whole, by -0.2% from the first quarter. Germany was the only eurozone member with positive growth for the quarter, as GDP rose 0.3% from the first quarter for the Germans. But the drag on Germany is going to end up being too much, I’m afraid. The rest of the eurozone will end up dragging Germany through the recession mud. But not yet.

So if the euro is attempting a run at the dollar, and has seen those two report this morning, what does that say about the dollar? As I’ve explained for many years now, the euro is the offset currency to the dollar. It’s the second-most liquid currency in the world, behind the dollar, so many times over the past 12 years that the euro has existed, we’ve seen these periods of when the fundamentals of the eurozone would indicate a weak euro, but the fundamentals of the dollar were even worse. Thus the euro would rally versus the dollar.

I’m not saying that given what the eurozone is going through right now, that the euro is going to go back to trading around 1.45 (remember that last summer?). What I’m saying is that these mini-rallies are better understood when you have the above facts in the back of your mind.

The two island nations of the South Pacific, Australia and New Zealand, both saw good reports overnight, and thus their respective currencies are stronger this morning. Let’s start with New Zealand, where retail sales increased 1.3% in the second quarter versus the first quarter, which was a bit of a shocker for so-called “experts.” And in Australia, a private survey showed that business confidence is on the rebound, with the index rising to 4 in July from -3 in June.

I saw where the new governor of the Reserve Bank of New Zealand (recall that Gov. Bollard’s term ends next month) is already taking up where Bollard left off, in dissing the kiwi strength. Where is my old friend Don Brash when he’s needed to kick these guys in the shins and tell them to go home to their mommies! Dissing one’s own currency does not, in my opinion, give anyone a warm and fuzzy about your ability to run a central bank!

Australia and New Zealand weren’t the only countries to print some good economic data/news overnight. Early this morning, Sweden’s krona (SEK) rallied on news that headline inflation has slowed to 0.7% in the year ending July and that industrial production rose 1.1% annualized in June.

Both Norway and Sweden are in a pickle, folks. They both are seeing good domestic demand and would love to hike rates, but with the mess in the eurozone, their hands are tied. But as long as they keep rates where they are, while all the mess gets attended to in the eurozone, there will be a steady bid on the currencies.

With the Swiss franc (CHF) tied to the euro via the cross these days (notice I didn’t say pegged to the euro, as the cross is not set in stone), whenever the euro gets legs and rallies, the franc rallies in step to maintain that 1.20 cross that was set by the Swiss National Bank almost a year ago. Don’t forget what I told you some time ago about what the SNB really wants: a much weaker franc. So it wouldn’t surprise me one iota to come in one day and see that the SNB set the new cross level at 1.30 or higher. That would let the air out of the franc’s balloon, folks.

Today is the day the Big Kahuna data report prints in the U.S. I’m talking about retail sales, which will print in about 2½ hours. As I said yesterday, the Butler Household Index (BHI) indicates to me that we’ll see some healing and thus a reversal of the negative -0.5% June retail sales report. July’s report, which is going to be goosed by the early back-to-school shopping, will probably print at +0.5%, which is a good number, but one that will have a difficult time repeating in the coming months. PPI (wholesale inflation) will also print today, but let’s just pretend it didn’t, because it’s a farce.

So it’s all about U.S. retail sales today. And what will that do to the currencies? Will it be a return to what’s fundamentally good rewards the dollar or will it be a case of what’s fundamentally good lathers up the global growth campers and the dollar gets sold as safe haven trades unwind? Since I’m always hammering about how I would like to see the markets return to fundamentals as drivers for currencies, I can’t have my cake and eat it too. So look for the dollar to rally today should the retail sales report for July be as good as I guessed it to be.

The price of oil is bubbling out of the ground again. This time it wasn’t Jed Clampett that caused it to happen. This time, we have refinery problems. But even greater than that, we have some saber rattling in the Mideast. I’m sure you know or heard about these comments coming out of Israel. So tensions are tight here, and thus the price of oil gets bid higher.

And as usual, when the price of oil moves higher, the petrol currencies move in lock step. These petrol currencies include Norway, Brazil, Russia, Canada, Mexico and the U.K. (there are others, but you get the drift here).

I just saw on the TV a report that Ft. Lauderdale is the top spot for bald men to get dates. Not that I’m looking for a date (except with my beautiful bride), but it’s always nice to know! HA!

Heading to the Big Finish, but before we go, I want to mention that even the Chinese renminbi (CNY) is taking part in the currency rally this morning. The renminbi/yuan has been stuck in the mud for a couple of weeks now, so it was good to see that the Chinese leaders allowed the currency to gain versus the dollar. I think this is the way the Chinese leaders are able to keep the pressure on the currency down, by removing the appearance of a “one-way street” for the currency.

Speaking of the renminbi/yuan, I know that I told you all this a long time ago, and if you’ve heard me talk about China in any of my many presentations the past couple of years, you’ll recall me telling you why I thought China was hoarding all the gold they’ve been buying and producing over the past five years. I personally think that China is preparing to back their currency with some percentage of gold. Now, I ask you this: Should the Chinese float the renminbi/yuan with a gold backing of some sort, wouldn’t that make it the most-attractive currency in the world? And wouldn’t it go a long way toward what the Chinese really want, to remove the dollar as the reserve currency of the world? Yes, it would! I’ve told you all this before, but we do have new readers all the time.

Then There Was This, from Bloomberg:

“Deutsche Bank estimated that policies implemented by central banks will cost investors about $163 billion over a decade. Policies have depressed interest rates, and yields on government debt have declined as central banks bolster their balance sheets. ‘It seems to be taken for granted now that central bank policies have implicitly underwritten a period of financial repression by artificially suppressing returns,’ according to Deutsche Bank. ‘For the issuer, this is the mirror image of the benefit in terms of lower borrowing costs.’”

Yes, while the idea of driving down interest rates to boost the economy seems to be the only thing on all the central bankers’ minds these days, and it’s not a proven thing yet that it’s going to work, the threat of inflation from these moves hangs over us like the sword of Damocles. And if you think the financial repression on us is bad with low interest rates, you don’t even want to feel the wrath of the financial repression from inflation!

To recap: The currencies lost steam during the trading day yesterday, but have come back again this morning for another attempted run on the dollar. Gold held steady for most of Monday and then got hammered at the New York close. Good economic reports from Australia, New Zealand and Sweden overnight have helped to boost those respective currencies. And the price of oil is seeing a rise on the saber rattling going on in the Mideast.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning