Daily Reckoning: Yen Weakens to 80!

By Chuck Butler

02/22/12 St. Louis, Missouri – Well, the crazy things that have been going on with Japanese yen (JPY) finally seem to be unwinding… For anyone new to class, the Japanese yen has been one of the best-performing currencies the past couple of years, and not for strong fundamentals… The economy has been in a funk for over two decades, interest rates have been zero for so long now — I don’t remember when they weren’t zero — an aging population and government debt up to their eyeballs, but still the yen rallied…

But that appears to be over, giving credence that the only reason yen was so strong for so long was that it was still considered to be a “safe haven” currency. Well, with the latest agreement in the eurozone, I’m sure a lot of those “safe haven” trades into yen are being unwound, from the looks of it, I should say. So for the first time since July of last year, yen is trading with an 80 handle…

The euro (EUR) remains above 1.32 this morning… but has found the waters quite rough as it attempts a run at 1.33, and just like a couple of weeks ago, when we saw the euro bounce around 1.32-1.33 and never really climb past 1.33, the markets will grow tired of this trade, and soon the euro will begin to slide again. That is, unless it can get some strong legs and move past 1.33. Personally, I would be happy to see the euro remain around 1.32, for now, and see where the baby steps of stabilization for the eurozone go from here…

In the 1980s here in St. Louis, the world-famous rock radio station, KSHE, used to run a TV ad that had a father break into air guitar when the Stones’ song “Brown Sugar” would come on, and the daughter would get all freaked out and say, “Mom… he’s doing it again.”

Well, I told you all that to set up… “Pfennig readers, China’s doing it again.” China announced last night that they had signed a new member to their club of countries that have currency swap agreements to remove dollars from the terms of trade. This time, China signed an agreement with Turkey. Yes, China is being coy with these smaller — in terms of world trade — countries, but that’s how they are going to spread their wings, and gain a wider distribution of their currency. And again, I sit here and tell you, dear reader, that China has plans to remove the dollar as the reserve currency of the world.

And maybe it won’t be the renminbi (CNY) that takes over… maybe the so-called reserve currency is a basket of major currencies. The point here, and I can’t emphasize this enough, is that to have the reserve currency title stripped from the dollar would be devastating to our economy… To you, me, our kids, our grandkids… Think about this, dear reader… after World War II, the pound sterling (GBP) could no longer be the reserve currency of the world. Because of the debts the U.K. built fighting the war, the U.S. became the financier of the world, and was the only country that had the ability to act as “settlement banks” and use dollars in the terms of trade…

Then gloom, despair and agony fell on the U.K. economy. So this is what the Chinese have in mind for us… and why are they doing this? They believe that the U.S. has broken their promise to the world to keep the dollar strong, which they can no longer do, given the debts, deficits, economy, scandals, unfunded liabilities and on and on…

OK, I’ve got to go on, because this is really depressing me this morning!

This morning, the euro was dealt a bit of a blow by a worse-than-expected manufacturing index report for this month… remember, these manufacturing index reports are called “PMI.” So the eurozone PMI came in at less than 50, at 49.7. In addition, remember that any number below 50 represents contraction of the manufacturing sector. I find this report to be interesting, given that there appears to be a strong economy in Germany. But even with Germany representing the largest economy of the eurozone, there are many more countries in the eurozone that are not experiencing economic strength.

In the U.K., the latest Bank of England (BOE) meeting minutes showed that two members voted for additional bond purchases greater than what was implemented. I’m surprised at how the markets slammed the pound after the printing of this report… Silly markets… fickle markets… It’s just two votes… But the real point here is that we have to keep our eye on the ball, as I’ve explained several times over the past few years, and that is that what happens in the U.K. ends up on our shores about six months later… The BOE implemented another round of QE last month, so the clock has started…

The Aussie dollar (AUD) is still gasping for air, after having the wind knocked out of it by the RBA meeting minutes… We talked about this yesterday, but for those that missed class yesterday, the RBA added some wording in their latest meeting minutes that surprised the markets. The RBA kept their foot in the door of more rate cuts. Of course, they didn’t say they would cut rates, they simply said they “had the scope to do so, should the economy weaken”…

So as I said yesterday, we saw this same type of trading after a RBA rumor about three months ago, and it took the A$ a few days to get its wind back. I think it may get its wind back when the markets get a drift of the latest Wage Cost Index for the fourth quarter, which printed stronger than expected!

As I look at the currency screens this morning, most of the currencies are moving in the wrong direction, but not by much, just an underlying bias to buy dollars this morning. And gold, which had a very strong performance yesterday, is off about $5 this morning, as it appears some profit taking has taken over.

The price of oil didn’t take a step back, though. The oil price is up another $1, to $105, and knocking on the door to $106… I stopped to fill up my gas tank this morning… and much as the way groceries, restaurants and so on are doing… I got less and paid the same… This way, most of us don’t really feel the inflation all around us, but it’s there… trust me. No wage inflation or home inflation, but everything else that touches our lives… and as long as everything else around us is going up in price or going down in the quantity at the same price (it’s the same thing), it would be OK to see some wage inflation, eh?

China also printed a weaker manufacturing index (PMI). The preliminary report from HSBC Holdings shows that China’s PMI was 49.7, again below 50. This is all a part of the “moderation” of the Chinese economy, folks… nothing to be really concerned about yet, so move along, these are not the droids you are looking for…

Well, it looks as if the U.S. isn’t the only country that didn’t experience a grand Christmas shopping season. Retail Sales in Canada too, came in much weaker than previous months… December Retail sales for Canada slipped 0.2%, following increases of 0.4% in November and 0.8% in October! So maybe everyone shopped early? December was the first drop in five months for Canada, and a look under the hood (pun intended) showed that motor vehicles were to blame for the drop. So let’s not write the Canadian economy off just yet…

One European currency, the krone, (NOK) that’s bucking the trend of following the euro today, and in my opinion, it’s about darn time! The Norwegian krone is rallying nicely this morning. You might recall me bemoaning the fact that the krone was following the euro, even though Norway had sterling fundamentals and should be held to a different standard. Well, maybe that’s happening, finally! The krone is the best-performing major currency this month!

After cutting rates in December, the Norwegian central bank, the Norges Bank, might just be sitting on its hands going forward, as speculation of another rate cut fades… All this fading speculation is really pushing the krone… I wonder how long this will last? Does it have legs? Is it on terra firma? I guess we’ll have to wait and see, but in my opinion, it should be OK! Of course, just because I say that, I need to make sure you understand that it’s just my opinion, and I could be wrong!

I saw a cartoon on Ed Steer’s excellent morning Gold & Silver Daily this morning… It shows the president holding a dollar bill that’s on fire, and he says, “Look, Green Energy!” If it weren’t so true, it might be funny, eh?

Not much in the way of data from the data cupboard this morning here in the U.S., just existing home sales for January… The thing to look for here is not the homes sold, but at what price? Did the median price decline as it has for a couple of years now? That’s what to look for…

Then there was this from The Economist:

“The European Union has lower government debt levels than America. Gross government debt in the 27 nations of the EU was 80% of the region’s GDP at the end of 2010; in America, gross federal debt at the end of 2010 was 94% of GDP. Furthermore, government debt is growing more slowly as a percentage of GDP in the EU than in America, because pretty much every nation in the EU is implementing austerity measures. The general government deficit in the EU-27 in 2010 was 6.6% of GDP. In America, the federal deficit in 2010 was 9% of GDP.”

I tell you this not as a “hey, they’re better than us” type of thing. This article caught my eye, because we’re going to hear over and over again during the election campaign that we are “becoming Europe” because of the debt. But if that were true, then we as a country would be cutting deficit spending, and implementing austerity measures… watch out for that!

To recap… Yen finally surrenders to intervention and reduction of safe-haven flows. China signs another member to their currency swap club. Oil climbs further. Gold has strong performance yesterday followed by some profit taking today. The A$ is still searching for some wind, after having it knocked out of it by the RBA minutes on Monday, and maybe, just maybe, Norway is breaking the trend to follow the euro…

Chuck Butler
for The Daily Reckoning


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