Strong US Retail Sales Equals Stronger US Dollar

A chill came over the currencies and metals yesterday, which was about right, when you take into consideration the trading patterns of the past month… Two days risk on; two days risk off, and so on… This time though, the risk off that began yesterday mid-morning, looked to me to be a fundamental move… What? Fundamentals driving currency movements? What, has the world gone crazy? Well… It certainly looked that way… And it all began with the printing of US retail sales…

First, let’s take a trip back to Monday’s Pfennig, when I said this regarding what I expected for retail sales… “We’ll also see retail sales for November, tomorrow… and I would have to say that not only is the Butler Household Index (BHI) flashing strong signals for a strong number, but… Remember, gasoline sales are a part of retail sales… and what have I been telling you for over a month now? That oil prices were rising… And if oil prices are rising, gas prices are rising, and if gas prices are rising, retail sales are rising!”

And then, what did we have happen yesterday that apparently surprised a lot of people? We had a very strong retail sales number print! (These knuckleheads should consult me on the BHI; that would set them straight!) US retail sales increased by 0.8% last month – more than expected, as holiday shoppers streamed into stores and went online to buy stuff!

So, a strong retail sales figure got people buying dollars, but that was just the beginning… You see, later in the day, the Fed/Cartel/Bernank met and put the kybosh on any thoughts (right now at least) that there would be more than the original $600 billion in quantitative easing implemented… Yesterday I told you that the dollar was getting sold on speculation that Big Ben would announce that more than $600 billion would be needed… It still “may be needed” according to the Fed Heads, but, for now, the answer is no. And that news unwound the dollar sells that were put on when the speculation began…

The pending extension of tax cuts is still hanging over us like the Sword of Damocles… It was thought that this would have been put to bed last night, but that isn’t the case. So there’s another feather in the dollar’s cap this morning, because commodities were driving forces of dollar selling, when it was thought that this tax cut extension would be put to bed… And now, just like the dollar sells that were mounting on the speculation regarding QE and the FOMC, these dollar sells are being reversed/unwound… So, that means things like copper, iron ore, and the two most prominent precious metals of gold and silver are getting whacked!

The Aussie dollar (AUD), which traded most of the day at parity to the US dollar, has sold off by 1-cent…. The euro (EUR) is also off by 1-cent this morning… So, the currencies and metals all look much cheaper today than they did yesterday morning… I think that as long as US Treasuries continue to rot on the vine (yields rise, causing bond holders losses) the migration to Aussie dollars will slow down, for the Aussie dollar will no longer have the largest yield differentials in the industrialized world.

I’m still convinced that this is the end of the Treasury bubble, though… Even though I’ve been talking about this for over a year now, saying that the Treasury bubble was inflating more and more while floating around the room looking for a pin, I just don’t see how this could be happening with the looming bond buying that the Cartel/Bernank will be doing as a part of their quantitative easing operations. But… Here we are, on December 15, 2010, with 10-year Treasury yields having risen 79 basis points in a little more than a month!

The price of oil is off by over a $1 this morning… Of course that didn’t help me as today was gas fill up day… By the time I need to fill up again, the price of oil will have begun to rally again… Oh well… Not much I can do about that!

Gold has lost $11 this morning, and silver has lost 50-cents… So… What I said yesterday about how it was time for gold to stop messing around with the $1,400 figure, and begin to put $1,400 in its rear view mirror, will have to wait for another day… But you know, this reminds me of when gold messed around with $1,000, and then $1,100… Each time when reaching those milestones, the shiny metal went back and forth around the figures, until it finally put the milestone in its rear view mirror… I have the feeling that $1,400 is going to be the same way… But… That’s just my opinion… I could be wrong!

Well… The goings on in the Eurozone continue to haunt the euro… This morning, we’re talking about the division between the Eurozone countries on how big the “debt crisis facility” needs to be… Germany is putting up a good fight to increasing the size of the facility… This time, Germany is at odds with the European Central Bank (ECB)… And seems to be a stalemate at this time, which leaves uncertainty in the euro, and when a currency has uncertainty around it, the currency gets sold! I’m hoping that this gets put to bed soon, but if it doesn’t, look for more euro weakness…

I just saw a story headline come across the TV screen… It said, and I’m still laughing… “Bullishness reaches 3-year high in Investor Intelligence survey”… Not that I question investor intelligence… No wait… I DO question investor intelligence, for not diversifying their investment portfolio with currencies and metals, and their reluctance to step away from Treasuries… Of course, readers of this letter don’t fall under those items, as they understand what’s going on, right? Right! And what are they so bullish about?

OK… Get this! Now… I’ve told you all about the things that the Chinese are doing to gain a wider distribution of their currency… But did you hear that Chinese renminbi/yuan (CNY) can now be exchanged for Russian rubles (RUB)? Moscow’s Micex exchange started trading the renminbi against the ruble for the first time today… And you know why this is being done between China and Russia, don’t you? I bet you can guess… Yes! That’s right! These two countries want to take the next step in removing dollars from their trade… Another feather in the cap of the Chinese, folks… I sure hope that you took me up on that suggestion I made a couple of years ago, regarding keeping a journal and recording things and changes, so that you will be able to explain to your grandkids just what happened to the once almighty dollar…

The Swiss franc (CHF) continues to book gains against not only the dollar but the euro too! In fact, this morning, the franc traded at an all-time high versus the euro… Remember last year, when the Swiss National Bank (SNB) was hell-bent about keeping the franc from getting so strong versus the euro? Well, we now see just how well that worked out for them, eh?

And… As I suspected earlier this week, Sweden’s Riksbank hiked interest rates for the fourth time since July by 25 Basis Points (BPS) (1/4%)… The good news from this meeting is that the Riksbank issued a communiqué that basically forecast the need for more rate hikes… And that’s a good thing to see, considering the Swedish third quarter GDP showed an annualized surge of 6.9%!

I think that it’s important to set Sweden and Norway apart from the goings on in the periphery countries of the Eurozone… These two countries don’t have the debt problems or banking problems of the GIIPS… (Greece, Italy, Ireland, Portugal, Spain)… Unfortunately, the markets continue beat down the currencies of these two countries any time the euro gets whacked for the GIIPS… One of these days, though, the markets will get their heads screwed on right, and see Sweden and Norway in a different light than the one that shines on the GIIPS…

Oh… And on that thought… Moody’s put Spain on review for a possible downgrade… Well, you can bet that a downgrade in Spain’s credit rating is coming if Moody’s announced that they were under review!

Well… The data cupboard is chock-full-o-data today… The stupid CPI for November will print this morning… But the real meat in the data cupboard today are my faves, Industrial Production and Capacity Utilization… We’ll also see the TIC’s data for October… (TIC’s are what used to be called the Net Security Purchases by foreigners)… This data gives us an idea of how well the US is financing its deficit spending, or how much they have to kick the can down the road…

Then there was this… Well… It looks like same-ol’, same-ol’ in Washington DC. Here’s the skinny… It seems that the bill that’s being put together to fund the government next year, turns out to be more than just that bill… $8 billion in earmarks were added to the bill, that now consists of 1,924 pages! Isn’t this what we told Washington DC that “We the People” didn’t want to see… These pork-laden, earmarked, 1,924-page measures any more… And what’s the first thing they do? I’m so disgusted with all this… I’m glad that in the future we may see some improvement here, as earmarks are banned when Congress returns next year… But… It’ll always be something. And the more I think about the tax cut extension, the more I believe that it’s fiscally irresponsible, since there are no spending cuts to offset it. And apparently, given the news above, there are no plans to stop spending! UGH!

To recap… The currency and commodities rally was stopped yesterday, and gains were lost, as 1. US retail sales were very strong, 2. The Bernank did not increase their $600 billion QE plans, 3. Germany and the ECB are at odds over the size of their debt-crisis facility, and 4. Moody’s puts Spain on review for a downgrade in their credit rating. Sweden’s Riksbank hiked rates 25 BPS, as expected, but kept their hawkish tone in their statement following the rate hike.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning