Chinese Data Lead Risk On Assault

This past weekend, we observed the ninth year since the awful, cowardly acts on our nation. I was proud to see all the American flags flying on Saturday. I really don’t like talking about 9/11; it brings back all those sick feelings I had that day, and the days following… I will never forget…

Front and center this morning, we have a very nice currency rally going on. Yes, the “risk on” trading is happening, and happening in a big way! What’s driving the risk on assault versus the dollar, yen (JPY) and Swiss franc (CHF)? Ahhh… Grasshopper, you have learned well! Chinese data has opened the floodgates to risk assets, and trading is flowing out of the risk aversion assets, even more US Treasury selling!

But first, let’s see what the Chinese data is that has the risk takers all lathered up this morning…

China reported that their August Industrial Production grew 13.9%, the most in three months, and… That August retail sales increased 18.4%… Sure doesn’t look like their economy is collapsing now, does it? Remember when all those economists and pundits were saying China’s economy was going to collapse, and I kept responding by saying that it would “moderate” not collapse… Yes, you know me well… I’m patting my self on the back right now! HA!

The Aussie dollar (AUD) is trading over 93-cents this morning, which is good, and the euro (EUR) has gained over one cent to 1.28, but the real movers and shakers this morning are the Scandi currencies of Norway (NOK) and Sweden (SEK), which always makes me happy, for I’ve been waving the fundamentals flag of Norway for five years now!

We also had an agreement last night in the Basel Committee on Financial Regulations, which was pushed by Norway and Sweden. A couple of years ago, I wrote an article about the difference between the way Norway and Sweden (the “Scandis”) handled their banking meltdown a decade earlier, and how the US was handling their mess… I’ve said it many times, that you never heard one Scandi bank mentioned when banks all over the world were experiencing related problems from the US financial meltdown.

For right now… Gold is seeing some selling, as stocks around the world react to the strong Chinese data, and this has been the pattern now for some time… In the initial turning on of risk, gold gets sold… But as risk ramps up, people begin to see the light, and worry about inflation, etc. So… Here’s your assignment if you choose to accept it… Watch gold, and if it dips by a good margin, then look to buy at cheaper levels… Or not… Whatever floats your boat!

Well… There were some rumors over the weekend that the strong data in China would bring about a rate hike… But seeing none, the race to risk assets was on. Here’s the thing that I’ve talked about for over five years now, and that is… The Chinese know that a strong currency fights inflation just as well as a rate hike, and if the Chinese economy is going to show resilience like it did in the two reports over the weekend, then Chinese officials can breathe easier about allowing the renminbi to gain versus the dollar.

And… So it is that the renminbi reached the highest level versus the dollar since the dropping of the peg in July of 2005, overnight! It’s “ON” in China, folks…

And if it’s “ON” in China, that should benefit the Singapore dollar (SGD)… Just remember, I’ve told you for years now, that the Asian currencies all trade in a range together, so that they can remain in competition for their exports… This is a case of “what’s good for the goose…”

Back in North America to finish out today… Canada doesn’t really have much in the way of data to move the Canadian dollar/loonie (CAD) this week. We will hear a couple of speakers from the government as the week goes on, and their manufacturing data on Wednesday, but beyond that the loonie will have to look for help from the other commodity currencies, and… Don’t forget the price of oil, which has been rising again lately, eh?

And here in the US, three-out-of-five economists surveyed by The Wall Street Journal expect the US Federal Reserve to resume large-scale purchases of securities in the face of a deteriorating economic outlook – but, by a 3-to-2 margin, most of them also think that would be a mistake.

The survey showed economists continuing to cut their growth forecasts for the rest of this year and into 2011.

Yes… I would throw my hat into that ring too, for I see the Fed Heads panicking, acting like a person who just had the wind knocked out of him, gasping for air, and grabbing on to anything he can… And… Of course, I too say it would be a mistake, but I would also add the word BIG!

Well… That end of the bond rally talk I had with you on Friday is still playing with the yield of the 10-year rising more on Friday to 2.82%… Here’s something for you to chew on… Long-time readers know that I’ve said over and over again that this dance is gonna be a drag… And that is that when foreigners grew tired of bailing out the US and their deficit spending, that they would demand higher yields at auctions for those Treasuries… And that may have been the case at the last auction, where the interest in Treasuries waned… Uh-Oh!

The monthly budget deficit is due to print today, but sometimes it’s delayed… Wink, wink… Yes, sometimes, I think they try to release the data when no one is looking… Anyway, expect the monthly deficit to be near $100 billion… Again!

Tomorrow, we’ll see the August retail sales, which should have been boosted by back-to-school sales… The BHI (Butler Household Index) indicates that to be the case, so look for an “OK” retail sales report… Nothing to get all lathered up about, just “OK”…

I read something last week that made so much sense to me, I wondered why the “talking heads” on TV weren’t talking about it… Basically, government officials claim that this economic mess we’re in is a recession that’s (in their minds) over… But, you may recall the past couple of years, me referring to the economic mess as a depression…

Well… This is what I heard that plays well with my call of a depression, and that is the “soup lines” have been replaced by government checks in mailboxes… With over 20% unemployment, and NO – I repeat – NO sign of an improving labor sector, and GDP that consists of nothing but government spending… The government should call it what it is…

But that won’t get them re-elected… I’ve got news for them, they might as well go out swinging, because they’re not getting re-elected any way!

Then there was this… Recall a couple of weeks ago, me telling you that IRA custodians are reporting that people are pulling out their IRA funds early, and taking the penalty… Well, the AP reported this past weekend that people are bailing out of bank CDs and parking their cash in checking and savings accounts that earn little or no interest (except at EverBank!).

And in another sign that liquidity is at the top of most people’s minds these days… $145.3 billion has been pulled out of mutual funds this year… 414 mutual funds have closed or been merged into another fund this year, and most of them were stock funds… Liquidity never seems to be a big deal until there isn’t any, right?

Of course, if they were diversified correctly and didn’t have all their funds in those stock funds, then they wouldn’t need to panic like this…

To recap… Strong Chinese data has opened the floodgates to risk on this morning, and the currencies are taking back ground lost to the dollar, franc and yen. Gold is fluctuating, and The Basel III groundwork has been agreed on…

Chuck Butler
fo The Daily Reckoning

The Daily Reckoning