China's New Silk Road Train Makes Initial Run

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

The currencies that held gains in the early morning trading yesterday, were able to hold those gains throughout the day, and the currencies that were getting sold (euros and yen) in the early morning trading yesterday, continued to get sold throughout the day.

Gold, which was up $7 when I sent the letter out for review, gave that $7 back, and then some, but did remain with a $1,200 handle, but only by the skin of its teeth!  I had a dear reader write me the other day, and ask me why I spent so much time talking about gold and not an equal amount of time talking about silver. This was not the first time this had happened through the years.

The thing that I think of when I read these type of emails to me is that failed to reach this person. It’s my fault, and so I then will go on to explain that I talk about gold with the frame of mind that I’m talking about gold and silver, without having to say both every time I mention the metals. But if there’s something special going on with silver, I certainly will take time and make sure that I separate the two.

Alrighty then, moving along. The price of oil remained under $30 with a $29 handle, but at least it didn’t drop more yesterday and overnight! It’s the little victories like this that the Petrol Currencies hang their hats on these days.

The Russian ruble, Brazilian real and Canadian dollar/loonie are gaining vs. the dollar this morning, while the Norwegian krone struggles to get on the positive side of the road. The Best Performing currency overnight is the Mexican peso. I was talking with some colleagues on the phone last Friday, and the conversation went to the Mexican peso at 19 (which is where it was on Friday) and I said to them, “I’m not a fan of the peso, but, the peso at 19 is not right, that’s too weak”  And it’s like peso traders were listening in, and took that statement as the gospel, because since Friday, the peso has been on a mission to rally, and it no longer trades with a 19 handle. The currency was simply, oversold, in my opinion.

With the price of oil steady Eddie for two days, the safe havens that were bought like funnel cakes at a State Fair last week, are being treated as persona non gratis this week. The gains that yen, euro, francs, treasuries and gold are being taken away, not all at once, but slowly, as if traders, etc. aren’t sure they want to do this. I think it would behoove them to hold on to some of those safe havens because we’ve seen the price of oil take a ride on the slippery slope on more than a few occasions in the past two years.

The euro struggled yesterday and is doing the same today. Yesterday, Germany saw their latest report on the current conditions as measured by the think tank ZEW, drop lower for the third consecutive month. The euro finds it difficult to get on terra firma when the dollar isn’t dropping. The euro’s economic fundamentals, while better than the U.S.’s and China’s, and Japan’s, but that’s not saying much, just aren’t that sterling to warrant the currency getting ahead of the pack like it used to. Mario Draghi, the president of the European Central Bank (ECB), was out trying to paint the picture of a Eurozone economy that is rosy. I don’t think he should quit his day job as ECB President to become an artist. I’m just saying…

The Chinese really got jiggy with renminbi fixing overnight, as the renminbi was fixed at a much higher level. I have stated before that I just don’t get what the Chinese are attempting to do with the renminbi these days. Just when you think that they are set on depreciating the currency, they allow it to gain for a couple of days, and when you think that they might be ready to remain steady Eddie with the currency, they go on a multi-day depreciation mission. 

Remember how the Peoples Bank of China (PBOC) would attempt to throw the traders, etc. off the scent of an appreciating renminbi, by halting the daily appreciations, and mark down the currency? Back in “the day” we all knew that this was just a one and done thing for the PBOC, that they would be back to appreciating the currency the next day, and they were. But that is no longer the case folks, this is a whole new ballgame in China.  And one that I’m not familiar with.

I was reading some research on China last night regarding their selling of U.S. Treasuries. This goes hand in hand with the drop of their reserves that I highlighted last week or sometime in the past couple of weeks!  And the thing that really bothers me here is the rise of their government debt, while their reserves drop. Come on Chinese leaders, think about this some more, is having 6 or 7% GDP numbers that important that your debt numbers soar, and reserve numbers drop?

And in Singapore, they just can’t seem to catch a break these days, but I guess that’s what happens when you pin your colors to the mast of a sinking ship. Don’t know what I’m talking about? Well, Singapore went all-in with their support of China several years ago. The Singapore dollar and Chinese renminbi have been hand in hand for quite some time now, and with the Chinese depreciating their currency, guess what happens to the Singapore dollar? That’s right. And now the economic data in Singapore is dragging the currency through the mud too. The non-Oil Domestic Exports (NODX) in January fell -9.9% vs. a year earlier. And this didn’t just start. December was -7.2%,  and November was -3.4%.

For those of you keeping score at home; since the original peg to the dollar was dropped in July 2005, the Chinese renminbi has gained 26.81%, and the Sing dollar has gained 20.24%. Before all this turmoil in China began, these two currencies used to trade in tandem, one would be up 10% in a year, and so would the other one.

So, you could look at this difference now two ways; 1. That the Sing dollar has been oversold, and needs to gain 6% to get back in line with the renminbi… or 2. The renminbi will do whatever it takes to drop 6% to get in line with the Sing dollar. In today’s environment, I think I would cast my lot with what’s behind door #1, Johnny.

Well, the BIG thing happening today is the release of the Fed’s last meeting minutes, from their meeting of January 26 and 27, in which they left rates unchanged, and chose to talk about overseas markets turmoil as the reason for their concern right now. I expect the minutes to repeat that message and in fact I think – are you ready for this – that the minutes will actually sound dovish. And that won’t be dollar positive.

Before we get to the Fed’s Meeting Minutes this afternoon, the U.S. Data Cupboard will have a plethora of economic data to print, with most of it considered to be Tier 2 data, like PPI, (wholesale inflation). But there will be a print of “real data” this morning, and that is January Industrial Production, and Capacity Utilization.  Industrial Production surprised the markets last month with a negative -0.4% print. We might see the reversal of that negative print in January, which would mean that for the last two months, we’ve had 0% growth in IP. UGH!

Yesterday, I talked about the agreement that Russia and Saudi Arabia had come to, that would freeze oil production at current levels.  I then read later in the day that actually, Russia had oil production at a record level in January. So, they agreed to “freeze” oil production at not just “current levels, but instead at “record levels”. Oh, way to go about stabilizing the price of oil, boys. that really helps to not produce oil at more than record levels! NOT! UGH! I initially thought there could be some hope from this agreement, but not any more.

Before we head to the Big Finish today, I wanted to highlight this story from China. Remember me talking about the new “silk road train” which was a train that would go from Shanghai to Europe and would drastically reduce the number of days it takes for exports to reach their destinations? Well, the new Silk Road Train made its first run yesterday from Shanghai to Iran and made the trip in 14 days, knocking off 30 days from the normal time it took to make this trip by ship. Most people would look at this as no big deal, but this train is going to help China establish itself as the hub of the East, folks. and reduce the U.S.’s role. That’s how I look at it.

Well, he sure knows how to get everyone’s attention even though it was his first rodeo as a member of the Fed. Neel Kashkari, the newest member of the Fed and president of the Fed Minneapolis, gave a speech yesterday, and threw a grenade from left field.  So, here’s the link to the whole article on MarketWatch, and here is the snippet:

The official who helped operate the nation’s financial bailout plan says it may be necessary to break up the country’s biggest banks – and is developing a plan to reduce the risks from lenders making mistakes.

‘The nation’s biggest banks remain too big to fail and pose significant risk to the economy,’ said Neel Kashkari in his debut speech as the president of the Minneapolis Fed on Tuesday. ‘While significant progress has been made to strengthen our financial system, I believe the [Dodd-Frank] Act did not go far enough,’ Kashkari said in a speech at the Brookings Institution.

‘Congress must take further action to strengthen the financial sector,’ he said.

Kashkari said that policymakers must give serious consideration to breaking up banks. Another idea is to turn large banks into public utilities ‘by forcing them to hold so much capital that they virtually can’t fail.’

Chuck again. It just keeps getting better all the time, doesn’t it?  Of course, I’m being facetious, but when are the markets going to sit up, and take notice, that we’re heading back down the same road that took us to near collapse in 2007-08? I shake my head in disgust.

And with that, I’ll get out of your hair for today, and send you on your way to having a wonderful Wednesday!

Regards,

Chuck Butler
for The Daily Pfennig

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