Japan Trade Deficit Hits Global Growth Campers

I see that the euro (EUR) looks as though it is trading in yesterday’s clothes, but the Australian dollar (AUD) has slipped below $1.05 again. Gold has put in a nice week of performance so far and is up $4 this morning. There’s not much in the way of data today here in the US, except the FOMC meeting minutes that will print this afternoon. And US Treasuries are making a comeback, once again! So there are your headlines. Here are the stories for today.

US Treasuries have found some love for the first time in over a week, and the love comes from all places. Investors fleeing Japan. Last night, Japan reported a July trade deficit of 517.4 billion yen ($6.5 billion). Remember when you could hang your hat on the outlook that Japan would print a trade surplus? But that all changed this year, and now Japan is like the US with its twin deficits of trade and national debt. So US Treasuries saw some buying. But isn’t that like going from the frying pan into the fire? I sure think so!

But what this Japanese trade deficit points out is just how weak the global growth picture is. And that’s why the Aussie dollar (A$) is getting sold this morning. I’ve long said that the A$ is the proxy for global growth, so this is not a good picture for global growth. But if it’s like just about every other piece of data we see these days, give it a couple of days and everyone will forget about it! I think that we could see this negative feeling toward global growth be pushed to the side of the road, if the meetings in Europe this week can smooth the ruffled feathers of the markets.

But the euro was unaffected. Interesting, eh? After hitting a six-week high yesterday, the currency is just a tad off of that six-week high this morning. And in the category of Believe it or Don’t, Germany received bids exceeding their targets for 2-year notes with a 0% yield. Go figure. It’s become, once again — as I’ve said this multiple times over the years — a case of it being more important to have a return OF capital than a return ON capital for these investors. I get it for the eurozone peripheral country investors. They have to put money somewhere, and they sure don’t get a warm and fuzzy about their own country’s outlook, and they could invest in Japan and get the same 0% or go to the US and get near zero, but have to deal with a Treasury bubble. So they go to Germany. Makes sense to me.

Gold has really turned tail on the range-bound trading trap it was caught in for a long time. Of course, it’s been a long time coming, and hopefully, we can look at the $1,600 level in our rear mirror as gold trends higher and higher. I say hopefully because we’ve seen this breakout before, only to be beaten back down by end of day trading. Will this time be different? Only the Shadow knows. But it’s better to ride this ride than to sit on the side and watch everyone on the ride smiling like Cheshire Cats!

In China overnight, Bloomberg noted that the People’s Bank of China Gov. Zhou said that “adjustments to interest rates and bank’s reserve requirements are still possible. ‘Use of either tool can’t be ruled out,’ Zhou said to reporters.” That’s Zhou now. In the old days (not that long ago, really), if Zhou would have said these things, the global growth campers would be drooling all over themselves with excitement. But on a night when Japan has shown that they have taken a ride on the slippery slope of twin deficits, Zhou’s comments basically went unnoticed by the markets. But not by me! I read what he said, and I’ve told you all this many times in the past. The Chinese don’t say things just to hear themselves talk. They say things so investors and what have you can prepare to be ready.

These remarks by Zhou open the door further for additional monetary stimulus. Remember, folks, China has the interest rates that can be cut, unlike the US and Japan. And China has the treasure chest of reserves that can be used to stimulate their economy, unlike the US and Japan that have to go further in debt to stimulate their respective economies.

I did another interview with The Wall Street Journal yesterday. This has become a weekly thing, which is great! I get to talk about what’s on my mind regarding what’s moving currencies, and whether it gets printed or not, I have someone else listening to me! But I caught the writer at the WSJ off guard a bit when I said that I thought the Chinese were taking the steps to remove the dollar as the reserve currency of the world. I then went about listing all the things China has already done that have been chronicled here the past three years. It will interesting to see if that gets printed. The Chinese renminbi has been back on the appreciation tracks this week, so far.

I doubt it will. That’s too controversial. But you, dear Pfennig readers, don’t have to worry about me being namby-pamby about controversial things! You know, I’m lucky. I get to write this letter every day saying what’s on my mind and giving you the tools (hopefully) for you to make investment decisions, and the sponsor of the letter is a bank! Sure, there are tons of investment letters out there, but they don’t cover the stuff I cover, and if they come close, they sure don’t come from a bank! I’ve been lucky that the two banks (It’s really three banks, but I don’t like the one I left off) that I have been associated with, Mark Twain Bank and EverBank, have allowed me to write this letter..

In Canada this morning, the Canadian dollar/loonie (CAD) has slipped back below $1.01, as traders are fearing the worst for today’s print of retail sales. I personally think that Canadian retail sales will beat the forecasts for a 0.2% rise. I don’t have a Canadian BHI to help guide me, but all the reports I’ve been reading indicate to me that retail sales will be better than forecast. That would be bullish for the loonie. But then later today, Bank of Canada (BOC) Gov. Carney is going to be speaking to the Canadian auto workers. You can bet your sweet bippy that Carney will appease the audience and talk about the strength of the loonie. I say that because the auto workers are getting hurt by the strong loonie, and if Carney can share their pain with them, he just might jawbone the loonie weaker today. So be careful here today.

I had a dear reader send me a note and ask me to talk about South African rand (ZAR). And yes, I do forget to mention what’s going on in South Africa all the time. So, good idea! Long ago, I created the Commodity Currency Basket CD and made certain that South African rand were an equal part of the CD that also had Australia, New Zealand and Canada. During most of the first decade of this millennium, this CD outperformed just about anything (except gold and silver!). I tell you this because when things are good for rand, they are really good, and when they are bad, they are really bad. And to that thought, it’s why I think that owning rand is best when they are part of a basket, so that maybe when they’re bad, the other components of the basket can offset the bad.

If Australia is the proxy for global growth, the South African rand is the Deputy Dawg for global growth. But the rand is so volatile. So if global growth is weak, the A$ might lose a cent, whereas the South African rand would rack up a 3 cent loss. And so on. So all I’ll say is be careful here. If global growth gets on its horse again, then rand will benefit. If not, then rand won’t.

Yesterday, I told you about the story that a senior lawmaker with German Chancellor Angela Merkel’s party told reporters that concessions are possible for Greece so long as Greek Prime Minister Samaras show a willingness to meet the main targets set out in his country’s bailout program. Well, that story has really begun to gain traction. So much so that I truly expect the German chancellor or someone high up in the administration to talk tough about Greece walking the line on the bailout program. The German leadership can’t be seen as “soft” with Greece. The German people aren’t happy about the whole thing to begin with. So if we see or hear some offsetting jabber, the euro could back off this near-six-week high it’s trading at this morning.

I read a story on the Bloomberg about the Swiss National Bank beginning to diversify a significant amount of the euros they own into currencies like the Aussie dollar and Canadian dollar. You may recall me explaining to you how the SNB was maintaining the cross to the euro at 1.20 by selling francs and buying euros. Apparently, the SNB realized that they had a truckload of euros and didn’t want them! Here’s the key thing about the story that’s very true: When central banks buy currencies, they tend to be buy-and-hold investors, rather than “traders.” So this news is bullish for A$s and loonies, eh?

I’m seeing a little slippage in the euro as I write, so maybe the “tough talk” is already happening. And in following up on something I wrote about recently, Brazil and President Rousseff are doing the V8 forehead slap and realizing that the Rio Olympics are only four years away. Since then, the Brazilian real has been slowly edging higher in value versus US dollars. As I said in the previous post on Brazil, I believe we’ll see interest rates begin to rise here in the next year as Brazil attempts to attract foreign investment to help fund the infrastructure projects that will be needed for the Rio Olympics. And that could be bullish for the real. But investors have been once bitten here and probably will be twice shy about holding real, given how they were treated by the Rousseff government in the past.

I just saw a table of worldwide international reserve assets by economy. The comparison of international reserves excluded gold. But the thing that caught my eye was the size of the reserves of the BRICS countries (Brazil, Russia, India, China and South Africa) are greater than the those of the G-7 nations! And when you break the table down by individual country, there are 25 countries in the world that have more in reserve assets than the US. I found that to be a bit unbelievable, but there it was right there on Bloomberg!

Then There Was This, from Reuters:

“Earnings season is drawing to a close and the results raise a number of worrying questions about the economy’s direction.

“For the second quarter, the percentage of companies beating revenue forecasts was the lowest since 2009. For every company that gave a positive outlook, nearly five companies gave negative outlooks, Thomson Reuters data showed.

“Third-quarter earnings estimates are down sharply, and now show a year-over-year decline of 1.8%, which would be the first quarter of negative growth in three years.”

Uh-oh! This could be the beginning of a period of little or no profit for the US corporations, as the 23% unemployment in the country finally catches up to them. That’s not good for the economy, folks, because it could lead to more layoffs. And the vicious cycle really gets rolling.

To recap: Japan posted an awful trade deficit last night, thus putting the kibosh on the global growth campers, which was not good for the A$. The euro was pretty much unchanged from yesterday’s level for most of the morning, but has begun to slip a bit as we head to the Big Finish! Canadian retail sales today and the FOMC meeting minutes are the big dawgs on the calendar today.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning