Good day. As our Christine would say, Hooray for me because this is my Friday! I am heading out to Colorado with my family for an extended weekend of snow skiing. Looking forward to getting back out on the mountain, it has been a few years since I last went. But I know you don’t read the Pfennig for my travel updates, so let me get to what is going on in the currency markets.
The dollar had a pretty flat day again yesterday, as the US data came in pretty much right where it was expected. The biggest stories of the day (besides Lance Armstrong’s interview with Oprah) were concerning what many believe is the beginning of a currency war. Officials from Russia’s central bank started the latest round of ‘currency wars’ talk when they said the world’s leading economies are on the brink of a new war. And looking at the global currency markets movements as of late, the seems to be some validity to what Russia is saying.
It is well documented that the new Prime Minister in Japan is going to do anything he can to generate some inflation, and the markets have pushed the yen lower on this knowledge. While Abe hasn’t come right out and said he wants to drive the value of the Japanese yen lower, it is well known that the Japanese are some of the most active participants in the currency markets. The strength of the yen is something which has been a concern to Japanese policy makers and Abe has certainly been willing to do what he thinks is necessary to improve the Japanese economy. Abe and the rest of the policy makers know that the steps they are taking will continue to drive the value of the Japanese yen lower, and that is something they are not fighting.
And the US policy makers are in a similar situation as their Japanese counterparts. Ben Bernanke continues to figure out creative ways to try and stimulate the US economy, pumping billions of dollars a month into the markets. This activity is certainly inflationary, and will lead to a lower US$. Policy makers know this, and as we have written they are actually wanting to see the value of the dollar fall. US policy makers are planning to deal with our debt by paying it down with cheaper dollars (print more and pay it off).
Finally, the Europeans certainly benefitted from the weaker euro last year, and the recent rise has some policy makers worried. Luxembourg Prime Minister Juncker, who also leads the euro-area finance ministers, expressed concern over the euro’s recent rise. “The euro foreign-exchange rate is dangerously high” Juncker told a gropu of business leaders yesterday. During the heat of the euro-debt crisis we noted that German Chancellor seemed to be taking advantage of the crisis in order to ‘jawbone’ the euro lower. A lower euro, we surmised, would certainly help Germany’s export driven economy. And that is exactly what happened.
And it is well documented that the Chinese have long been one of the largest currency manipulators in the world. China’s pegged currency continues to be undervalued, though the 33% appreciation of the Chinese currency since 2005 has certainly narrowed the gap. In fact, back in 2005 I remember congressmen complaining that the Chinese currency was ‘at least 25% undervalued’! So I guess these same congressmen would say the Chinese currency is about 8% overvalued now, right? It is interesting what the Chinese have accomplished over the past 7 years, allowing their currency to slowly appreciate without any dramatic impacts on their economy. If you dust off some of our old Review & Focus issues you will see this is exactly what we said would happen; China would not revalue their currency overnight, but would rather let the value adjust slowly. The Chinese certainly have a longer term outlook than some here in the west.
So the Russians are correct, the developed nations of the globe certainly seem to be caught up in a race to the bottom for their respective currencies. But the currency markets are a ‘zero sum’ game – value is relative. If one currency is being pushed lower the value of another currency is rising in relation to it. So if all of the developed nations want to push their currencies lower, it would certainly seem the developing nations currencies will be the ones to benefit. I would also think the one ‘true’ currency (PRECIOUS METALS) will also benefit from this next round of ‘currency wars’ as investors realize the value of all fiat currencies are subject to whims of the markets.
But I will get off my soapbox now and back to what is happening in the markets. The data released yesterday showed Retail sales rose a bit more than forecast in December, ending 2012 on a positive note. Advance Retail Sales rose .5% in December after rising an adjusted .4% the previous month. Apparently the worries about the impact of the Fiscal Cliff on consumer spending were unfounded. But the higher taxes which return to workers paychecks this month may have a slightly negative impact on Retail sales in the first quarter of 2013. Producer Price increases were slightly lower than expected, indicating that inflation continues to be kept in check (for now).
Today we will more inflation numbers with the release of CPI for December. Like the PPI numbers, consumer prices are expected to have been flat during the last month of 2012. We will also see the TIC flows, an indication of whether foreign investors are ‘keeping their faith’ in the US economy in spite of all of the budget wrangling. We also get the Industrial Production numbers and Chuck’s favorite Capacity Utilization numbers (both of which are expected to be right where they were last month). And the afternoon will be capped off with the release of the US Federal Reserve’s Beige Book.
Moving ‘across the pond’ UK inflation held at the highest rate since May, rising 2.7% from a year earlier. Inflation has held steady the past 3 months, just as economists had predicted. The Bank of England has a 2% inflation goal, and many policy makers are beginning to question if additional stimulus is warranted. The British economy is continuing to struggle, and policy makers would like to bolster more growth but with inflation holding above their goal additional stimulus is definitely not assured. Other reports showed UK house prices rose 2.1 percent in November, up slightly from the month previous.
Sticking to Europe, a story I read on the Bloomberg this morning suggests Norway’s government is facing pressures to move rates lower as the krone continues to appreciate. The Norwegian Krone has been the best performing major currency over the past 6 months, appreciating over 9 percent vs the US$ since July of last year. The krone had been incorrectly associated with the euro debt crisis, and has benefitted with the easing of concerns over the euro. Some members of Norway’s government are now expressing concern over the strength of the krone (sound familiar?) and want the Norges Bank to ease rates in order to take some of the price pressure away from the Norwegian currency. I would hope the central bank will look first at the Norwegian economy in setting rates, and not just consider the value of the krone.
And data down under showed Australian consumer confidence was little changed. Australian consumer confidence rose to 100.6, with readings above 100 indicating an optimistic outlook. Recent drops in interest rates by the RBA and a lower unemployment rate seem to have been offset by worries concerning personal finances. Employment data for December is scheduled to be released tomorrow, and that may give us some more direction on the possibility of another rate cut in February. Right now I am leaning toward a pause in rates in February, with the RBA waiting to see if the recent bounce in the Chinese economy will filter back into better growth for Australia. In fact, I am now leaning toward no more rate cuts in Australia during 2012, but we will just have to wait and see.
The Aussie dollar gave back a bit of its earlier gains, but is still holding fairly steady in the middle of the $1.05 handle.
Then There Was This. I promised readers to have a TTWT section today, and I actually have two items. First, I had several readers, including Chuck, who sent me questions about Germany’s plans to pull their gold from the Federal Reserve. You will recall Chuck pointed out the fact that some in Germany were questioning the amount of gold which the NY Fed was actually holding, and apparently Germany is worried about the ‘safe custody’ of this gold. Here is what Chuck shared with me early yesterday morning:
The German business newspaper Handelsblatt, based in Dusseldorf, reported exclusively last night that the Bundesbank will announce a plan to retrieve Germany’s national gold from the Federal Reserve Bank of New York and the Banque de France in Paris. I wonder if they’ll get “stopped at the border” this time!
And another follow-up on a story which I reported on Monday. Many economists had been calling into question the validity of the recent Chinese trade figures, suggesting external data didn’t support the big export numbers reported by the Chinese government. Well the Chinese government responded to the allegations as follows: “Customer import and export statistics are based upon actual customs declarations,” the General Administration of Customs said in an emailed statement yesterday, responding to questions submitted by Bloomberg News on Jan. 11. “In our published export and import data, every dollar has a corresponding customs declaration document to back it.”
What is surprising to me is that China actually responded to these questions. In past years they would have simply ignored all of the calls of data manipulation. But now it seems they care and want to try and convince investors that the information coming out of China can be trusted. We will continue to believe about ½ of what comes out (just slightly less reliable than the data out of the US).
To recap. The currency wars are heating up, with several of the developed nations trying to push the value of their currencies lower. Data out of the US showed retail sales were slightly higher, ending 2012 on a positive note. UK inflation data showed prices continue to increase above the target rate which may force the BOE to keep from further stimulus. Australian consumer confidence ticked higher which could make the RBA hold off on further rate cuts. And Germany is coming for their gold, I sure hope it is there!
Currencies today 1/16/13. American Style: A$ $1.055, kiwi .8392, C$ $1.015, euro 1.3292, sterling 1.6012, Swiss $1.0754. European Style: rand 8.8376, krone 5.581, SEK 6.4951, forint 221.61, zloty 3.1059, koruna 19.249, RUB 30.398, yen 88.12, sing 1.2243, HKD 7.7525, INR 54.6937, China 6.2184, pesos 12.661, BRL 2.0388, Dollar Index 79.705, Oil $93.42, 10-year 1.81%, Silver $31.21, Gold $1,677.07, and Platinum $1,670.50.
That’s it for today. Mike will take the helm of the good ship Pfennig the rest of the week, and Chuck will be back next Tuesday. If you can’t tell, I am really excited about getting out to Colorado with my family. Both of my sisters and their families are also heading out, so it should be a great time. I hope everyone has a Wonderful Wednesday, and thanks for reading the Pfennig!