Markets With Renewed Risk Appetites Rethink China

Are you full? You know, appetite wise? Probably not, for most of you read the Pfennig in the morning, with a cup o’ Joe… The renewed appetite for risk that the markets were displaying yesterday disappeared yesterday afternoon. The markets were full of risk, I guess… For the selling was swift and damaging to the levels that the currencies, commodities, and stocks had gained overnight on the news that China would allow more flexibility in the renminbi (CNY).

See how fickle these markets/traders are? Very! You had a day that everyone was looking forward to, China allowing the renminbi to gain versus the dollar again, and just threw it to the roadside… UGH!

Yes… The China news was good for about 12 hours, and then it was back to fretting about the debt crisis in the Eurozone… The euro (EUR), which had traded above 1.24 for most of the morning yesterday, not only lost the 1.24 handle, but the 1.23 handle too! UGH! The Aussie dollar (AUD) lost about a cent, as did the New Zealand dollar/kiwi (NZD). So did the Canadian dollar (CAD)… The Lone Ranger of “gained ground not given up” was the Swiss franc (CHF), which remained well bid at 90-cents.

This morning, German Business Confidence as measured by the think tank, IFO, posted an unexpected rise to a two-year high this month. Here’s the skinny, folks… With the weakened euro, businesses are eyeing a return to export glory… So, they pushed the confidence survey to a high since May of 2008! Imagine what these guys would be saying if they had known about China’s decision before they were surveyed! For you see… If the renminbi DOES GET (question mark) stronger versus the dollar, and other currencies, it could slow their exports, and Germany could take back the crown of “export king”!

OK… I had one more thought on China’s announcement yesterday, after I had time to think more about it… And you know me… Mr. Conspiracy, right? Well… What if the Chinese just said that about more flexibility to appease the G-20 members that will meet this weekend? What if the Chinese don’t have any intention of carrying out a more flexible renminbi? Wouldn’t it be just like them to give us a rug to stand on while entering the room, and then pull it out from under us? Yes, it would…

A reader sent me this snippet from today’s issue of The International Herald Tribune, distributed in China, which put me on the conspiracy path regarding China:

“The Chinese central bank announced Sunday afternoon that any changes in the value of its currency, the renminbi, would be gradual, in a clear attempt to reassure the Chinese people that a move Saturday evening toward a more flexible currency would not result in a sharp or disruptive change.”

And if the markets have a conspiracy bone in them, they have probably snuffed this out already, and thus the sell-off… But then that’s giving the markets a great deal of credit that they don’t deserve!

Well… There’s a story on the Bloomie this morning titled, “Central Banks show euro losing reserve currency status with loonie gaining”… Hmmm…

According to the writer, “The Australian and Canadian dollars are becoming reserve currencies for central bankers seeking alternatives to deteriorating government credit quality in Europe, the US and Japan.”

Well… That’s right… But let’s put this in perspective… The debt problems of the US and Japan far outweigh those in the Eurozone… So, let’s not be so quick to lump them together, eh?  Bank of America/Merrill Lynch believes that the markets have “overreacted to the debt crisis in Europe” and expects a 10% gain in the region’s stocks by the end of this year… Hmmm…

I guess this is a follow up from the story I told you about last week regarding the thought that Russia would be adding Canadian dollar/loonies to their reserves…

But, let me tell you the most important part of all this… Central banks are seeing the need to diversify… WOW! Just like you and me!

I had someone send me a note regarding my interview with MarketWatch last week, and said I was wrong, that fiat currencies do not give your investment portfolio diversification… Hmmm… On what planet does that not take? If your investment portfolio is denominated in one currency, let’s say dollars, then you have no diversification… And yes… Metals like gold, silver, and platinum also diversify your portfolio… I never said they didn’t!

So… Why wouldn’t an investor look to add currencies from countries that show good fundamental economic growth, and feature an interest rate differential? Like the Aussie dollar? Check out this most recent data print from Australia… Overall earnings of Australia’s commodity exports are set to gain as much as 23% in the fiscal year of 2010 to 2011, led by a 28.5% increase in profit from mineral and coal exports, according to the Bureau of Agricultural and Resource Economics. Fundamentally sound…

Speaking of debt, the US has plenty of it… Like the $1.6 trillion budget deficit that will be posted this year… There are rumors that the US Budget Director, Peter Orszag, will resign soon… Like BEFORE he has to put his name on another budget that shows another $1.6 trillion deficit! That’s just my guess, folks… But who could do that year after year? I couldn’t… But then, debt to me is like kryptonite to Superman… You have to avoid it!

Today… The data cupboard yields the Existing Home Sales data from May… This number will still be a component of two things…. 1. Government assistance, and 2. Much lower Home Prices.

My friend, David Galland, had a good thought about the Canadian dollar in a roundabout way, yesterday… David said that, “with the US set to spend $ 15 billion on offshore drilling” and with “the Gulf shut down”… “The destination of those funds are probably going to head to the tar sands of Canada.”

Well… Gold got caught in the cross winds of the China news and the end of the risk taking euphoria yesterday… At one point, gold was down $22… I had told our metals trader, Jen, that I wanted to buy more gold the next time it dipped… And she reminded me of that yesterday, like a good sales/trader would do!

Silver also backed off, as you would expect, given the $22 loss in the gold price yesterday.

Yesterday I made a Big Deal out of Canada’s CPI report that would print this morning… I was half hoping that it was greater than expected, so that the Bank of Canada (BOC) would have no other choice but to raise rates again at their next meeting next month. That’s kind of a strange thought pattern, eh? Oh well… Canadian CPI for May fell to 1.4% from April’s 1.8%…

So… That news will probably knock some of the stuffing out of the loonie today… Because interest rates are not going higher in Canada with inflation data like that! And here’s my strange thought pattern working again… That’s a good thing for those that want to buy loonies… A cheaper price…

Then there was this… For years now, I’ve told you about the cartel that calls themselves the Fed Reserve… I’ve told you about how it was created, and who threw the Constitution in the trash to create it (Woodrow Wilson)… I’ve also stated on several occasions how we, as a country would be better off without the Fed. It were supposedly created to even out the economic peaks and valleys and stop recessions… They were also supposed to protect the dollar… Well… If I did my job as badly as the Fed has, I would have been fired decades ago! And so… They should also be fired… This is not just me on the soapbox, folks… Anyway… A guy names James Cobb wrote and performs a song about ending the Fed… It’s here, should you want to hear it…

To recap… The strong risk appetite on display yesterday morning, disappeared in the afternoon hours, and the euphoria over the China announcement to allow more flexibility in the renminbi was thrown overboard! The Swiss franc was the only currency that had risen the night before, to hold on to most of its gains, as most others lost at least 1-cent. There are questions about what China meant in its announcement, and therefore, the focus returned to the debt crisis in the Eurozone.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning