RBI Cuts Internal Rate for 5th Time in 17 Months

And now… today’s Pfennig for your thoughts…

Good day, and a wonderful Wednesday to you!

Just when it appeared to be safe to get back into the water, along came the BLS. That’s how I view the goings on since last Friday. Fed Chair Janet Yellen had set the table for the currencies to fill up on whatever they wanted, and what they wanted was to eat away at the dollar’s strength. That was going along just fine and dandy, until the BLS decided to crash the party and take away the punch bowl. And it’s been the aftermath of a crashed party since.

The dollar is still holding the conn again today, and today the dollar has even beaten back the Japanese yen. And gold is down $5. So once again, we are looking at an all-out assault by the dollar on the currencies and metals. The Aussie dollar (A$), Hong Kong dollar, Polish zloty, Hungarian forint, and Singapore dollar are at least flat to up so small I would consider them flat on the day so far.

The Reserve Bank of India (RBI) Gov. Rajan, brought yet another rate cut to the party last night, cutting rates 25 Basis Points from the repo rate bringing the internal rate to 6.50%. This marks the fifth rate cut from Rajan in the past 17-months, that has seen 150 Basis Points taken from the internal rate. Rajan also lowered the Reserve Ratio Requirement, and told the markets that he would buy bonds if needed.  Rajan has done a lot to keep the Indian economy going and this latest move to inject more liquidity into the Indian economy will go a long way toward achieving that goal.

But Rajan has a lesson to learn. And that is you can lead a horse to water, but you can’t make it drink. You can lead banks to lend more money, but if consumers aren’t borrowing, you’ve wasted a lot of monetary policies. One would think that just by watching the U.S. go through this leading the horse to water thing, that it would be the last thing on your list to try. But, I get it. Every country thinks “they are different” and “that what happened in the U.S. can’t happen to us”. The rupee traders aren’t buying it, and sold rupees after the rate announcement.

The price of oil jumped higher by $2 in the last 24 hours. Bouncing off the $35 handle to a $37 handle this morning. But I once again, I don’t think anyone is impressed, especially the petrol currencies. And even though the oil price did drop below the recent trading range, it only lasted about ½-day there. So, to me, the trading range for oil remains in place, and these bumps higher or drops lower don’t mean much, and that’s why no one is impressed. There are still those sages out there that remain steadfast in their calls that the price of oil will fall to $20. I have stayed away from the whole “call the oil price” game. I just don’t see how the industry survives with all the supply, and the price below the cost to produce.

I was going through Bloomberg this morning and came across an article that certainly had my attention, let’s see if it piques yours. Here’s the title: Currency Traders Brace for Wild Ride as Volatility Curves Invert. The article refers to how the for the first time since 2010, Traders of all five of the world’s most transacted currency pairs are more wary of price swings in the next three months than over the next year. That’s an anomaly in that usually longer-term measures of volatility are higher than short term. Hmmm, what does all this mean?

Basically it means that traders feel that there’s just too much stuff including fundamentals, Central Bank moves, geopolitical tensions, and other fears going on right now, that could provide wild swings in the currency prices. I’ve always been one to shrug off short-term moves in currencies and instead focus on the trend, which was put in place by fundamentals. But stuff like this always catches my attention, because I think when traders publicize their thoughts, it becomes a self-fulfilling prophecy.

The Chinese renminbi saw another depreciation at the fixing last night. Last week it was “appreciation week” and this week it’s “depreciation week”. Keep ’em guessing, right, China? And to think I was doubting myself last week, thinking that my call that the Chinese would continue to depreciate the renminbi!

Come on Chuck, why would you doubt yourself? You’ve always been a man of conviction, what you believe in is what you believe in, no wavering, no wishy-washy thoughts. Well, in my defense, I did think that the Yellen effect had carried over to the Chinese. And maybe it did, and maybe it didn’t. Oh, stop with the excuses! You, stumbled, fumbled, and went head first into this, just stand up and admit you were wrong last week! OK. OK.  I was wrong, thinking the Yellen effect had come to China. There! Satisfied now? Well, yes. That’s much better.

I mentioned above that even the Japanese yen, which had been on a tear, was losing ground to the dollar this morning. At this point, I don’t know if this is profit taking, regular trading, or even Bank of Japan (BOJ) intervention. These things usually get sorted out later. Where yen goes from here will be interesting to watch. I believe that the fundamentals of Japan warrant a much weaker currency, but fundamentals haven’t been in play for some times now. So, will traders challenge the BOJ and keep pushing the currency appreciation envelope further and further with yen, or will the BOJ fight back?

The Aussie dollar (A$) sure hasn’t gotten its bang for the buck from the RBA leaving rates unchanged, and not bashing A$ strength. I’m surprised by this, but maybe the A$ has gone too fast with its rise. I know this, that the A$ has the Sword of Damocles hanging over it, and that sword is represented by the U.S. Fed. Will the Fed continue to tighten interest rates, or have they truly run out of steam? With the Aussie economy drifting along, it wouldn’t take much to reverse recent A$ strength. And that includes a potential narrowing of the rate advantage that Australia enjoys over the U.S. and Europe, and Japan, and the former mothership the U.K.

I used to say that the A$ was so dependent on China, but now it appears that the markets are focused on what the Fed might do to narrow the rate advantage that Australia enjoys. Hey! At least rate differentials are fundamentals!  You don’t know how happy that makes me to see currencies trading on fundamentals!

The U.S. Data Cupboard yesterday had the Feb. Trade Balance, which always makes me laugh, because the world “balance” should be replaced with “deficit”, because that’s what it has been as long as I can remember. A deficit! Well, that Feb. Trade Deficit widened by a larger margin than what was expected growing to $47.1 billion, greater than $46.2 billion that was expected, and much larger than even an upward revised by $200 million, January Deficit was at $45.9 billion.

The Trade Deficit is a drag on GDP folks, and this widening of the deficit has put my GDP tracker at a very low number for first QTR GDP.  0.4% right now, folks. Hey! I don’t make this stuff up! Of course the 1st QTR just ended, so it will be some time before we see the preliminary prints of GDP. Just mark that down that I say that first QTR GDP will be less than 1% (at this time) and if that is what prints, then we’ll all know why it was easy for Janet Yellen to keep rates unchanged in the 1st QTR.

Today’s Data Cupboard just has the Fed’s FOMC Meeting Minutes (FMM) from their meeting a couple of weeks ago. I think the markets are going to be quite interested in these minutes in that they’ll want to see if the fed members were showing signs of dovish thoughts before the Janet Yellen speech confirmed the dovish stance of the Fed about 10 days later..

Well, as I stated above, gold is down $5 this morning after posting a nearly $16 gain ($15.90) yesterday. Did you see or hear that two traders have been fined $1.3 million each in civil penalties for “spoofing gold and silver futures markets”. I’ve explained this before, but for those that are new to class: spoofing is a trading act where large orders are entered and can be buys or sells, to influence the markets that a large buyer or seller is entering the markets, thus getting them to follow, but at the last minute the large order is cancelled. Thus removing the reason the markets followed. That’s called “spoofing.”

I know you probably didn’t see this, so that’s what I’m here for! But the World Gold Council (WGC) sent out a new report last week, which was basically their market update, and in the update the WGC talked about the effect that negative interest rate policies have had on gold, and said the following (please take note that this is the WGC speaking); “Negative interest rates double gold returns, and Investors should consider doubling their gold allocations amid negative rates.”

Well, those Panama Papers sure are getting a lot of air time on TV and print space in papers around the world! Yesterday I brought this to your attention and today I have an article from the NY Times that I found in Ed Steer’s letter this morning that talks about the Icelandic PM resigning because of what’s in those Panama Papers. Here’s the link to the story, and here’s your snippet:

The revelation of vast wealth hidden by politicians and powerful figures across the globe set off criminal investigations on at least two continents on Tuesday, forced leaders from Europe to Asia to beat back calls for their removal and claimed its first political casualty – pressuring the prime minister of Iceland to step down.

Public outrage over millions of documents leaked from a boutique Panamanian law firm – now known as the Panama Papers – wrenched attention away from wars and humanitarian crises, as harsh new light was shed on the elaborate ways wealthy people hide money in secretive shell companies and offshore tax shelters.

The repercussions have come quickly. In Iceland, Prime Minister Sigmundur David Gunnlaugsson, confronted by demands for his resignation after documents revealing that he and his wealthy wife had set up a company in the British Virgin Islands led to accusations of a conflict of interest, asked his deputy to take over on Tuesday.

In Britain, Prime Minister David Cameron faced calls for a government inquiry and accusations of bald hypocrisy by championing financial transparency – when the leaks showed that his family held undisclosed wealth in tax havens offshore.

Chuck again. Oh, this is just the tip of the iceberg folks. Just the tip of the iceberg. I wonder who will be next to be signaled out?

That’s it for today. And with that I’ll send you out to start your own wonderful Wednesday. Be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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