Hello Tower? We Are Cleared for Liftoff

And now… today’s Pfennig for your thoughts…

Good day, and a happy Friday to one and all!

So, it’s finally Friday, and with that brings us some “real data”. So no more drifting and so on.  The problem for the currencies this morning, is that traders and market participants believe that U.S. November Retail Sales will be strong, thus giving the dollar the last green light to liftoff of interest rates next week.

And with that clear path, everyone finally realizes that the first rate hike in a decade by the Fed is only 4 trading days away…  So, dollar strength is in the cards today, folks. I guess a disappointing Retail Sales report could wrap a tourniquet around the bleeding in the currencies, but that’s about all it would do.  And the BHI tells me that the report will be OK. Not great, but OK, and certainly not disappointing.

The price of oil has fallen further, and now sits at an 11-year low in the low $36 handle. Yesterday, we saw a couple of the Petrol Currencies trade outside of the depressing oil price, but not today. In fact, today, has the Petrol Currencies, all of them, at the woodshed.  And the trip to the woodshed has been even harsher on the Russian ruble, who saw the Central Bank of Russia (CBR) leave rates unchanged this morning.

That, and the news that really hurt is that the EU had delayed their decision to extend the economic sanctions against Russia.  You see, it was thought that these sanctions might end, but just when the EU was about to vote, Italy demanded a review. And so now the decision will be delayed. And that has hurt the ruble this morning as well.  The ruble picked a bad day to get out of bed, eh?

The “relatively higher yielding” currencies like Aussie dollars (A$) and, New Zealand dollars/kiwi, are finding it difficult to find a bid this morning, as traders are focusing on the positive rate differentials that these two currencies enjoy vs. the dollar, and seeing that positive differential narrowing with the Fed rate hike.

When traders get to trading like this, you have to run for cover, batten down the hatches and hide behind the trees, because these traders are out for a pound of flesh from the currencies and will make up stuff to justify their selling of the currencies. I say that in reference to what I just told you about the positive rate differential narrowing.

Oh come on! Give me a break! The U.S. rate hike is only going to be 25 Basis Points, sure, theoretically “narrowing” is correct, but there is still a differential!  And in the old days, I saw bonds traded for other bonds to pick up yield that was less than 25 Basis Points! It’s all crazy folks.

I thought that since I actually will start my winter vacation the day I would be writing about the Fed rate hike, and now someone else will be doing that, that I would walk you through what I feel is going to happen in five days. So, there is a difference between “should” and “will”.  I stand my ground on the thought that the U.S. economy is in no condition whatsoever to take on rate hikes.

However, at this point of the proceedings I do concede that the Fed will hike rates by 25 Basis Points next week.  But as soon as they do, the markets are going to start bugging them about when the next rate hike will take place, and what the size of the rate hike will be, and who will be delivering the news, and what will they be wearing, and so on and so on.  The rhetoric will become impossible.  So, I say once again, that I do hope that the Fed feels real good about this trip they are about to take. Because after the rate announcement things are going to get really hairy for them.

And I’m not naïve enough to think that the Fed’s rate hike will be a one and done. But how much pain will the Fed be willing to accept to hike rates further in 2016?  Whatever the number is, by late summer they will rue the day they ever thought the economy was strong enough, and that inflation was ready to take off, that would warrant a rate hike.

Wait a minute there, Chuck, did you just kind of try to be sneaky with a comment about more rate hikes in 2016?  Have you forgotten that you said earlier this year that there would be no rate hikes in 2016 either?  Shhh, I was trying to slide that through, without anyone noticing, but you, evil twin, just had to point out what I was doing, didn’t you!?

There were a couple of inflation reports yesterday that directed their respective associated currencies in either direction. So, I already told you the price of oil slid below $37 yesterday, but that didn’t stop the Norwegian krone from booking a gain. Of course not having the price of oil slide below $37 would have probably widened the gain in the krone, but oh well.

Norway’s November Inflation report beat the expectations, and climbed to +0.4%, (consensus was +0.2%).  Now, back in the day, inflation was the boogey man for economies, but in today’s world, that’s not the way things get done! So the krone was up and running in the face of a lower oil price yesterday. You won’t see that happen very often! But that was yesterday, and like I told you above, the Petrol currencies are getting whacked this morning, so , so much for the gain yesterday in krone, eh? Norway’s Norges Bank will meet next week, and I expect them to keep things steady Eddie.

Norway’s neighbor, Sweden, saw a different outcome to their November inflation report, which came in weaker than the consensus at 0.1% Year on year.  YIKES! Sweden’s Riksbank has already moved interest rates into negative territory, and a report like this just might get the Riksbank to widen them further into negative territory, and that is not good for the Swedish krone, who took one on the chin yesterday.

The Riksbank does meet next week too, but in the end, I’m thinking that since the ECB didn’t go all hog-wild with additions to stimulus last week, that the Riksbank will leave everything unchanged.

The Big News around town yesterday was that S. Africa’s president, Jacob Zuma, fired his Finance Minister, Nene. And from there all hell broke loose on the S. African rand.  The rand fell quickly, and reached near an all-time record low level at one point of the day.  The firing came as a surprise to the markets, who just as recently as earlier this week, had institutions saying that the rand would be one of 2016’s currency winners.

Well, those claims were scrapped in a heartbeat, and immediately analysts, traders, etc. began to think that Nene, who was widely respected, was fired because Zuma wants to disregard the spending ceilings and fiscal targets ahead of the municipal elections in the next three months, and Nene opposed him doing that. So, the rand is getting taken to the woodshed, no wait. It’s loss is even greater than a trip to the woodshed, maybe a trip to the buzz saw!

Well, did you hear that China has delayed the launch of their gold fixing at the Shanghai Gold Exchange (SGE) that was scheduled for delivery by the end of the year?  April is the new target date. As a recap, you might recall me talking about this months ago, as something that China now feels they are in a position to do, as the World’s Top Producer, and consumer of gold. The Chinese Fix won’t overtake the London Gold Fix for some time, and will depend on foreign institutions doing business through the SGE, and the Chinese Fixing.

Overnight, the Chinese renminbi saw the largest appreciation it has received in a month of Sundays.  But for once in a blue moon, the Indian rupee didn’t come along for the ride on the appreciation train with the renminbi.

The U.S. Data Cupboard has the aforementioned November Retail Sales for us to view today. In addition, we’ll also see, the stupid Nov. PPI,  and the latest U. of Michigan sentiment report, which used to be called the Consumer Confidence report. So, no great shakes, and nothing to compare with Retail Sales.

Gold is down $6 as I write this morning. The rate hike sentiment is carrying over to gold, which has done well at times in rising rate environments, so it’s not a given that gold will go down in price as the Fed hikes rates. Besides 77% of the rate hike is priced in by now, folks. that means we could very well see a case of buy the rumor, sell the fact next week. I guess it all depends on the words that are used afterward, for there will be a ton of fine tooth combing going on with what is said.

Well, remember when I told you that in December, the U.S. had to come back and figure out their spending so that the government didn’t shut down? This is different from the debt ceiling stuff.  Well, there was something that happened yesterday with the government spending bill and it can be found here, Or, you can read the snippets here:

Senate Majority Leader Mitch McConnell (R-Ky.) and other congressional leaders are trying to wrap up a deal by the middle of next week. The Senate on Thursday passed a stop-gap bill that would give negotiators until the middle of next week to reach a deal on a year-end spending bill, as congressional leaders slowly make progress toward an agreement.

The Senate quietly passed the short-term funding extension by voice vote and the House is expected to clear the legislation early on Friday, hours before funding for the government is set to run out.

Sen. Roy Blunt (R-Mo.), a junior member of Senate Majority Leader Mitch McConnell’s leadership team, said it is now up to top leaders to reach an agreement.

‘Most people have determined that there’s not much they can do about these final negotiations,’ Blunt said. ‘That’s probably finally set in that this is going to be decided by three or four people and most of us are not one of those three or four people.’

Chuck again. Sure, it’s nice to know that three or four people decide all this stuff.  I shake my head in disgust and disbelief that we as a country have gotten ourselves into this debt mess, and then act like it’s “nothing”. One, day, Alice. One day, someone, other than me, is going to step forward and say, “enough”,  but until that day, these are the shenanigans we have to deal with.

That’s it for today. Now it’s time to get off this bus today, and head to a fantastico Friday. I hope you will be able to join me there!


Chuck Butler
for The Daily Reckoning

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