China Takes Another Step…
October 10, 2013 · by Chuck Butler
Good day… And a Tub Thumpin’ Thursday to you! We were doing some Tub Thumpin’ here in St. Louis last night, as our Cardinals won Game 5 and move on to the next round of the playoffs! Our Blues beat the rival Blackhawks too, so that was worth an extra round of Tub Thumpin’! My kids made me feel guilty about going to bed before the end of the game, so I stayed up way past my bedtime… Thus I’m getting started a little later than usual this morning, but I think you’ll forgive me for that!
The dollar bias to sell dollars that has held a tight grip on the currencies since the Gov’t announced their partial shutdown (PS), finally loosened up yesterday, and has moved to a “buy” bias overnight. It’s not a strong buy bias, for most of the currencies that we follow are flat to down just a smidgen… But the Dollar Index has climbed back above 80, so the dollar has that going for it!
The dollar sure doesn’t have the news from the Eurozone going for it! OK, let me set this up for you. Recall, that I’ve kept you abreast of the moves that China takes to replace the dollar standard, which includes signing currency swap agreements with countries around the world that removes the dollar from the middle of the terms of trade between the two countries. What China achieves by signing these currency swap agreements is two-fold. 1. They get to gain a wider distribution for their currency, and 2. The remove one more block in the dollar’s foundation as a reserve currency…
So… Guess who is the newest member on the roster that makes up countries that have signed a currency swap agreement with China? Well, I kind of gave it away above, but it’s the Eurozone! The European Central Bank (ECB) announced this morning that they have signed a bilateral currency swap agreement with China to bolster trade financing… Now, Eurozone companies don’t have to change their euros to dollars first to settle the terms of trade with China, they just deliver euros, or receive renminbi… This is HUGE folks! China now has nearly all of Asia on their roster, along with Australia, and New Zealand, Russia, Argentina, Brazil and now the Eurozone!
Talk about gaining a wider distribution of their currency! This will strengthen the international use of the renminbi/ yuan… And that’s what China wants! They want to keep removing the dollar’s relevancy in the terms of trade throughout the world, one country at a time. But the Eurozone is HUGE, folks…
Remember, the recent (June 28th) talk by People’s Bank of China (PBOC) Gov. Zhou, where he pledged to expand cross-border use of the renminbi / yuan, and he encouraged multinational companies to include the Chinese currency in their asset portfolios… When China decides to all direct trading between their currency and other foreign currencies, convertibility will occur, and when all that happens, it’s game over for the dollar as the reserve currency folks… I don’t know how else I can say this to make it any clearer…
I told you earlier this week that we would see the color of the latest jobs report from Australia later in the week, and last night it printed. The Headline Employment report was weaker than expected, as only 9,000 jobs were created in September, while 15,000 were expected. And much like the goings on with the U.S. Unemployment Rate, The Aussie Unemployment Rate fell from 5.8% to 5.6%, but the move was tied to a drop in the participation rate, which fell to a 2006 low… None of this signaled to the markets that the Reserve Bank of Australia (RBA) has put the last nail in the rate cut coffin, and so the pressure returned to the Aussie dollar (A$).
In New Zealand, their latest manufacturing index dropped from 57.1 to 54.3, still above 50, but a significant drop nonetheless. Given the weakness in the A$ that carried over to kiwi, this data made things even worse for kiwi… Give it a day, and all will be forgotten…
Well, I guess all the focus and the reason the bias has switched to dollar buying is tied to the news that there could be an agreement on a short-term extension so that negotiations can continue here in the U.S. I find this to be just plain ridiculous… These guys have had plenty of time leading up to this to “negotiate” and now they will move the goal posts to give them some extra time? Simply ridiculous! But… It is what it is, right? And if it means that the negotiations bring about major deficit spending cuts it might turn out to be OK… But you and me and the guy down the street that gets mad when someone parks their car in front of his house, know that’s not going to happen… That in the end, they make up some story about how what they did was significant, but no one will be able to figure it out, and they’ll raise the Debt Ceiling, and the National Debt will continue to move toward $20 Trillion..
We only have one more week to the 17th, when the extraordinary measures to keep paying the bills (read take money from some other place in hopes of paying it back) run dry… I think these lawmakers love all the attention they get on this PS and Debt Ceiling. Why else would this be such a big deal? I’m telling you this so you can hear me now, so you can listen to me later… (in my best Arnold voice) We will not default (now that is) and the Debt Ceiling will be raised, and we will go merrily down the road to ruin…
So… I’m sitting here this morning, listening to a CD that was burned by a Pfennig reader a year or so ago, with songs that he liked, and thought would be good tunes to write the Pfennig each day. I have to say that the music taste is bang on with me, but needing more variety on a daily basis, I only play it every once in a while, and… some of the songs on the CD are on my IPod anyway!
But one of the songs got me thinking… The song is Freedom Rider by Traffic… For the longest time when I was a young man, and the internet was galaxies away, for me to look up the lyrics… I used to think that Steve Winwood was saying Freedom Writer… And so when I hear the song, I think about a Freedom Writer! Which is what I believe I am! I talk about our freedom to invest in currencies outside the dollar! OK, I know that’s stretching it a bit, but that’s how my mind works, always stretching things a bit… Shoot Rudy, just ask the people that cringe at everything I write or say!
The Fed’s FOMC meeting minutes printed yesterday… I didn’t see any sign of the infighting over whether or not to taper occurred, which was reported at first to have happened… What I mostly saw was a group of Fed Heads that are straining their eyes to find “economic growth” they all did admit that the “economic activity expanded at a moderate pace, albeit somewhat more slowly than earlier anticipated.” Now tell me, does this validate my call a few months ago, that the Fed Heads were being overly optimistic about the economy? Why yes, Chuck it does!
So, tell me Chuck, how did you know that they were being overly optimistic about the economy 6 months ago? Ahhh grasshopper, it was easy… The Fed Heads have been wrong about the economy 4 years in a row… Why would I think that they would be right this time? And now with this PS going on here in the U.S. what will the Fed Heads think about their call for 2nd Half of the year economic growth pick-up? I know what I think, and you know all too well, that when I think something, I’m going to share it with you, whether you want to hear it or not!
This PS is going to play hell with the economy’s attempt to grow… But in the end, and I’ll say this now for probably the 100th time… Whatever growth the economy has, is all stimulus driven… Take the stimulus away, and let’s see what we have then… Frankly, I would prefer this to be our choice of swords to fall on, for at least 6 months to a year later, it would all be in our rear-view mirror and we would be on our way to real economic growth!
And then before I head to the Big Finish today… Brazil’s Central Bank raised interest rates again yesterday, pushing their internal rate up 50 Basis points to 9.5%… The Central Bank Gov. Tombini, also signaled that he will continue to keep raising interest rates higher to combat inflation… You see, the Brazilian Central Bank (BCB) is a prime example of what I always complain about with Central Banks… They arbitrarily move interest rates in one direction to achieve an internal goal, but don’t consider the unintended consequences…
Remember when the BCB and the Brazilian Gov’t was going hog wild with their attempts to weaken the real? They made huge cuts in their interest rates to make the real less attractive, but once the real was very weak, the weak currency invited inflation into the Brazilian economy… And before the BCB could say “rate hike” inflation was everywhere in Brazil… So the BCB had to break from the Brazilian Gov’t who still wanted to play the Currency Wars game and keep the real weak, and the BCB decided that inflation was a more bitter pill to swallow than currency appreciation… So, now the BCB has been frantically raising interest rates to combat the inflation that they, themselves invited into the Brazilian economy! Stupid Central Bank pet tricks… They ought to go on Letterman!
And here’s a line, sent to me from my good friend Rick, that’s from one of my fave comedians, Ron White… “I tried on the tux from my high school prom and found a $20 bill in the pocket. I was excited until I realized it’s now only worth $4.25….
For What It’s Worth… Well… You know how I carry on and yell at the walls and all that, when it comes to price manipulation… We’ve seen it in LIBOR… We’ve seen it in Treasuries (with QE)… We’ve seen it elsewhere, and most obvious is the price manipulation in commodities, namely Gold and Silver… I saw this story on Bloomberg yesterday and thought it played well with these thoughts that I’ve shared with you these past years…
“In a Bloomberg News survey conducted during the past eight weeks, 85 traders and analysts said they have little confidence in the assessed prices of crude, metals and iron ore. Regulators, including European Union Competition Commissioner Joaquin Almunia, may examine commodities markets, having already increased investigations of manipulation of benchmarks for interest rates, derivatives, foreign exchange and oil.
Five years after the global credit crisis prompted more regulation of banks, benchmark prices for hundreds of commodities are determined through surveys of anonymous traders who may have a stake in the outcome of the assessments. Unlike stock prices, available in real time at regulated exchanges for all investors to see, many raw materials that go into food, clothing and power are bought and sold in private.
“There will be growing pressure for more regulation,” David Wilson, director of metals research and strategy at Citigroup Inc. in London, said by phone Sept. 3. “Commodities markets have traditionally been a backwater that only specialists would have been involved with. Clearly these markets haven’t changed with the times.”
Chuck again… I’ve got a novel idea… how about we don’t make more regulations, but instead enforce the regulation that exist?
To recap… The bias to sell dollars shifted to a buy dollars bias albeit a muted one, all because there are rumors that the lawmakers will announce an extension so that we don’t default and they can continue to negotiate… Now? Really? They’re going to negotiate now? Oh well, we carry on despite our lawmakers… Aussie labor was weaker than expected, and China took another step toward removing the dollar standard by signing a currency swap agreement with the Eurozone…
Currencies today 10/10/13… American Style: A$ .9435, kiwi .8255, C$ .9625, euro 1.3535, sterling 1.5955, Swiss $1.0990, … European Style: rand 9.9625, krone 6.0515, SEK 6.5185, forint 218.25, zloty 3.1005, koruna 18.8570, RUB 32.28, yen 97.80, sing 1.2500, HKD 7.7545, INR 61.36, China 6.1452, pesos 13.14, BRL 2.1975, Dollar Index 80.39, Oil $102.06, 10-year 2.71%, Silver $21.96, Platinum $1,385.38, Palladium $707.38
That’s it for today… So, hooray for my beloved Cardinals! I had a friend in Toronto and on in Carlsbad Ca, texting me last night during the game… It was a nail biter for awhile, but then the Cardinals finally blew it open, late… The Cardinals now face the Dodgers in the NLCS… The Dodgers have all that pitching… UGH! Alex got his results from the ACT the other day, he scored big time on it! I sure hope that helps with the college costs! He only has 1 more month to fill out his applications… Chris just told me that he’s going to be on the Street.com this morning, so look for that… he’s got a tie on, and I don’t! HA! Now let’s go have a Tub Thumpin’ Thursday!
EverBank World Markets
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