US Dollar Long Positions Get Pared Back Again!

Good day, and a marvelous Monday to you! I pinched my two middle fingers in the garage door this morning (long story), and I’m finding out front and center how painful it is to type using those fingers! But I carry on, as your faithful Pfennig writer and friend! The Olympics are over. They were really something to watch for the last 17 days. Allowed us to get debts, deficit spending, bailouts and Grexits out of our minds for short periods of time.

I had a nice long interview with a Wall Street Journal reporter on Friday morning. She wanted to know why I thought the Australian dollar (AUD) was so strong. I told her, “As I told my readers some time ago, the A$ is becoming the new Swiss franc with interest!” Yes, Australia has its problems — don’t all countries have problems? But right now their banking sector is strong, their domestic economy is good and balanced and unemployment isn’t a problem, and even though the Reserve Bank of Australia (RBA) has cut a major slice of Australia’s positive interest rate differential away, they still enjoy a positive rate differential to the big boys: the U.S., eurozone, Japan and U.K…

Having said all that, the A$ is down about half a cent this morning. But that’s just noise and gives buyers an opportunity to buy at cheaper levels! Several years ago, I heard our Ty Keough explain a drop in the price of a currency like this: “It’s to your advantage, because now you can buy even more than you could before”

There’s a story on the Bloomberg this morning about A$s. I’ll tell you a bit of it, because it’s good stuff: “The Australian and New Zealand dollars (NZD), this year’s best-performing currencies among developed economies, are reducing their links with stocks and commodities as investors search for faster growth and higher interest rates.”

The story goes on to talk about how, according to data compiled by Bloomberg, the correlation of these currencies and global stocks has fallen. Man, oh, man, is that welcome news or what? I sure hope it’s good data, because this is what we’ve been waiting for since the financial meltdown: a break of the trading in risk assets and a return to fundamentals. No concrete evidence yet, but we’re on the right tracks! YAHOO!

I hear you asking but what about the other currencies, Chuck? Yes, there are other currencies to talk about. On Friday morning, the currencies were reeling from the blow they received in the mid-ection by the weak Chinese economic data that printed Thursday night. But as the day went on, they saw strength return to them and it was as if the Chinese data hadn’t printed at all!

The Big Kahuna from the U.S. data cupboard this week will be the July retail sales that will print tomorrow. We should see some improvement from June’s -0.5% print, and I think the BHI is indicating a positive number, but nothing to write home about. The back-to-school stuff gets moved up to July these days, as schools don’t wait until Labor Day to begin. Alex will begin his junior year in the next week! Crazy!

We’ll also see July PPI (wholesale inflation) and business inventories tomorrow, but nothing today. So the currencies are on their own today! I’ve become so jaded by U.S. data prints, folks. I just can’t get my arms around them. They make no sense to me, and I just know that the books are getting cooked every time we see economic data. And that will be quite evident this week. For instance, the stupid CPI (consumer inflation) will print on Wednesday and is expected to show a month-on-month gain of 0.2% and year-on-year of 1.6%..Who are they trying to kid? You, me and everyone that breathes knows that inflation is higher than 1.6%!

Just wait until the food prices begin to soar this year (again) as the drought in the Midwest devastates crops. A month or so ago, I wrote about how a reader made a trip through Illinois and observed that the corn crops that had irrigation systems were doing fine, but the other crops were burned up. I witnessed some of that this past weekend, going past a corn field that just a month ago looked fine but is now burned up. There will be no yield from that corn field this year. And we as consumers can expect to see rising food prices as a result. But the stupid CPI won’t record that. I’m sure they’ll make a “substitution” to make everything just fine.

Gold is up a few bucks this morning, after finishing last week with a gain. I read Ed Steer’s report on gold and silver Saturday and came away even more convinced that there’s something shady going on here, folks. This is from Ed’s excellent report on the ETFs of GLD and SLV:

“While on the subject of these two ETFs, the new short interest numbers for both were posted on the shortsqueeze.com Internet site late on Thursday night. So late, in fact, that I never saw them, because I checked twice earlier in the evening and they weren’t there.

“In silver, there was a whopping increase in the number of shares/ounces sold short in this ETF. The short interest blew out by 30.22%, to 14,784,600 shares/ounces, an increase of 3,431,300 shares/ounces from just two weeks ago.

“The numbers for gold were equally atrocious. The short interest rose 28.67%, up to 21,749,900 shares sold short, or 2.17 million ounces of gold. That was an increase of 4,846,600 shares, or about 485,000 troy ounces of gold over the two-week reporting period.

“As of the cutoff for this report, GLD is owed just under 68 tonnes of gold and SLV is owed 460 tonnes of silver. This is what would have to be added to cover all the short positions outstanding in each ETF.

“One can only imagine what the prices of both silver and gold would be if the short holders actually had to purchase the metal to cover these short positions.”

Yes, I always like to give you different analyst’s views on stuff. Most of you probably read Ed’s letter already. If you don’t and want to, just Google his name.

I do expect the price of gold to go higher, but is it ready for prime time yet? Only the Shadow knows, folks. But one of these days, Alice. And then we’ll be looking at these days and levels in our rearview mirror. Of course, that’s just my opinion, and I could be wrong! And if you ask my beautiful bride, I’m wrong all the time! HA!

The German government printed a strong current account surplus and then had to defend it. I know that sounds strange. Apparently, it is rumored that the European Commission will demand that Germany rebalances its current account. But I like what German Chancellor Angela Merkel had to say: “The surplus is proof of German competitiveness, for which we say that others should aspire to it rather than we should scale it back.”

That’s right, Angela! You tell ’em! Sort of like when the former U.S. Treasury Secretary John Connally told his European counterparts in 1971 that “The dollar is our currency, but your problem.” Remember in 1971, President Nixon had closed the gold window and the dollar was set loose from its tie to gold, and the dollar immediately was sold and became quite weak, in its first weak-dollar trend.

Recall last week I told you that U.S. dollar long positions had been pared back the previous week? The latest reports show that those U.S. dollar long positions continue to be pared back. Guess which currency is the main beneficiary of the closing dollar positions? The Aussie dollar. I guess that plays well with what I told the Wall Street Journal interviewer last week! In fact, the A$ position flipped from a record net short position in early June to a 14-week high net long.

The bulk of U.S. dollar long positions are versus the euro (EUR). But even the euro short positions were pared back last week. Could this be the beginning of a real shift? You never really know, for as I’ve told you many times over the years, these traders are fickle. They’ll change sentiment on a dime. In a fiat currency world, sentiment goes a long way toward what a currency does.

Then There Was This, from The Economist:

“The American economy managed just 1.5% annualised GDP growth in the second quarter… How does this compare with other recoveries of recent decades? Output has grown 6.7% since the recession’s official end in June 2009, and employment is up 2.1%. That is a shadow of the rebound of the early 1980s, when real output grew 18.5% in the first three years of recovery and employment soared by 11.1%.”

The back end of the financial storm is just now approaching our shores. Better hunker down and hope to ride it out.

To recap: The currencies rebounded on Friday after the selloff that came as a result of the weak Chinese data. This morning, they are just a tad weaker, with the A$ giving back half a cent. Gold is higher in the face of huge short positions. And the long U.S. dollar positions were pared back again last week. Is this the beginning of a shift?

Chuck Butler
for The Daily Reckoning

The Daily Reckoning