US Manufacturing is Recovering

Yesterday, I left you with the euro (EUR) popping back and forth over the 1.43 level… But in the blink of an eye, the 1.43 level was gone, and the euro was trading with a 1.44 level, and remained there the rest of the day, reaching 1.4420 for the high. As I turn on the screens this morning, I see that the single unit has gone to popping back and forth over the 1.44 level. You don’t think it will get another slingshot higher today, do you?

I don’t… I was actually shocked to see that move yesterday. But then, I did say that the bias to sell dollars had really picked up steam lately. The piece of data that really pushed the dollar lower yesterday was actually a “good piece of data” for the US economy. The ISM Index (manufacturing) came in higher than expected and has reached a pre-Lehman Bros collapse level of 48.9… This was a BIG move from the previous month’s 44.8… It’s still below the “line in the sand figure” of 50, which is the indicator of contraction or expansion. I would say – given the move from 44.8 to near 49 – that expansion is already happening..

And why would that be, given the rot on the US economy’s vine? Ahhh grasshopper… Here’s a key ingredient, which I’ve pointed out to you for years now… The dollar… The dollar, measured by the dollar index, has lost 13.4%. The dollar index, in case you’re new to class or have forgotten a previous lesson, is a basket of US trading partners’ currencies. It is heavily weighted toward euros, though… And therefore you have one of the reasons I always talk about the euro being the Big Dog… That, and the fact that the euro is the second most liquid trading currency in the world, and… It’s the offset currency to the dollar!

And… So… Here’s a note to the dollar bulls… Mess with this, and you’ll see manufacturing go right back into the dumpster!

But, what about this ISM Index? Pretty strong, I would say, given all that’s going on in not only the US but the world. Going back to yesterday’s discussion about the recession coming to an end. This is one of the key pieces of data that will indicate to me that we have hit bottom and the bounce is on. I know that I have been pretty cynical of the forecasters that were calling for the bounce six months ago and so on, but if we get more of this type of data in the coming weeks, I’ll have to put a different cap on.

OK… The Reserve Bank of Australia (RBA) met last night, and as expected, they left their internal interest rates unchanged. The RBA did move their bias for interest rates from easing to neutral, which is a natural progression to the next step of beginning a rate hike cycle. The RBA wasn’t in the mood to go “all in” on the move to neutral though. They hedged their move by saying that, “the present accommodative setting of monetary policy is appropriate given the economy’s circumstances.” That’s central bank parlance for, “we’re doing this now, but we’re prepared to go back to easing should the economy’s rebound falter.”

So, the Aussie dollar was not able to push higher, as would normally be expected if the central bank had gone “all in” on the move higher in bias. The Aussie dollar is hovering around 84-cents these days, which isn’t shabby considering that on March 1st of this year it was trading with a 63-cent handle! Still not the “go-go” days of summer 2008, when the Aussie dollar was knocking at the door of parity to the green/peachback.

The Aussie dollar’s rise from the ashes of February 2008 is dragging kiwi along. The New Zealand dollar/kiwi (NZD) saw the same kind of bloodletting the Aussie dollar did last fall, so any dragging higher is a welcome sight to kiwi holders. I’m still not sold on kiwi’s ability to maintain the levels it reached last year, given their deficit position. For those of you new to class, the kiwi was able to rise in the fact of a HUGE deficit, because of their interest rate differential to the rest of the world. New Zealand had the highest interest rates in the industrialized world, and those interest rates kept the blinders on their deficit… But, I kept warning folks that once the rates began to drop the deficit would be as obvious as a man with a hatchet in his forehead!

So… The dragging is good news to the kiwi holders…

OK… Back in the US… The Treasury announced that they would need to borrow less than originally forecast in the third quarter by $109 billion. They’ll still need to borrow over $400 billion, and will keep the pace of the total borrowings through the end of the fiscal year (September) at $1.39 trillion.

The Treasury is borrowing less, because a handful of Big Banks are repaying their TARP loans… That’s a good thing, I guess… But I just can’t get a warm and fuzzy about the stories I keep reading regarding this whole deal of loaning money and buying back their bad assets so they can repay the loans to the Treasury. It’s all mish-mashed, folks… But! I’m not going there! I’m keeping my nose to the task at hand, and not veering off course…

The thing to take from this is that the Treasury will still need to borrow $1.39 trillion, with the borrowings gaining momentum in the past six months. And this total amount of borrowings is what’s weighing on the appetite for Treasuries by foreigners…

Did you see where Wal-Mart just issued $1 billion in bonds but denominated them in yen? Is there a message there? I believe so, folks… Now, if we begin to see more corporations doing this, then the message will be loud and clear. These corporations don’t believe they can sell their debt denominated in dollars, as the world is choking on dollars right now… When and if other corporations begin to do this, we’ll see the dollar get sold like ponchos on a rainy day at Disney World!

OK… Let’s not go down that road of gloom and doom… Instead, let’s talk about a currency that’s moved higher while remaining in stealth mode… The Canadian dollar/loonie (CAD)… Ever since the Bank of Canada’s Governor said earlier this month that he was going to do whatever he needed to do to keep the loonie weak… The loonie has taken off on a moon shot! In fact, the loonie just hit a 10-month high versus the green/peachback!

And, not meaning to place “Chuck’s kiss of death” on these currencies, but this scene has played out in other places too… In Canada, Switzerland (CHF), and Brazil (BRL), each respective country’s Central Bank Governor issued warnings about keeping their currency weak… In all three, the exact opposite has happened. And I have to smile about that, because… You may recall me calling out today’s currency traders as not having the cojones to take on central banks, as opposed to the currency traders of yesteryear who would make it a personal challenge to defeat a central banker that put down a line in the sand on a currency’s level.

So… It may all be a co-inky-dink that these three currencies are rallying after their Central Bank Governors said they would keep their respective currencies weak… But I doubt it!

I see that gold and silver are back on the rally tracks again… Gold is trading over $950 again… And the price of oil has jumped too ($70.67)… Commodities are all on the rise once again as risk appetite really begins to grow. The Chinese have ignited the fire on commodities with their economic growth and demand for the raw materials, and with that thought, commodity traders are jumping on the bandwagon.

I suspect we’ll see some profit taking today in the currencies and commodities, though. But that’s OK! Bring them back a bit, give everyone that was sitting on the sidelines waiting for an opportunity to buy, a chance to do so, and then move on to higher ground! That sounds like a plan! And you know what I like to say… I love it when a plan comes together!

The Daily Reckoning