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Daily Pfennig: China Takes Over As Top Trading Partner!

Wednesday December 05, 2012 09:25

In This Issue.

*Currencies rally led by A$.
*RBA cuts rates, but talks hawkish.
*Greece announces a bond buyback.
*Bank of Canada next up.

And, Now, Today's Pfennig For Your Thoughts!

China Takes Over As Top Trading Partner!

Good day.  And a Tom Terrific Tuesday to you! How are you this morning? (or afternoon, night, whenever one gets around to reading the Pfennig!) I'm actually on a roll, which in my mind means that I have had 4 consecutive days of waking up and feeling good. Let's hope that "roll" continues each and every day! The Fiscal Cliff talks continue to be high drama, with nothing coming from the drama, and just in case the lawmakers didn't realize it. we're all watching, and. another day has been crossed off the calendar!

Well. The Big News overnight was that the Reserve Bank of Australia (RBA) did cut their official interest rate 25 Basis Points (1/4%). So, the markets were correct in anticipating the rate cut, but what they didn't anticipate was the hawkish statement by the RBA that followed the rate cut announcement.  The RBA's hawkish statement dropped the phrase" for the time being" in reference to their previous stance of the rate policy being appropriate, and then the thing that really got the markets lathered up, was no reference to their previous line about "further easing may be appropriate in the period ahead.

So. guess what the markets did to the Aussie dollar ( A$)? Well. they shrugged off the rate cut, as most of the price action of a rate cut was already priced in, and the markets focused on the hawkish statement, and pushed the A$ higher!  So. at the end of the day, the A$ was higher in value VS the U.S. dollar, and interest rate cuts in Australia, are finished. (unless the world goes to hell in a hand basket next year!)

I think the RBA saw what I said I hoped they would see, and that is that China's economy is recovering very quickly, and the RBA is hoping that  China's economic growth will carry over to Australia, which it should, very easily, and soon!

Speaking of China.  I saw some interesting data yesterday. (thanks Ty!)  In 2006. The U.S. was the number one country in the world as the trading partner of the world.  The U.S. WAS the larger trading partner for 127 countries, Versus just 70 for China.  Now. skip ahead to 2012.  the two have traded places! China now is the larger trading partner for 124 countries while the U.S. has slipped to 76.    It's happening folks. just like I've been warning you for about 5 years now.

There was also a story I read yesterday that forecasts that China will once again, for the coming year, widen their band for the renminbi / yuan, which means the Chinese are not ready for prime time with a complete float for their currency, but. more appreciation is a possibility.  For those of you new to class. The People's Bank of China (PBOC) sets a daily reference rate for the renminbi / yuan based on market makers' quotations and the spot contract in Shanghai can trade as much as 1% on either side.   I think that we may see the PBOC widen that band to 1.5 or even 2%...   This would be another baby step toward floating the currency, as this wider band would introduce more volatility, which the Chinese could still manage, but get a feel for it all the same.

This widening of the band, would play well with the Communist Party's pledge last month to make the exchange rate more market-based and promote freer movement of capital in and out of the country for investment purposes.   Besides, the current band has been breached a few times since this past April, so widening it, keeps everything in order.

The euro is stronger this morning, by a small amount, but stronger nonetheless. The European Union (EU) Ministers are meeting today, and probably slapping themselves on the back, for they have gained a period of stability again for the region.  It was announced yesterday that Greece will perform a bond buyback, which would be very good for stability in the region. And here's where we could really begin to see a bounce.

The bounce I'm talking about is in the currencies. you see, if the Eurozone region has any stability whatsoever, the markets will shift their focus back on the U.S. and the Fiscal Cliff and the debt ceiling. and that won't be good for the dollar, folks. Anytime the focus is on the dollar's future and surrounding fundamentals, it's not good for the green/peachback. Or that's the way I've seen it for 11 years now.

Did you hear about what the Swiss are going to do next to keep the franc from climbing in value?  They are going to introduce a negative -1% interest rate on deposits.  And with the rumor spreading like wildfire, the Swiss franc is losing ground VS the rallying euro, which is the Swiss National Bank's (SNB) objective!  The euro/ franc cross which held steady Eddie at 1.20 for almost a year, has weakened to 1.2130.  Remember how I had told you in the last year, that the SNB really wants the franc cross to the euro around 1.30 or 1.35?  Well. maybe they'll get their wish, eventually.  This cross trading between the euro and franc will eventually spill over to the dollar / franc, which most of us really care about.

The Bank of Canada (BOC) will meet today. I don't know when BOC Gov. Carney is going to leave the BOC to take over the Bank of England (BOE) but I would guess it's soon.  But, him leaving the BOC won't be any opportunity to move rates, so look for rates in Canada to remain steady. The thing you might end up seeing is a change to the statement and bias. You may recall me telling you for most of 2012 that the BOC had a tightening bias and the markets were ready and willing to mark up the Canadian dollar / loonie should that tightening bias turn into a real rate hike. But no rate hike materialized, and in my opinion, the BOC should remove that bias, for if they are not going to act on it, they shouldn't be getting the markets all lathered up over it and leading them on!

The Canadian dollar / loonie is a bit weaker this morning, as the markets prepare for a change in the statement / bias.  Which I believe we'll see today. Recall me telling you that 3rd QTR GDP slowed in Canada (no NHL hockey is probably to blame!) and this report alone will probably get a change in the bias from tightening to neutral.

Last week I told you how the U.S. dollar futures positions had turned to a net long position for the first time in weeks? Well, it only lasted a week. U.S. dollar futures dropped 28,000 positions last week, leaving it without a hand to hold, but it's Ok, I'm Ok, how are you? No wait, sorry, But that song by Graham Nash is so apropos when talking about the dollar. The title of the song is: I used to be a king.  which the dollar used to be. but after years of deficit spending by our leaders, overwhelming debt has put the dollar in a very vulnerable position.

Well. yesterday was not a good one for the U.S. economy. The ISM Manufacturing Index fell back into contraction last month falling from 51.7 to 49.5. So. we had China's manufacturing index rise above 50 for the second consecutive month, while the U.S. manufacturing index fall below 50.    The deterioration in the manufacturing index saw sharp declines in the "new orders, inventory change and employment" components of the index. Manufacturing employment contracted for the first time since September 2009, falling to 48.4 from 52.1 in the previous month!

And of course we had the disclaimer about how the data was affected by hurricane Sandy. That's not to say that I don't believe the problems from Sandy affected things. Shoot Rudy, my guy on the ground there, tells me that things are still pretty bad in areas. I'm just afraid that the Gov't will be using this disclaimer until the cows come home!

There's only the N.Y. region manufacturing report today that will come out of the U.S. data cupboard, so we're left to the discussions on the Fiscal Cliff and debt ceiling  to guide us through today.

And Gold. UGH! Gold is losing ground this morning, as I write. Right now it's down $14, while the other currencies are rallying for the most part.  Gold is being held as the "responsible one" here with regards to the Fiscal Cliff talks. Whenever the "talks" appear to be going nowhere, Gold gets whacked. and vice versa when the "talks" appear to be heading toward compromise. I've explained this before. the markets seem to believe that the Fiscal Cliff could very well lead us right back to 2008, and flight to dollars and treasuries.  So, you can see now why Gold is getting whacked today.

But. as I've said numerous times recently. I believe the Fiscal Cliff will not happen. This is all drama. Our leaders will find a way to kick the can down further down the road.  And then the dollar can get back to losing value VS Gold (& Silver, Platinum) 

Then There Was This. from Bloomberg this morning. "Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed- income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds.

The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it's purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.

"The shrinking amount of bonds in the market is lowering rates and not just benefiting the Treasury, but providing lower rates for private-sector decision-makers as well," Zach Pandl, a senior interest-rate strategist in Minneapolis at Columbia Management Investment Advisers LLC, which oversees $340 billion, said in a Nov. 30 telephone interview. "The Fed is not creating this scarcity to help out the Treasury, it's primarily to get the economy going."

Chuck again. I guess the bond vigilantes are nowhere to be found, eh?  Back "in the day" they would take a country's bonds to the woodshed if the Central Bank of that country were going to absorb 90% of the bonds.   I shake my head in disgust, folks.

To recap. The currencies are still rallying, led by the A$. The RBA did cut rates 25 Basis Points yesterday, but left the markets with a very hawkish statement, and that influenced the markets to push the A$ higher.  The Chinese have overtaken the U.S. as the top leading trade partner for the world. The euro is higher again today, marking 4 consecutive days of advances after Greece announced a bond buyback. And Gold is getting whacked due to the lack of compromise on the Fiscal Cliff talks.

Currencies today 12/4/12. American Style: A$ $1.0480, kiwi .8250, C$ $1.0065, euro 1.3095, sterling 1.6125, Swiss $1.0790, . European Style: rand 8.8175, krone 5.6115, SEK 6.5915, forint 215.30, zloty 3.1515, koruna 19.2680, RUB 30.85, yen 82, sing 1.2175, HKD 7.75, INR 54.68, China 6.2250, pesos 12.96, BRL 2.1025, Dollar Index 79.70, Oil $88.91, 10-year 1.63%, Silver $33.20 and Gold. $1,703.27

That's it for today. OK. I was waaaaaaaayyyyyy off on the 823 days thing I said yesterday for the 5 Saturdays, Sundays and Mondays in December. Ok. I forgot a couple of things going on this December when I was listing the oddities of this December yesterday.  first. we will have 12/12/12, and.  we can't forget that that the Mayan calendar ends on December 21st.    It's the end of the world and I know it. It's the end of the world and I know it, and I feel fine -REM  Our unseasonably warm weather ended last night, but it's still warmer than normal here, so I can't complain about cold weather! Geez what will I do if I can't complain about something? HA!  Last Friday, we had a small impromptu get together after work for the boys and girls on the trade desk, and were joined by our former colleague, and fan favorite, Kristin Kuchem. It was great to see her again, and all my colleagues on the desk outside of the office.  And with that. I thank you for reading the Pfennig and hope you have a Tom Terrific Tuesday!

Chuck Butler
EverBank World Markets

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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