Renminbi Appreciates for the Third Consecutive Day

Yesterday morning, the currencies and precious metals were soaring versus the dollar, and I said we would have to see what the NY boys and girls thought about it all when they arrived at their trading desks. Apparently, they didn’t think too much about anything, as the currencies just drifted the rest of the day. Yes, there was some profit taking, but not much, leaving the currencies and precious metals adrift…

The Brazilian real (BRL), got smacked by the Brazilian Central Bank, which bought dollars to stem the real’s rise… Ty got up from his desk yesterday, and said, “Hey, Chuck… As you said last week, Brazil, Switzerland and Japan have all seen their central banks intervene this year to stem their currency’s rise… And look at those currencies now.”

Yes… Those Central Banks have failed miserably at keeping their respective currency’s value down… What they have been successful at is spending money that doesn’t belong to them, and losing it! That’s right… If I’ve told you this once, I’ve told you it a dozen times, and that is simply: The government doesn’t have money. The only money they have they stole, I mean got from taxpayers… So, either the central bank prints up money (like we do here in the US) to intervene, or they spend taxpayers’ money… Hmmm… Oh, I guess they could also spend the trade surpluses they accumulate… But in this case, only Japan has a trade surplus…

And in the end… We all know that intervention doesn’t work!

So… The currencies have rebounded a bit from yesterday’s drifting about. Gold is off by $3 this morning… I thought I would shift gears this morning, and bring you a couple of pieces on gold and silver by “other writers”… People whom I have the utmost respect for… Richard Russell, and David Galland… I used to work with David Galland… Talk about a wordsmith, and marketing genius… And the incomparable Richard Russell, what else could I say about him… A true gem…

OK.. First, Richard Russell, whose quote I got from Agora Financial’s 5-Minute Forecast

“Gold is overextended and overbought,” observes Richard Russell, the dean of all newsletter writers everywhere. “So what else is new? Everybody knows that, and what everybody knows in this business is usually worthless.

“This is one powerful bull market, and so far, the gold bull isn’t giving bears a snort. So I sit with my gold position and wait for the ‘dollar-bugs’ to be right. Would you rather sit with dollars or gold?”

Looking at his charts, Russell concludes, “Gold could decline to the $1,300 level and still be in a bullish trend.”

OK… Then there is David Galland, whose words can be found in his Daily Dispatch

David was talking about silver… Let’s listen in…

Warming up the digits this morning, I can’t help but note that gold broke in to new record territory – above $1,380 in the overnight markets.

A new record in nominal terms, that is. To top the previous high in inflation-adjusted dollars, gold will have to approximately double from here.

Silver, however, hasn’t even made it halfway back to its prior nominal high of $49.45 an ounce, achieved on January 21, 1980. In order to break in to new territory in inflation-adjusted dollars (using the same CPI calculation methodology used in 1980), silver would have to rise to over $250 an ounce – five times where it is today.

David goes on to mention the industrial use of silver, and how the industrial use destroys the metal, which reduces the amount of above-ground silver that’s available for investment… When I’m speaking to an audience, that is something that I mention almost every time I talk about silver…

Overnight, China has once again allowed a greater-than 1% appreciation of the renminbi (CNY) versus the dollar! WOW! That’s three days in a row! Last night’s figure was 1.01%… I have to wonder if China is playing a game with the US and Tim Geithner, allowing this quick appreciation to get Geithner to back off his attack on China, and then after the dust settles, China goes back to the baby steps of appreciation for the renminbi. Just a thought… I’ve seen China play these games with other US Treasury Secretaries, O’Neil, Paulson, and now Geithner…

With China allowing the renminbi to move so much this week, Singapore dollars just follow along. I told you yesterday that the Monetary Authority of Singapore has turned on the green lights to greater appreciation of the Sing dollar, so this all plays nicely with my thoughts that Asia and Pan Asia are going places, economy-wise, currency-wise, and strength-wise…

Here in the US the data prints yesterday were not good stuff… Here’s the skinny… First, the trade deficit widened, (like I said I thought it would) even greater than forecast, jumping to $46.3 billion from $42.6 billion in July… OUCH! The Producer Price Index (PPI) (wholesale inflation) edged up much more than forecast, pushing the year-on-year wholesale inflation level to 4%… And then the Initial Jobless Claims ratcheted up to 462,000 from 449,000 the previous week.

I know I’ve been avoiding talking about the foreclosure mess going on here in the US… It now appears that banks might have to end up taking back the mortgages… That’s weighed heavily on bank stocks… In fact, yesterday was one of the few days we’ve seen since 2008 where stock sell-off and currencies hold a bid. There is a huge cost that financial institutions might face to put the foreclosure crisis behind them. Estimates have run to $10 billion or more. According to a report from Branch Hill Capital, Bank of America might be hit with more than $70 billion in losses if it is forced to buy back mortgage assets from investors.

And just in time for the Frank-Dodd financial regulations… I think that in the end, all this foreclosure mess is just prolonging the inevitable agony… The foreclosure will eventually catch up… You’re not supposed to get something for nothing!

OK… Enough of that!

Today’s data cupboard has the stupid CPI data for September, the U. of Michigan Consumer Confidence, Business Inventories, and most importantly, retail sales for September. The BHI (Butler Household Index) indicates to me that retail sales will be disappointing, and that should be a drag for the dollar today.

Getting back to the currencies for a minute before we head to the Big Finish… The investment arm of British insurer, Aviva plc, is telling their customers that the euro (EUR) will climb to 1.45 before year-end. Here’s a quote from them… “This year’s sovereign debt crisis was a strong test of the ECB’s credibility. They’ve come out of the fight with their head up, winning. We are bullish on the euro.”

Hmmm… Yes… The ECB, in my opinion, didn’t have to prove anything regarding credibility, they already had it. And yes, they’ve come away from the fight in good shape, but the questions around the GIIPS sovereign debt still remain… I think that walking on eggshells right now would be prudent with regards to the euro.

As I told you yesterday, the negativity toward the dollar is great right now, with the pending quantitative easing by the FOMC hanging over the dollar like the Sword of Damocles… But there were no new QE developments yesterday… Hmmm… There’s a great story on Bloomberg this morning with the headline, “Currency Vigilantes May Replace Bond Counterparts”…

It’s all about how there used to be these “bond vigilantes” that would enforce government fiscal discipline… But with all the government asset purchases (QE), the former “bond vigilantes” are unable to perform their vigilante role… So… The thought is that maybe currency traders could replace the “bond vigilantes” and become… Da…dada…da… “currency vigilantes”…

I think we’ve seen some of this already. Once the FOMC indicated they would use more QE, the dollar has been sent to the woodshed… The currency vigilantes were already at work, punishing a government that chooses to print their currency, and expose their economy to raging inflation…

Then there was this…  From Reuters this morning…

The average mortgage rate on a 30-year fixed loan in the US dropped to 4.19% this week, down from 4.27% last week, according to Freddie Mac. The average rate on a 15-year mortgage slid from 3.72% to 3.62%. The ongoing decline has done little to bolster property demand, but it has spurred refinancing.

Hmmm… I see this as noting that the bond bubble is being pumped full of more air…

To recap… The currencies and metals drifted most of the day yesterday, after stocks sold off, and the US data that printed was soft or not good at all. But theses two asset classes held their bid, and that was important. The feeling toward the risk assets this morning is more of a bias to buy, but I think the data today will determine the true direction. China allowed yet another, more than 1% appreciation of the renminbi versus the dollar overnight… Something’s awry here…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning