Oil Price Rise Pushes Petrol Currencies Higher

We settled down in the currencies and metals yesterday, after Tuesday’s wild swings. Big Ben Bernanke was on the hot seat yesterday, as Ron Paul asked some questions that made the Fed chairman squirm in his seat. I watched some of the proceedings, but then decided I had seen Big Ben not really answer the question that was asked of him enough, and decided to get back to work.

The market gurus were still wishing and hoping and thinking and praying, planning and dreaming, each night that Big Ben would mention additional stimulus, but were disappointed once again. At least, this time, they didn’t take their frustrations out on the risk assets. No, this time, they took their frustrations out on the dollar!

I hate to beat on this subject so much, but one thing that really ticked me off yesterday during the testimony on the outlook for the economy was the lawmakers kept asking Big Ben about his previous implementations of stimulus, and all he would say was that it was “productive,”  but would never give examples of how “productive” they were. We, as Pfennig readers, all know what he meant by “productive.” The dollar was sold, and stocks rose in value. Our central bank verified a couple of years ago that their main assignment was to prop up asset values.

OK, enough, Chuck! Can’t you see the people want to move along, and not spend all morning on your problems with the central bank? Sorry. Let’s see. This morning, the currencies have added to their gains from yesterday. The euro (EUR) is back to 1.23, and the Australian dollar (AUD) is trading with a $1.04 handle this morning!

We could see more gains today in the risk assets if the economic data that print continues to be weak. The main piece today is the weekly initial jobless claims. This data have come front and center today because of last week’s fall in the number of claims.

I explained on Friday that apparently nobody in the media had noticed that the data were from the holiday-shortened week, so they were bound to show a fall in the number of claims. So today, we’ll see if I was right. If I am right, the markets are going to jump on that “we need additional stimulus” bandwagon again, and that would send the dollar to the woodshed.

There is one piece of data today that normally gets pushed to the back of the closet, and that is the Philly Fed Index. This is one of those regional manufacturing indexes that normally don’t get much attention, and this one won’t, either, by the masses. But here at my desk in St. Louis, Mo., home of the 11-time world champion Cardinals, I came across something last month that was very interesting. And that is the relationship of the Philly Fed Index and the risk assets.

It appears to me, from the graph I pulled, that the Philly Fed Index’s performance dictates the performances of the risk assets. Take last month’s print for an illustration. Last month, the Philly Fed Index (PFI) printed a negative -16.6, and the risk assets performed very poorly: The euro fell 1%, the A$ fell 1.5%, stocks fell 2% and oil fell 3.5%. Since then, these risk assets have recovered considerably (except the euro, which has other problems also weighing on it).

So if this relationship holds true today, we could be in for some poor performances that hopefully would be offset by the markets wishing and hoping for more stimulus. I say that because the consensus for the PFI, which will print this morning, is for a negative -8 figure (better than last month, but still very weak). So it could be a very interesting day. Traders will love the volatility; I will sit here and shake my head, for these knee-jerk reactions to things drive me crazy!

While we’re talking about economic data here in the U.S., housing starts yesterday printed strong for June, and June capacity utilization and industrial production printed OK. They didn’t show the rot on the vine they showed last month. So the hand basket the U.S. economy is in isn’t exactly going to hell right now, but these tiny sparks of economic strength will die out when the rest of the economy weighs too much on it.

Today, we’ll see leading indicators for June. I expect them to turn negative, which will be a very good indicator that the economy is headed south. There will be no data prints tomorrow, so today is the last shot of data for the markets until next Monday, so a lot of attention will be on today’s prints.

The euro was rallying this morning, to 1.2320, and then the results of Spain’s latest auction became a real drag on the euro, causing it to fall to 1.2270. But it has recovered back to 1.23, while I’ve been typing my fat fingers away here.

Recall that about a week ago, I told you that German T-bills were auctioned with a negative yield? Yesterday, German two-year notes also had a negative yield. That’s absolutely crazy, folks! The demand to own German debt by Europeans is very strong. Obviously, my old line about how investors now “look at a return OF capital being more important than a return ON capital holds true here, eh?

Besides being unlawful for them to do so. You can see why the Germans throw such a fit about issuing a eurozone bond — as long as they can get such cheap financing, why would they want to have to pay much-higher interest rates that would be assigned to a bond that included the peripheral countries like Greece, Italy, Portugal and Spain? Club Med.

In Asia, the market gurus there are also hoping for additional stimulus, but not from the U.S. Fed, although they wouldn’t mind see it come from there. No, here, they are looking to the Chinese to announce additional stimulus measures.

One of my favorite currencies — and that’s not a solicitation to buy it; it’s just a statement of fact — is the Singapore dollar (SGD), which continues to follow the Chinese renminbi/yuan (CNY). Now that the renminbi/yuan is appreciating versus the dollar again (three consecutive days this week) the Sing dollar is pushing the envelope of what the Monetary Authority of Singapore (MAS), the people responsible for setting the trading bands for the Singapore dollar, their tolerance for Singapore dollar strength. And with inflation under control in Singapore, it gives the MAS more room to maneuver the Singapore dollar.

I don’t think the MAS, which all central banks should follow, use the Singapore dollar as their main tool for keeping inflation under control. That’s right, the MAS uses the exchange rate of the Singapore dollar, rather than borrowing costs to conduct monetary policy, adjusting the trading bands that the Singapore dollar is allowed to move in. This all may sound complicated, but it’s not, and the MAS has always been very transparent with their moves.

So having said all that, the Singapore dollar will appreciate IF the Chinese renminbi/yuan appreciates. Because right now, the trading band for the Singapore dollar is sloped to appreciation, but will be held back if the Chinese renminbi/yuan goes into hibernation again.

Speaking of pushing the envelope of appreciation, the Japanese yen (JPY) is back in the 78 handle this morning. This has just got to tick the Japanese officials off to no end. They’ve tried everything in the book, and some things outside of the book, to get the yen weaker. It’s just not happening on their timetable!

The price of oil has really rebounded this week, and trades with a $90 handle this morning. When the price of oil moves like this, the petrol currencies of Norway, Canada, Brazil, Russia, the U.K. and even Mexico perform better. For instance, Bloomberg tells me that the Russian ruble (RUB) has gained for eight consecutive days, which is the longest winning streak for the ruble since December 2010, when it gained for 10 consecutive days.

The Canadian dollar/loonie (CAD) also is seeing a boost from the rising price of oil, as the loonie moves past 99 cents on its way back to parity! (Maybe, just my opinion, I could be wrong!)

And gold is up $14 this morning. That’s a nice figure this morning. Silver is up 30 cents, so all-around a good, strong performance this morning for the metals. Now we sit here and wait for the price of gold to get taken down by the manipulators — it will happen, maybe not today, and not because they fear it to be too brazen. They have no fear of the regulators.

Then There Was This… I saw this on Reuters this morning that another California city is seeking bankruptcy protection (maybe). Yet the media want to focus on Greece? This stuff is going on here in the U.S., and our media don’t cover it? But somebody setting a building on fire in Greece is important to us. Oh well, here’s the story. Get ready for this kind of stuff to come to a city near you!

“The city of Compton, a city of 93,000 people located on the outskirts of Los Angeles, must decide by Sept. 1 whether to seek bankruptcy, according to its two most-senior financial officials.

“Such a move would see it join a growing number of deficit-hobbled California cities that have used the filing to restructure onerous debt loads.

“Compton, which has an accumulated $43 million deficit and has depleted what had been a $22 million reserve, will run out of cash to make its payroll on Sept. 1 at its current cash consumption rate, city comptroller Steven Ajobiewe told the city council during a July 17 meeting.”

Chuck again. I’ve said enough about this trend. I’ll just continue to report on it, because eventually this will make the news.

To recap, Big Ben was at his best yesterday, not answering questions. That’s called, in media training, deflection. But the markets took their frustrations out on the dollar this time, and the risk assets are stronger this morning. The euro is back to 1.23, and the A$ $1.04. The price of oil is rising again, and pushing the petrol currencies higher. And the Singapore dollar is pushing the envelope of appreciation that the MAS allows.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning