The Day of Reckoning

Today’s Penning for your thoughts…

Good day, and a tub thumpin’ Thursday to you!

This is not how I usually begin to talk about what happened yesterday, but we’re going to have to steer away from the usual this morning, for the U.S. Data Cupboard was responsible for the currency moves yesterday. So, let’s check it out!

The U.S. Data Cupboard had the stupid CPI (consumer inflation) for August yesterday. I know I failed to mention that yesterday morning, but it was intentional. I just don’t care about CPI any longer because of all the hedonic adjustments and substitutions it contains.

But a funny thing happened on the way to the forum yesterday, and that is the currencies really took off for higher ground by mid-morning. What could have caused this? I looked around and the only thing  I could see was that everyone was talking about how CPI had weakened in August.

I guess the currencies guys don’t know it, but the Fed doesn’t pay attention to CPI either. But the currency traders all acted like they did, and voila, no inflation, and a hint of deflation, would keep the rate hike on the table, according to the currency traders.

Well, that’s how the day went yesterday. As participants attempted to stay out of the marshmallow forest or have their battleship destroyed , the currencies all traded as if the Fed had already decided to hold rates unchanged.

This morning, things are different, and we’re back to the mixed-bag-o-results for the currencies as the day of reckoning for the Fed finally arrives. The Aussie dollar (A$), which had seen about 5 consecutive days of gains, is giving some of those gains back this morning, and the New Zealand dollar/kiwi is playing follow the leader.

The euro has climbed back above the 1.13 handle, and it sure looks like the Chinese currency moves are a game of one step forward, one step backward.

Speaking of the Fed’s Day of Reckoning…

Well, the day is finally here. The day the markets have waited for like little kids waiting for Santa Claus. The Fed’s FOMC will end their two-day meeting with a rate announcement. Will it be: unchanged and the members remain dovish, or will it be unchanged but the members are hawkish about rate hikes being on their way, or will they hike rates but sound dovish about future hikes, or, will they hike rates and say, “you ain’t seen nothing yet”?

So, 4 options are available to the FOMC members. Didn’t know it could be that convoluted? Well, I guess it can, but the Fed members have brought this all on themselves, by not singing from the same song sheet whenever they went out to speak.

So, everyone is going their own separate ways and that brings us to the 4 options I just sent through. It really is not that difficult to do.  But everyone has their own opinion as to what should happen, and I guess they are entitled to express it. I just think that this is no way to give the markets a clear indication of what you plan to do.

Remember Ben Bernanke was going to make the Fed more “Transparent”?  I wonder what he thinks about all this now.

So, I ‘ll just say this; I believe it’s down to 2 of the options. Either the Fed will leave rates unchanged but talk hawkish about future rate hikes (this has been their MO for the last two rate meetings), or they will hike rates and sound very dovish about any further rate hikes (this one would be very difficult to deal with for the markets) and, unfortunately, for the Fed, in either case I think they lose some credibility with the markets.

The markets are not going to like being left out in the cold with a rate hike and nothing to go on from there. Where’s the direction?  So, that’s my take on the whole process leading into this afternoon.

I told you earlier this week that the Swiss National Bank (SNB) would be meeting the same day as the Fed, and with the time difference in their favor, the SNB has already met and had their say. The SNB left rates unchanged, and then tried to steer the markets with words.

The SNB didn’t really put fear into the markets, but they did remind them that even though the franc has depreciated a little, that it really hasn’t been enough, and they reserve the right to intervene should anyone get a wild idea that the franc should be stronger.

You know what I think? (Come on Chuck, that’s what these dear readers read your letter for,  hear what you think!, OK, sorry. let’s try this again.) Here’s what I think on the SNB message. That the Fed gave them the wink and nod that they are not going to hike rates today, which would send the message to the markets that the dollar is overvalued, because that value has been attained under false pretenses, and the dollar would get sold, thus making the franc stronger, so the SNB just decided out of the blue here to let the markets know that they are ready to intervene.

Hmmm… Makes sense to me.

The price of oil has gained another buck to the $46 level overnight. Yesterday’s oil price move really helped the Russian ruble out of a selling trend that was beginning to look ugly. But today’s move is not of help, as the ruble traders are fearful of a Fed rate hike this afternoon, and the ruble traders fear that the ruble is the most vulnerable currency to a rate hike.

I have to wonder why they feel that way, given that the positive interest rate differential they enjoy over the dollar, euro, yen, sterling and everyone else around the world except Brazil, will still be there for the most part, given IF the Fed hike rates it most likely would be a small 25 Basis Points move.

I guess, Russia looks at like this. A Fed rate hike and not knowing what their next move will be, could take a hit on the price of oil. And Russia needs the price of oil to fall further like they need another hole in their head.

It’s a game of one day up and the next day down, and the next day up with the Chinese renminbi. I’ve seen just about the same size move for 3 consecutive days of trading in the renminbi that followed that trend.

How does one get a handle on what the Chinese are doing with their currency right now?  Well, I’ll say this. Yesterday, I told you about the comment that the writer of the Global Changes & Opportunities Report, Jim Powell, said about something like this. Just remain in place, don’t go trying to find your way home. And that’s a good thought when you have a currency acting like the renminbi recently.

I had to shake my head in disbelief when the devaluation/depreciation of 4.6% came about last month, and our currency trader, Jen Mclean, told me that she was selling a ton of renminbi for customers. What, what? The currency had risen more than 37% since it dropped the peg to the dollar in July, 2005, and a 4.6% adjustment in the gains causes people to panic?

Oh, well, move along here Chuck, you don’t want to get mixed up in this.

On a sidebar. I had to laugh out loud yesterday when I read a headline about something that will happen soon. So, let me set this up. China’s President Xi Jinping,  (Xi) is coming to the U.S. next week and visiting the U.S. President.  So, add to that the U.S. and China have been having discussions about “cybersecurity”  and did reach a “cybersecurity agreement”.

So. This is what the headline said: ” U.S. Rules out Chinese cybersanctions Ahead of Xi’s Visit”. The U.S. has decided not to sanction Chinese companies and individuals for cyberattacks before Xi’s visit next week.

OK… after I stopped laughing, I said out loud, “Why not? Are we afraid of the Chinese?” This is crazy, folks.

I said above that the New Zealand dollar/kiwi was playing follow the leader with the drop in the A$… But that’s not all that moved kiwi lower this morning. New Zealand 2nd QTR GDP failed to meet the Reserve Bank of New Zealand (RBNZ)’s expectations/forecast of 0.6%, when it printed at 0.4% vs. the previous QTR.

But this data is so stale now, right? Who cares about what happened in the second QTR at this point, it’s all water under the bridge, and that’s why I don’t think it had much bearing on kiwi’s direction, but it could have had some.

The U.S. Data Cupboard, of course has the FOMC Rate Decision this afternoon, but also has quite a few other data prints, like: The Current Account Balance (read deficit) in the second QTR. In addition, Housing Starts & Building Permits for August will print, along with the usual Thursday stuff, the Weekly Initial Jobless Claims, which seem to have found a home around 275,000 per week.

The Bloomberg Consumer Comfort Index  for this month, along with the Philly Fed Business Outlook will print too. So, a bunch of stuff, but none of it is market moving. And that takes us right back to the FOMC Rate Decision this afternoon.

Well, gold sure found a flyer to ride on yesterday in the weak U.S. CPI data, and bounced higher at one point by $17. In the end I think it finally settled in with a $15 gain. Same reason as above for the currencies for gold to move higher on the CPI data.  This morning, gold is down a couple of bucks, so at least yesterday’s gains aren’t getting wiped out.

I’ve been tracking the news stories on this for some time now, and I have to say, I’ve been champing at the bit to finally talk about it. Yesterday, a dear reader sent me a link to an article and it was just what I had been looking for. Confirmation that the Indian Government had passed legislature to monetize gold. That’s right, monetize gold! Indians holding private gold will be able to deposit it at banks, and then earn interest on their bullion holdings!  Now, the Indian Government has to get the Indian people to go along with this idea.

The Indian Government said that they would do this, in order to stem the gold imports that drive the deficit in India up. But I don’t see it that way. First of all, this isn’t the first time this has been attempted here. In addition, I just don’t see the bulk of Indian gold holders flocking to banks to deposit their privately held gold.

But think about this for a minute; should this work, then why wouldn’t the rest of Asia adopt similar programs since holding gold is so important throughout the region? Monetizing gold. Who thought that would happen?  Leave it to India to come forward with that idea…

Well, lucky me. I found this on the Bloomberg this morning while I was looking for something else!  This is an article regarding the Emerging Markets and the chance of a rate hike in the U.S. and what it effect it could have on the Emerging Markets. It’s a different take than what you’re expecting. You can read the article here. Or you can opt for the snippets that start here:

For all the concern about the effect of the Federal Reserve’s impending interest-rate increase on emerging-market equities, history suggests they’re more likely to benefit than take a beating.

When former Fed Chairman Alan Greenspan started tightening monetary policy in June 2004, the MSCI Emerging Markets Index began climbing. After keeping the target federal funds rate at 1 percent for the prior 12 months, Greenspan gradually lifted it to a peak of 5.25 percent by June 2006. Developing-nation equities had soared more than 70 percent by then and wouldn’t peak until October 2007, by which time they had more than tripled.

The positive trigger from Fed tightening didn’t just happen in 2004. In June 1999, as the U.S. raised borrowing costs to 5 percent after keeping them on hold for seven months, the MSCI index rose 19 percent by year-end.

The markets have had almost two and a half years to get used to the idea of rates going up,” said Julian Mayo, who helps oversee about $2.3 billion as co-chief investment officer at Charlemagne Capital in London. He holds a greater percentage of Indian, Mexican, Taiwanese and Turkish stocks relative to the emerging-markets benchmark.

“You may well see an initial relief rally and then, a gradual rise over a period of time,” Mayo said. “I don’t think you’re going to see markets going up 40, 50 percent as they have in the past.”

Chuck again. yes, after all the gloom and doom for Emerging Markets should the Fed hike rates, that has been written, there’s this. And you know me. While I sound like a gloom and doom guy at times, I’m really the look to the sun for brighter days kind of guy. The problem lies in the fact that I’m a logical person, and that leads me to sound gloom and doom at times.

That’s it for today. I hope you have a tub thumpin’ Thursday!

Regards,

Chuck Butler
for The Daily Reckoning

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