Chinese Data Throws Currencies Under The Bus!

Well, front and center this morning, the dollar is broadly stronger as the appetite for risk assets has gone in to have its stomach stapled! The culprit behind this move to run to dollars once again is Chinese economic data. Yes, I told you earlier in the week that this was a week chock-full o’ Chinese-data, and the first round on Wednesday night (for us) saw inflation drop, but industrial production and retail sales slip, but not by much, thus leaving the markets wondering if the drop in inflation was going to be enough to make Chinese leaders cut rates.

Well, wonder no more! Last night, we received more Chinese data, and this time, there is no question a rate cut will come soon. Chinese exports collapsed in July, and imports, which had been taking up the slack in the falling exports, saw a deep drop too. As I had told you a long time ago, the Chinese leaders were pushing for domestic demand to offset the slowdown in exports, as they foresaw the recession in the eurozone (their largest customer) and the malaise going on in the U.S. And while this is a radical change for the Chinese, they were seeing their imports remain strong, which is a very good indication that the domestic demand is strong. Another indication of strength or lack of in domestic demand is the lending data: New loans fell to the lowest monthly number since September 2011.

For those of you keeping score at home, exports fell from 11.3% to 1%, and imports fell from 6.3% to 4.7%. And the July trade surplus printed at $25.1 billion, versus $35.5 billion a year ago.

So I’ll betcha a dollar to a Krispy Kreme that the Chinese react very quickly to this data set. We could very well see a reserve ratio requirement reduction (check out that alliteration! My poetry teacher would be very proud of me!) today… rate cuts, stimulus. I’m sure the Chinese will be very aggressive in reacting to this data set.

I guess I don’t have to tell you longtime readers that the Chinese data have really put the risk assets on the selling blocks this morning. And one of the prime reactions comes from the Australian dollar (AUD), which has seen the country build an economy on mining and exports of those raw materials to China. The A$, which was nearing a return to $1.06, had the trapdoor sprung under it, and the A$ is now fighting to remain above $1.05!

Maybe the selling of the A$ hasn’t been as bad as one might suspect, given the Chinese data, and that is because the Reserve Bank of Australia (RBA) printed their quarterly statement on Monetary Policy. And in the statement, it was revealed that the RBA had made higher near-term growth forecasts.

In the back pages of the statement, the RBA made a comment that concerns me. They said, “The exchange rate may be more contractionary for the economy than historical relationships suggest.” This concerns me, because previously, the RBA didn’t make statements about the exchange rate, and now that they put this in on the back pages of the statement. So hopefully, no one really noticed it now, but when at sometime in the future, if they had to do something about the strength of the A$, they could point to the statement and say, “hey, we told you back in August”!

Well, the “While Chuck was gone” currency rally is over, folks. I told you on Tuesday that if you wanted to further the rally, I would have to go back on vacation and you would have to contact the Big Boss Frank Trotter or send those checks to Chuck’s retirement fund. HAHAHAHAHA! But seriously, the rally is over…O-V-E-R! For now, that is. And we’re back to the hedge funds and currency gurus bailing out of the currencies and going back to dollars for safety. I can’t believe I actually said that! For there’s no safety in dollars! Maybe short term, but unless you haven’t seen the debt clock recently, you’ll want to hit that link in the currency roundup and then try to figure out how we as a country pay for those unfunded liabilities without inflating the dollar’s value away, to pay the bills with cheaper dollars.

You know, I’ve been watching the price action in Japanese yen (JPY) this week and this is what I’ve seen: yen rallies (mini-rallies) during the U.S. trading session, but then sold off in the Asian session. Does this indicate that the Bank of Japan is intervening and selling yen? Maybe. But what I think is it really illustrates is the Asians know that Japanese yen is no so-called safe haven, and the Western investors haven’t figured that out yet!

Did you see that Big Al Greenspan gave himself a C- grade for his forecasting while chairman of the Fed? C-? OK, I’ll stop there before I get myself in trouble. But in a recent interview, Big Al said of Greece that “I just do not see how it can stay” in the euro (EUR). He doesn’t give any reasons for that statement, but it’s interesting that he’s still forecasting with his C- grade.

I’m reading a story on the Bloomie this morning the headline of which might give you the willies. But when you open up the story, you see what’s really going on. Those tricky headline writers, drawing me in. The title: “Norway Sovereign Wealth Fund Fell $13 Billion in Quarter as Stocks Dropped.” OK, if we’re still talking about the sovereign wealth fund (SWF) losing money four years from now, then Norway has a problem. But with a $620 billion SWF, they can afford to have a quarter that loses ground. So move along, these are not the droids you’re looking for.

I read a story last night that talked about how Norway has emerged as a safe haven from Europe’s debt crisis. Makes sense to me! Now, if we could just get the currency gurus to stop tarring the Norwegian krone (NOK) with the same brush used on the euro! Norway is NOT Greece or Portugal or Italy or Spain! Instead, Norway is the third-richest economy per capita in the world! Now, we as U.S.-based investors may not see the move versus the dollar, but to illustrate the statement that investors are moving to Norwegian krone as a safe haven from Europe’s debt crisis, all we have to do is look at the move of the krone versus the euro. And here we find that the krone has gained 5% against the euro since the end of March (so in about five months).

The top story on the Bloomberg and other news sites this morning is a blip about how the U.S. won’t prosecute Goldman Sachs or any of its employees for the firm’s role in the packaging and sale of subprime mortgage products. Of course, they won’t! That’s all I can say about that here. But join me on the patio tonight and we can discuss this further! HA!

Whew! That was a close one. I almost slipped up. But I’m older and wiser these days, and believe it or not, my sarcastic tone has died down. Which is a good thing, considering my forays into deep sarcasm and hyperbole got me in hot water.

My charts friend (thanks, Scott Pluschau) sent me his latest work on charting the price of gold. Let’s see what Scott has to say:

“The consolidating ‘symmetrical triangle’ has now morphed into a more-bullish triangle. An ‘ascending triangle’ is the most-bullish triangle pattern, and we are somewhat in between. There is a sign of increasing demand in the charts.

“In the near term, the 30-minute chart has a ‘concrete ceiling’ at $1,620. There is a determined seller or sellers here lately. However, each time a resistance level gets tested, it gets weakened. The ceiling has cracks, and needs a few more hammers and chisels for this level to become strong support. Basically, from my perspective, supply has been getting absorbed, and if the demand continues to deplete it, price will eventually launch.”

I like to see the technical stuff every now and then. I’ve always used the RSI (relative strength index) and the Commitments of Traders (COT), but the charting stuff is for other people that have far more gray matter than I have!

The data yesterday here in the U.S. saw the trade deficit shrink, as I said it would, given the price drop of oil in June. The trade deficit was $42.9 billion in June, versus $48 billion in May. So maybe it’s not just the drop in the price of oil here. Imports fell 1.5% in June. That’s HUGE, folks.

So let’s relate this to China. China’s imports drop and risk assets get sold. But U.S. imports drop and the dollar gets bought? Stranger than fiction, for sure!

The weekly initial jobless claims saw a drop of 6,000, from 367,000 to 361,000. But the continuing claims saw a HUGE jump, from 3,279,000 to 3,332,000. That’s not a good thing.

Then There Was This, from MarketWatch yesterday:

“Mortgage Delinquencies Rise in Second Quarter”

“Mortgage delinquencies rose in the second quarter to a seasonally adjusted rate of 7.58% of all mortgages, up from 7.4% in the first quarter, the Mortgage Bankers Association reported on Thursday… ‘Mortgage delinquencies were up only slightly over the last quarter,’ said Jay Brinkmann, MBA’s chief economist, in a news release.

“‘Perhaps more important than the small size of the increase, however, is the fact that it reversed the trend of fairly steady drops in delinquencies we have seen over the last year. This is consistent with the slowdown in the economy during the first half of the year and our stubbornly high unemployment rate,’ he said.”

Yes, I do believe that’s more important, the trend, because something not mentioned is the fact that second-quarter delinquencies rose beyond seasonal expectations.

And look for this today: A federal consumer regulator is expected to propose the first set of national standards for the mortgage-servicing industry. I’m shaking my head in disgust here, folks. Oh, well, they know best, right?

To recap: The currency rally is O-V-E-R… for now, that is. China’s latest economic data saw to that! China posted very weak export and import data, thus showing that both sides of their economy’s growth engine are hurting. The markets are already calling for aggressive monetary policy, so look for that. The weak Chinese data have all the currencies looking for cover this morning, especially the Australian dollar. Big Al Greenspan is forecasting an exit from the euro by Greece, but then he gives himself a C- for his forecasting while at the Fed!

Chuck Butler
for The Daily Reckoning