Central Banks Diversify

OK… Well, thanks to Chris for taking over the Pfennig on Friday. I was busy with other things for the day. I sent a note to Chris Friday morning about the Canadian Job report, and he replied that he had already written about it! WOW! Quick on the draw! He beat me to the punch… But, the report was so good it’s worth talking about some more! Canadian employment skyrocketed again in June rising by 93,200, almost four times the amount expected by forecasters (+20,000). Add this to the 133,000 jobs created in April/May and you’ve got the ingredients for a strong quarter of job creation! The unemployment rate fell back to 7.9%, lower than forecasts for an 8.1% print.

And that brings me to a story that a reader sent me over the weekend…

Recall last week I told you that there was a story going around about how Canadian dollars/loonies (CAD) were being picked up by central banks? Well, this report, done by Morgan Stanley analyst, Emma Lawson, goes on to say that central banks have dropped their allocation to US dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” She adds, “Over time we anticipate that reserve managers may reduce their holdings further.”

What is surprising is that the managers of those central banks aren’t buying traditional fall-backs like the euro (EUR), the British pound (GBP) or the Japanese yen (JPY). Instead, she suggests they’re putting their faith in other dollars – the kind that come from Australia and Canada. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the US dollar allocation.

That’s some good news for loonie and Aussie dollar (AUD) holders, eh? But the big thing in my mind is that central banks are diversifying… Shouldn’t you? Like that old soap commercial… Aren’t you glad you used Dial? Don’t you wish everyone did? HA!

The currencies, led by the Big Dog, euro, are weaker this morning, with the euro backing off 3/4’s of a cent (0.75) versus the dollar. I really haven’t come across anything that points to a reason for this backing off… Except the noise regarding the upcoming Street Tests results… But, to me, it’s really just “noise”…

Speaking of the euro… I was reading this weekend about how industrial production is rising along with factory output in Germany… And that is a Big Deal! Germany is the growth engine of the Eurozone, and with the weaker euro, manufacturing is taking off once again. The BIG automakers, BMW, Audi and Mercedes have all announced that they are hiring workers, and canceling holidays to catch up with demand.

If the German economy weren’t so strong right now, Chancellor Angela Merkel would not have been able to push through a four-year package of spending cuts that total 81.6 billion euros…

Again… I love this back and forth between the US who wants to spend their way out of the mess, and wants other countries to follow them, and the other countries that are in the opposite corner, wearing the blue trunks, and their pledge to cut spending and deficits.

Anyway… The Chicken Littles who were screaming that the sky was falling and that the euro would collapse and that there would be a break up, have all gone away… For now… I’m not saying the euro is out of the woods, folks… But for now… The cries have faded…

Over in Japan there was an Upper House election called that has rocked the yen a bit… I tell you this… If I had a 1 oz. gold coin for every new Japanese official and election that I’ve seen since 1992 (when I began trading foreign bonds), I would be a very rich man today!

Speaking of gold… With the euro backing off some, gold is back above $1,200… Back and forth we go, but the thing to take from this back and forth is that $1,200 seems to be the new “base”… Usually, what you have, in these assets like this, is a probe higher, then profit taking… Then a back and forth as the new base forms… And once everyone is strapped in, with their arms and legs inside the Gold Express at all times, the asset can then move higher and put the “base” in the rear view mirror.

And to all those naysayers and doomsday people who said that China’s economy was going to collapse, I guess they’ll have to go drape their black ribbons on some other economy… Hint, wink, wink… You don’t have to go far… Wink, wink…

China reported record exports for June and their largest trade surplus in eight months! And it’s just like old times again in China…

Especially after the US failed to name China a “currency manipulator”… Chickens… Bawk, Bawk… I mean wasn’t it the President who pledge to press China hard to stop manipulating its currency during the campaign? And then there was US Treasury Secretary Geithner, who told lawmakers during his confirmation hearings that he thought China was guilty of manipulation…

But for the third time since these two took office, they have failed to name China a currency manipulator… Hmmm…

Aussie Home Loan Data showed the first increase in last October, which is a good thing. However, the home financing is still down almost 12% year-to-date… So, here’s my take on this data… October was about the time the RBA began their rate hike cycle, and it took six months of rate hikes to get in people’s minds that home loan rates were going to be higher, and they should go ahead and book their loan now before they go higher!

And in Canada… The jobs data on Friday, has people talking rate hikes left and right for Canada… Whoa there, Partner! I’m still on board for a July 20 rate hike, which will be next week, when I’m in Canada… I’m not fully convinced there’s enough breathing room for another rate hike in September too! However, if the data keeps coming in strong, then I’ll change my mind! Today we might see something that leads us to the rate hike path in September, when Canada prints their Business Outlook and Senior Loan Officer Surveys… These will be the last data prints the Bank of Canada sees before their rate announcement next week.

No data in the data cupboard here in the US today… So… We could drift throughout the day with no rudder and no main sail!

To recap… The currencies are softer against the dollar this morning… The euro is off 3/4’s of a cent. The Aussie and Canadian dollars are getting picked up by the central banks looking for something other than dollars, euro, yen, and even gold! Japanese yen is weaker on the upper house election mess in Japan, and the rumors of a Chinese economic death have been greatly exaggerated, with China posting a record month of trade surplus in June!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning