Dollar Gets Sold On Bad Data Prints

The currencies traded yesterday, but in very tight ranges, as the US was on holiday. This morning, the bias is to sell dollars, much like it was on Friday before the liquidity of Europe went to the pubs… Let’s go back now, and revisit Friday’s action…

Well… There was more proof on Friday that the double dip is coming…

The Jobs Jamboree was pitiful… As the “real” numbers (non-census workers) added just 83,000 jobs in June… (With the census workers, 125,000 jobs were lost!) That’s just not the kind of job creation an economy like the US needs to push it along…

But the real proof in the pudding came from Factory Orders, which fell 1.4% in May… And… Factory earnings were down for the month and up only 1.7% annualized. Add this to the long and getting longer list of economic data that’s nowhere near “recovery status”!

We sure didn’t see the politicians on the cable news stations pounding their chests and claiming that job creation was proof their stimulus was working, now did we?

And here’s something from Friday’s letter… A reader was quite upset with me because after talking about the bad economy I said, “we’ve got that going for us”… Well, I explained that I was not rooting against the US that it was simply a facetious comment… Long-time readers know…

So… In a blast from the past, the currencies rallied and the dollar was sold on the bad data… WOW! It was just like olden, golden times! Now, that was the way currencies should react to bad economic news in a country. Why? Because, if a country is printing bad economic news, the next step for that country is to lower interest rates, which is debasing their currency.

In recent times, it’s been the opposite for bad data prints… So hopefully this is a step in the right direction… And I’m not just talking about the bad economics in the US…  If, say Australia, prints a bad labor number, the Aussie dollar should be sold, that… Would put us back under the fundamentals flag… Yes, I would love to run that flag up the pole and leave it there for a long time!

The euro (EUR) traded all the way to 1.26 on Friday morning after the US Jobs Jamboree, but once the liquidity of Europe went to the pubs, and beer halls, the dollar staged a mini comeback. Yesterday, I checked in the light trading, and noticed that the dollar had continued to gain… But that all changed overnight, and the dollar is back on the selling block this morning.

I saw a report yesterday that the euro could very well go back to 1.30 on technical moves… I then saw a report saying that the euro was going to go back to parity.

That’s quite a wide swing from 1.30 to 1, eh? So… I guess it all depends on your outlook on which way it goes… Will you pin your colors to the 1.30 mast? Or, the 1 mast?

I’m on the fence… Personally, I think that the euro is fine where it’s at for now… And if the 1-trillion euro aid package works, then the euro can move higher… If it doesn’t, then it should move lower… But, even if the euro moves higher, it’s not out of the woods by any stretch of the imagination, folks…

The Canadian dollar/loonie (CAD), which had been dancing in the same conga line as the Swiss franc (CHF) lately, has run into a roadblock, and here is a good example of what I was talking about above… The loonie had been on rally tracks because of the good economic data, and a rate hike from the first G-7 nation. But in the past week, Canada has seen some softer economic reports, and an oil price that has plummeted, and those things have dampened the thoughts on future rate hikes… So, the loonie sees weakness… That’s what fundamentals are all about!

The Reserve Bank of Australia (RBA) issued their most recent policy statement last night, after leaving their interest rates unchanged…. The policy statement, though, had a different tone to it than one would expect, given the unchanged rates… The RBA acknowledged in their statement that consumer spending and business investment are expanding…

In other news, Australia printed a very strong Trade Balance in May, with a large upward revision to April’s number… Here are the numbers… May Trade Surplus of A$ 1.645 billion, and April revised from A$ 134 million to A$ 1.123 billion! WOW! Now that’s a nice upward revision, eh?

My two cents on this is that the RBA wants to raise rates, but is waiting right now, to see what unfolds globally… Remember, their rate hikes were fast and furious six months ago. And… Remember I told you that I thought the RBA would wait to hike rates again until their meeting in August… So, that’s still my thought, and it’s out there on the table for people to shoot holes in…

Speaking of holes… You’ll have to figure this one out, folks… The Swiss franc is still dancing in the conga line, even if the loonie had to sit out for a song or two. The franc has seen some Swiss National Bank (SNB) intervention to keep the franc from getting too far out of whack with the euro. But now that the euro has gained back some lost ground in the past week, the SNB can take a break. For those of you new to class, the SNB sells francs against euros to bring that “pair” in line…

Long time readers know that I’ve thrown the UK under the same bus as the US was thrown under… But, I’ve got to back off some of that now, as the UK has announced some very strong austerity measures, and deficit reducing plans that I like… Now, I’m not saying that all’s well there, and we should look to buy pound sterling (GBP) again, right now… But… For those who are what you call “contrarian investors,” this is what they would do…

And it was a tough row to hoe for gold last week… But think about this for a minute, if you’re a conspiracy nut like me… It was month end/quarter end, and according to the GATA people (the gold antitrust people that are trying to sue the major banks for manipulating the price of gold), the major banks have HUGE short positions in gold… So, my conspiracy mind was racing so fast, and it came up with this thought… The major banks manipulated the price of gold down at quarter end so that their books wouldn’t look so bad… Hey! It’s a thought… Why do you think gold fell so hard at quarter end?

I would think that with a lot of the bearishness in the euro pushed to the roadside at this point (except for the guys calling for it to go to parity!), that would point to more dollar weakness, and that “should” be good for gold…

I actually believe that since gold hit $1,265 in June, and then slipped back to near $1200, that these could be looked at as “dips” and good entry points… But then, that’s me, and I’ve said before that there’s never a “bad time” to buy gold, as long as you’re buying it to hold…

The data cupboard is pretty bare this week after printing all that data last week, which culminated in the Jobs Jamboree on Friday. We will see the ISM non-manufacturing (Service) Index today, but no biggie… I would suspect that the services sector would show the same type of slowdown that the manufacturing sector showed last week.

Then there was this…  As reported in the USA Today

“The next big setback for the US job market might come as layoffs by state and local governments, under pressure to slash their payroll to narrow their budget deficit. As many as 400,000 workers could lose their jobs during the next year, said Mark Zandi, chief economist for Moody’s Economy.com. Together, states are confronting a $140 billion budget shortfall for fiscal 2011. Meanwhile, federal aid is shrinking. Money for states from the economic stimulus is expected to fall by $55 billion, says the National Governors Association. And the Senate last week failed to pass a measure to provide states $16 billion for extra Medicaid funding, an initiative that would have extended benefits from last year’s stimulus. The House approved $25 billion in enhanced Medicaid funding.

“The downturn has gone on so long, all the low-hanging fruit has been taken,” says Scott Pattison, head of the state budget officers group.”

I shake my head, and wonder…

To recap… The Jobs Jamboree last Friday for May was very soft with only 83,000 jobs created, and the net jobs counting census workers was negative! The markets reacted the way fundamentals would dictate for once, and the dollar was sold. The selling continued last night, after a brief rally in the dollar. The RBA left rates unchanged today, but their policy statement was hawkish… And gold attempts to recover from last week’s sell off.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning