Japan Agrees With US on Chinese Monetary Policy

The euphoria in the currencies and metals carried through yesterday morning, with the euro (EUR) bumping up to 1.3425, and the Aussie dollar (AUD) bumping up to 0.9568… But the profit taking began to step in, and soon all the lofty levels that the currencies and metals had gained for the previous 24 hours were seeing slippage, and that slippage soon became hard selling.

I had told the boys and girls on the trading desk here, yesterday, when the euro traded above 1.34, that the euro had “gapped” through 1.32, and 1.33, and I wouldn’t be surprised to see the currency go back and fill in those gaps, which is another way of saying that 1.3435 wasn’t going to last… And it didn’t!

The one currency that is kicking tail and taking names later this morning is the Swiss franc (CHF), which is trading above parity to the dollar once again. And versus the euro, the franc is really strong!

Besides the profit taking, we’ve had some soft data reports around the world that have put a damper on things. For instance, Yesterday in Canada, their July retail sales unexpectedly fell, causing selling in the loonie (CAD).

In addition, overnight, New Zealand’s kiwi (NZD) had a rough go of it, after the government printed a very weak second quarter GDP of just 0.2%… The thing that has scared kiwi holders is the fall off of GDP in the second quarter was before the earthquake that occurred earlier this month. With the fall off of GDP since the earthquake, there are fears that New Zealand’s third quarter GDP could dip negative… And that would be the telling blow to any thoughts that the Reserve Bank of New Zealand (RBNZ) would hike rates this year… Instead, I see the rebuilding after the earthquake pushing fourth quarter GDP to strong levels, and the RBNZ coming back to the rate hike table in 2011…

And in the Eurozone this morning, the Eurozone PMI (manufacturing Index) was disappointing, as it remained at 53.8, when it was expected to rise to 55.7! And the really disappointing data was in Germany, where manufacturing is king… The German numbers were weaker than previously… So… The euro has seen a 1-cent fall off its price overnight… OUCH!

The euro IS still trading above its 200-day moving average though, and that’s a good thing…

Yesterday, in the US… We had home prices data that really should have shook the markets to the core, but there’s too much periphery stuff going on these days… But for those of you keeping score at home… US house prices fell 0.5% in July to the lowest level in nearly six years, according to data released from the Federal Housing Finance Agency.

Recall… I’ve contended for some time now that we would see another 10% drop in home prices before reaching the bottom that the US government told us we reached a year ago!

There’s not much in the data cupboard for us to see here in the US today, but we will see the Initial Weekly Jobless Claims.

So, that leaves us to the BIG TALK overnight… And that is the saber rattling going on between the US and China… The US is now demanding that China allow a 20% appreciation in the renminbi (CNY) versus the dollar… China barked back saying that a 20% appreciation of the renminbi would be devastating to them and cause many bankruptcies…

Here’s the wild card in this whole thing… Now Japan is siding with the US and suggesting that China needs to allow appreciation of the renminbi… That’s all they need in Asia right now, is for these two giant economies to get into a hot debate…

Well, the President will be meeting with China today, and also Japan… Let’s hope he beats on Japan, as much as he beats on China… But in the end, isn’t this really a bunch of theater? This administration, like the administration before it, doesn’t have the answers, so they “deflect” and blame China for our problems… When in reality they should be thanking China for taking on so much of our debt the past decade! If China’s economy hadn’t woken up a decade ago, the problems for the US deficit spending would be even greater than they are right now!

There are reports this morning that The Bank of England (BOE) might roll out another round of stimulus to boost the struggling recovery, according to minutes of a Monetary Policy Committee meeting. Some committee members expressed concern that headwinds to private-sector demand are “somewhat stronger than previously thought.” The financial market has taken the language as a signal that the central bank is warming to more quantitative easing.

All I’ll say to that is, that’s another reason to believe the FOMC will be rolling out their own quantitative easing (QE) because… For over two years now, the stuff that happens in the UK is a precursor to what will happen here in the US.

Before I head to the Big Finish, I want to point out a story I was reading on the Bloomie this morning, about the Aussie dollar… Commonwealth Bank of Australia made a bold comment last night, saying that the Aussie dollar will reach 97-cents by the end of this year, and $1.02 by next March 2011… WOW! They also said they thought at the same time in March 2011 kiwi would be 76-cents…

Of course, you have to be careful about reading too much into reports like this, as you never know, what their motives are for writing this… Most of the time, I take these with a grain of salt… But Shoot Rudy, this one is so bold!

And speaking of bold… Gold went up, then it went down, then it went back up yesterday, and this morning, while the currencies have sold off their lofty levels, (except Swiss francs), gold is trading at the same level it was yesterday morning!

Then there was this… I saw this in The Washington Post yesterday… In order for the United States to recoup all of its $50 billion investment in General Motors, it must sell its ownership stake at $134 a share, according to the special inspector general of the government’s bailout programs. The estimate comes as the automaker readies itself for a public stock offering, setting the stage for the government to withdraw from its majority stake in the company.

The price needed for a full recovery of the US investment is far higher than shares of the automaker have ever reached, and some analysts and government officials have expressed doubts that the United States will be able to recover the money.

To recap… The currency euphoria hit a roadblock yesterday afternoon, and overnight, as profit taking has turned to hard selling. Soft economic data is adding to the currencies’ problems this morning. Home prices fell 0.5% here in the US, and there’s a ton of saber rattling going on between the US, China, and now Japan has been added to the mix!

Chuck Butler
for The Daily Reckoning