Oil Jumps to $51

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

Well, yesterday, was pretty much a nothing day. Gold close down $1.50, the Dollar Index continued to drop, but this time by just a few points, and the euro found a way to climb to 1.1370, but that’s about it. All the excitement and hoopla from the Friday Jobs Jamboree, and the Yellen speech on Monday, has been digested, and just like economies, that experience the booms, they need to experience the busts also, and so it was with the currencies and metals yesterday. They didn’t have a “bust” but they also didn’t experience any more “boom”!

The number of very well respected economists/analysts, coming out and dissing on the Fed is beginning to grow. Yesterday it was James Grant, and David Rosenberg. I don’t think you can get much more heavyweight than those two when it comes to analyzing what’s going on in the economy, and then comparing their thoughts with those coming from the Fed. For instance, James Grant said

Let’s conceive that we are not investors but rather basketball players, and the game’s about to be televised and. here’s a final and all people can talk about is the referee. The Federal Reserve has come to occupy the anomalous place of the referee who dominates, overshadows, and is in utter control of the game that he or she is intended to be merely supervising.

And David Rosenberg said:

My forecast is that the long lineup of Fed officials who were so vocal about raising rates this summer are going to be busy at summer school, as they go back to the drawing board to tighten monetary policy. Hopefully they have been silenced for good and learned a valuable lesson that they really should cast their votes at the FOMC meeting rather than in front of the TV Cameras.

I got both of those quotes from Ed Steer’s letter this morning. I really think that this dissing the Fed is going to continue, and take big chunks of their credibility armor away from the Fed. And then I’ll be looking like a genius, the old Swami for saying that this was going to happen way before it did. But that only lasts until the next thing I say and get wrong! HA! The U.S. economy is heading to Recessionville, and soon, (relatively speaking) the Fed will have to undo its December rate hike, and the chickens will come home to roost, like I said yesterday.

The big mover in the past 24 hours has been the price of oil, which climbed past $50 and went straight to $51, without passing Go, and without collecting $200! WOW! Yesterday morning the price of oil was knocking on the door to $50, at $49.90, and this morning, we’re looking at a price of $51.04! 

The Petrol Currencies should be boarding a rocket ship to Mars, but apparently they won’t be joining the Most Interesting Man in the World for that trip. Sure, the Petrol Currencies are bit stronger this morning, but I think that given the dollar drifting lower, that their strength is tied to that and not the move in the price of oil, because, like I just sort of said, the Petrol Currencies should be taking this rise in the price of oil and soaring. They’re up, just not soaring.  Maybe that comes later today.

The Reserve Bank of New Zealand (RBNZ) meets tonight, and like I told you on Monday, it is widely believed that the RBNZ will cut rates at this meeting. But that thought hasn’t stopped kiwi was driving higher to the 70-cent handle, like it has this morning!  The lackluster dairy prices in New Zealand I believe, will lead the RBNZ to cut rates tonight. But then when has a Central Bank really done what we thought they would do lately?  I’m pleasantly surprised that the currency traders have gone out on a limb and pushed the currency appreciation envelope of kiwi this morning.

The euro has a tiny gain overnight, and has lagged the other currencies and their collective reactions to the U.S. Jobs report and the Yellen speech. The euro, which I used to call the “Big Dog on the porch” has really backed off its importance to the dollar. It is still the offset currency to the dollar, but in a recent report the European Central Bank (ECB) announced that the global use of the euro had declined slightly in 2015 and early 2016, as the Chinese renminbi has started to take a larger role in reserves and trade in the international monetary system that is becoming more multipolar. The euro accounted for 19.9% of international reserves in 2015, down 0.6% from the previous year.

The Swiss franc has had a nice couple of weeks recently. I know I leave the franc out of most daily discussions about currencies, because not much goes on there, except referendums on everything. But in recent trading the franc has gained at a faster pace than the euro, and that hasn’t happened in some time. I do believe though that the franc is getting some love right now from those that fear the BEXIT referendum will not go in favor of the pound, and so they are doing their PEXIT (I made that up!) Pound exit to francs.

And the Canadian dollar/loonie, is the best performer this so far this week.  We have neighbors at our place in Florida that are from Canada, and this winter they were lamenting the fact that the loonie had fallen to 70-cents vs. the dollar. And each day I would see them I would tell them that the loonie was getting stronger. The last time I saw them was at the end of February, and the loonie had risen to 72-cents and we all celebrated with champagne on the deck! Well, I bet they’re happier now to see the loonie nearing 79-cents. 

That’s quite a rise in six months, don’t you think? Nearly 9-cents. And it’s not all about the rise in the price of oil. it has a lot to do with the fact that Bank of Canada (BOC) Gov. Poloz, hasn’t, yet, talked about how the strength of the loonie was hurting the economy, and blah, blah, blah. And then add in the fact that the new PM Trudeau, hasn’t opened his deficit spending checkbook yet. But he did promise to do that, so these are two things that could stop the loonie in its tracks, unless the price of oil continues to rise.

The U.K. got some economic news that wasn’t gloom and doom this morning as April Industrial Production surprised the markets to the upside, printing growth of 2% vs. March, with the main driver of the growth being manufacturing.. But don’t run out and get in line to look to buy pound sterling. Most observers are looking at this data as a one-and-done print as there are just too many one-time inputs to the data.  So watch out here, this could be a false dawn, and in fact I can’t believe this potentially one-and-done report was so strong!

The Aussie dollar (A$) continues yesterday’s rise after the Reserve Bank of Australia (RBA) left rates unchanged on Monday night (Tuesday morning for them!). I think that the RBA sees things getting better for the economy, and no longer sees any significant downside risk.  That all bodes well for the A$… But we have to hope that A$ traders don’t go hog wild here, and keep the currency appreciation envelope from crossing the desk. For if the A$ gets out of line with appreciation, the RBA will have to react negatively.

Gold lost $1.50 yesterday, but is up $8 this morning, crossing the $1,250 level in the process! Did you hear about how U.K. pensions are now able to buy and hold gold? The Royal Mint was approved for holding in specific pensions, gold bullion. Right now, investors are allowed to buy 100-gram and 1-kilogram bars, or pooled gold into a 400 ounce gold bar. Coins have not been approved at this time. This just opens up another avenue for gold that had not been open before, and should increase the demand for more physical gold.

And did you hear that former Bank of England (BOE) Gov. Mervyn King came out and said that:

Central Banks have thrown everything at their economies, and yet the results have been disappointing, whatever can be said about the world recovery since the crisis, it has been neither strong, nor sustainable, nor balanced. And I am very struck by the fact that over many, many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. Obviously, there is no high running return, but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept. And I think that’s why even central banks have always had a role in their portfolios for gold.

So, like Big Al Greenspan, now Mervyn King, is coming clean about their respect for gold, something they could never and didn’t say while they ran their respective Central Banks.

The U.S. Data Cupboard yesterday had the Productivity data, which has been a real problem here in the U.S. as it shows weakness, and the quarterly print showed a drop of -0.6%, to go along with the 1% drop in the previous quarter. And Consumer Credit (read: debt) slowed in April to $13.4 billion from the March number of $28.4 billion! This was a little surprising to me, and I wouldn’t doubt for one minute that it won’t be revised upward next month, as April saw Retail Sales rebound. Today’s Data Cupboard is basically empty with only the JOLTS data (job openings). So, this empty data cupboard adds to the Nothing kind of day so far.

This article came from the Bloomberg, and is titled: China Gives First Investment Quota to U.S. to Boost Yuan Use. Well, you knew by reading that title that I would be all over that like a cheap suit. And so you can read the whole article here, or here is your snippet:

China will give a 250 billion yuan ($38 billion) investment quota to the U.S., the largest after Hong Kong, as the Asian nation increases efforts to broaden use of the yuan overseas and lure capital back to the mainland.

The Chinese currency quota will be allocated under the Renminbi Qualified Foreign Institutional Investor scheme, the People’s Bank of China Deputy Governor Yi Gang said at a Tuesday briefing in Beijing on the sidelines of the two-day U.S.-China Strategic and Economic Dialogue. This is the first time China has given the quota to the U.S., which allows overseas institutions to use the yuan raised offshore to invest in onshore capital markets. China also selected an American bank to clear yuan transactions outside of the mainland.

Chuck again. Now, don’t you think that it would have been a better time to announce this when the renminbi was appreciating nearly every day, instead of depreciating nearly every day? I do. But I know that the timing just wasn’t right here. And so it’s being announced now, which probably won’t lead to long lines to buy, right now.

That’s it for today. Now go out and have a wonderful Wednesday, and be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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