Moody's Leaves Spain's Credit Rating Unchanged

Front and center this morning, the currencies are on the warpath versus the dollar this morning. It’s been about a month (when QE3 was announced) that we’ve seen moves like these by the currencies versus the dollar. So, what brought about this strong upward move? Well, I’m glad you asked! Late yesterday afternoon, about the time everyone was ready to head out the door, Moody’s announced that they were keeping Spain’s credit rating unchanged at a notch above junk. Remember my discussion about this long-awaited announcement by Moody’s?

Well… In case you missed class that day, I explained that by having Spain’s credit rating fall to junk bond status, it would really hurt Spain and the euro (EUR), for, if bonds were junk status, they would have to be removed from any global bond indexes. And if they were removed, that would mean they would be sold, along with the euro. But that didn’t happen, and you can bet your sweet bippie that there were lots of trades betting on this to happen that had to be reversed, before the losses mounted. And, so, the party spilled out into the streets, with traders and investors buying euros like there’s no tomorrow!

But the Moody’s announcement isn’t just all about the euro. It’s a stamp of approval for risk. Remember last week, I told you that it appeared that the risk sentiment was returning. Well, I would have to say that it’s in full force this morning! Overnight we saw China allow the renminbi/yuan (CNY) to reach another all-time high versus the dollar. I would have to think that, given this move, the Chinese know that their print of third quarter GDP tonight is going to be good. Otherwise, why would they jump in with both feet? Why not wait-n-see?

The Aussie dollar (AUD) has rallied back to $1.0335. I have long been calling the Aussie dollar the proxy for risk and global growth. And so, with the Aussie dollar pushing toward its 200-day moving average of $1.0345, that’s a very indication that it’s risk on. I think the Aussie dollar will have to wait to get past its 200-day moving average of $1.0345, until that Chinese GDP report prints tonight, to confirm that China’s economy bottomed out in the second quarter, and is on the rebound. But then, lines of resistance just aren’t what they used to be in the currencies. Which is to say that the 200-day moving average could be blown past today ahead of the Chinese GDP report. The markets wait for no one…

One currency that’s lagging and hasn’t joined the party in the streets is the Canadian dollar/loonie. The loonie got the stuffing knocked out of it yesterday, when Bank of Canada (BOC) Governor Carney made dovish comments, and pretty much said that no rate hike is coming. So, the markets in their infinite wisdom (NOT!) took those comments to indicate that the next move would be a rate cut. And the loonie was left at home, not able to join the other currencies to party in the streets.

I had a discussion with a Canadian fellow yesterday via email, and he wanted me to know that the loonie is too strong. I simply told him to look at the Canadian fundamentals. They have been strong, and that’s what traders and market participants look for when they want to buy a currency. I’m fully aware that the Canadian government and BOC don’t like it one bit when the loonie gets above parity, but unless they want to cut rates, in the middle of a housing problem, or intervene and sell loonies, their hands are tied.

And that’s what BOC Governor Carney was attempting to do yesterday with his dovish comments. He was doing the old Japanese Jawbone your currency weaker trick. It used to work for the Japanese, but then they never acted on their words, and the markets called their bluff. What will Carney do here? I guess we’ll just have to wait-n-see, eh?

Speaking of Japan… Japanese Prime Minister, Noda, is planning on introducing a new round of stimulus by the end of November. Oh boy! What’s it going to be this time? Let’s see, they’ve tried just about every stimulus in one’s imagination, and done them for two decades now. I guess why not try something again, since it’s worked the 100 times it failed before! I shake my head, and think about how here in the US we’ve followed Japan down this road of economic stimulus. Are our leaders willing to keep following Japan down this road? I sure hope not! But, I wouldn’t put anything past them!

I have a former colleague that really watches data like a hawk, and when I mentioned how retail sales soared in September, he sent me this note: “Chuck — Taking a look at the non-government (a.k.a. seasonally) adjusted figures for September Advanced Retail Sales reported yesterday, year-over-year total retail sales were up only 3% versus a reported 5.4%, while month-over-month figures were actually DOWN 7.5% versus the seasonally adjusted +1.1% reported.” (Thanks, Tim!)

So, once again, it’s all in how you figure the numbers. As I said recently, my dad used to always tell me that figures lie and liars figure. Now, I’m not calling anyone in the government a liar, I’m just questioning the data they keep spitting out. I’m to the point now that I don’t believe one iota of data that comes out of the government. Isn’t that sad? Now… If I were on the Butler patio, you would really get my thoughts on these reports. But, can’t do that here, so I’ll just move along.

Speaking of retail sales… A colleague in NY, Brian, sent me a note yesterday and a link to a story that reported how analysts are looking at satellite images of retailer’s parking lots, to get a true picture of sales. So, I clicked on a couple of the images, and one was from a Wal-Mart, and the other from a Target, and the parking lots didn’t scream “Strong Retail Sales”! So… We have another tool to use to expose these reports for what they are.

Yesterday, the government reported that US Industrial Production increased 0.4% after contracting 1.4% in August. Hmmm… Again, funny how that all appears, isn’t it? And Capacity Utilization gained 0.3% from August’s 78 reading. Oh! And that stupid CPI report for September printed too, and showed that consumer inflation gained 0.6% in September versus August, or 2% annualized. But, remember, the government really only looks at the “Core inflation number” which takes out food and energy, because, these aren’t things we use every day! And the Core inflation number was only up 0.1% in the month. Me? I prefer to not look at any of these trumped up, hedonically adjusted numbers.

Long ago, in a galaxy far away, I told you that inflation is a personal thing. And how inflation affects your pocket book/wallet is up to you and the things you do. Me? Inflation is soaring. And not just 2% in the past year! Of all the reports the government rigs to make look better, this is the one that really ticks me off, but… The markets use the numbers, so I have to at least acknowledge their existence!

Gold (and silver) is attempting to get back on the rally tracks again this morning, with the shiny metal up $3.75 as I write. I find this lagging move versus the dollar to be very interesting. I have to question what’s going on, when the rest of the currencies are taking liberties versus the dollar, the euro is 1.3125, the price of oil is up, and gold lags.

Bloomberg ran an article on physical gold that I found to be very interesting…

“The head of industrial and precious metals trading at Barclays, Cengiz Belentepe, has told Bloomberg that investors are selling their investments in gold ETFs and opting for the safety of allocated physical gold.

“According to Barclays, gold holdings in ETF products are growing at a slower pace than in 2004-2009 because some investors may be moving to physical bullion after initial purchases of an ETF.

“Gold ETFs have a very significant degree of counter-party risk to the many counter parties such as the trustees and the many custodians and sub custodians. The ETF is a second rate form of paper gold in which one becomes an unsecured creditor of a trust rather than the outright, beneficial owner of allocated and segregated coins and bars.”

Chuck again. Well… I guess I could say I told you so. But physical gold either allocated or non-allocated is the preferred way to hold gold in my opinion. And if we could get all those people that buy the gold ETF to buy physical gold instead, the price manipulators would be out of business in a heartbeat!

The British pound sterling/sterling (GBP), really pushed higher overnight, following the euro. But when sterling rallies it really says something about what people think of the US dollar. For the UK is no “seashells and balloons” economy. The Bank of England (BOE) has taken a page out of the Fed’s book on keeping Treasury yields low, by buying huge chunks of Gilts (British government bonds). So, things here aren’t good. But when sterling rallies versus the dollar, it makes one sit up and notice, eh?

I received a note from a reader who wanted me to talk about the Mexican peso (MXN). My initial reaction was, “Do I have to?” in a whiny voice, too! The peso has really been one of the better performing currencies this year, and one has to wonder why… Yes, they have 4% interest rates, but where’s the “risk premium”? I explained this risk premium a few times in the past, so I won’t go there again, but it’s important to note many times in the past investors have gotten burned to a crisp investing in pesos. I would want to be paid a premium over the internal interest rate to take on that kind of risk.

But like Canada, Mexico relies on the US economy and tourists. And since I’m talking about Mexico… My friend, Ed Steer, whom I met 5 years ago in New Orleans, ran a story on Mexican gold this morning that fits in well here. “The Mexican journalist Guillermo Barba, who last year revealed via GATA that the Bank of Mexico was refusing to disclose the location and form of the 93 tonnes of gold it supposedly had purchased recently…announced this week that he has pried the answer out of the bank, using Mexico’s freedom-of-information law just as GATA has been using US FOI law.

“Ninety-four percent of Mexico’s gold, Barba reports, is said to be vaulted at the Bank of England in London…that is, at the center of the fractional-reserve gold banking system.

“So much for Mexico’s sovereignty…and so much for Mexico’s gold.” – GATA (from Ed Steer)

And then the Singapore dollar (SGD), reached a 1-year high versus the dollar last night at 1.2160 — a very strong move for the Sing dollar…but right in step with the strong move in the renminbi. Remember, these two pretty much go lock-step with each other!

To recap… Moody’s left Spain’s credit rating a notch above junk last night, thus taking a huge weight off the shoulders of the risk assets, and sent the euro soaring past 1.31, the Aussie dollar past $1.0325, and the rest of the usual suspects with similar gains. Even sterling rallied versus the dollar; and with all that’s wrong in the UK what does that tell you about the dollar?

Chuck Butler
for The Daily Reckoning