Renminbi Sets 17-Year High!
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In This Issue.

* Risk Aversion is off table. now.

* BOC readies market for rate hike.

* A debt ceiling deadlock resolution?

* The best of both worlds for yen.

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

Renminbi Sets 17-Year High!

Good day. And a Wonderful Wednesday to you! Well, I said I wasn't going to come into the office before the air conditioning kicks in any longer, and as I opened the door to the office this morning, I remembered that I had said that, when the rush of hot stale air hit me in the face! Maybe, I'll remember tomorrow.

Well. the flight to so-called, "safety" that was all over the markets late last week, has dissipated, and investors and traders are going back out on the limb to take on risk. Of course, that could change on a dime at any time, so to say, "I think this will continue" would be leaving oneself hung out on a line. So, since I would drag any line down to the ground, you won't hear me saying that! At least not right now, with the debt ceiling deadlock here in the U.S. and the will we or won't we take defaulted bonds going on in the Eurozone.

So. with investors and traders taking on risk again, the currencies are doing better. But in a trading pattern that has begun to happen more and more, Gold & Silver has sold off as more risk takers come into the markets. So, that tells me that Gold & Silver were being bought as a part of the "flight to safety" as they should be! I would think that Gold will find its way back to $1,600, should the debt ceiling get raised here in the U.S. And the dollar? Well, short term it could have a "relief rally", but if the dollar has been in a weak trend for 9 years now because of its growing debt (and other things of course, but the debt problem was the fundamental reason the dollar entered the weak trend 9 years ago) then it would make sense that the dollar would get sold again, should the markets see that all we're doing here is adding on MORE DEBT!

And then the dollar can sing. It's the same old, same old situation. It's the same old ball and chain!

Yes, ball and chain for the dollar. debt, debt, debt. I saw a plan by lawmakers that called for $4 Trillion in cuts, spread over 10 years. Hmmm. Hey! It's something, right? At least we wouldn't be looking at a $20 Trillion debt in a few years, like we would if we remained on the current spending path. But this plan also calls for a "fundamentally changed tax code". There you have it! I can tell you right here, right now, that these lawmakers are looking for revenue to increase by more than they are willing to cut debt.

And. there's China. picking up the slack for the dollar. the U.S. and the dollar have been the King of the Hill for a long time, but there are chinks in their armor, both self-inflicted and from China chipping away at what was once the sole job of the U.S. What am I talking about here? Well, long time readers know that I've said over and over again, that this dance is gonna be a drag, no wait. I've said repeatedly that China will eventually have the reserve currency of the world, with the dollar getting that "circa 1950 pound sterling feeling" But, that's not going to happen today, or next week , next month or year, but with every chink in the dollar's armor. China is there to pick up the slack.

Like being the financier of the world. Look who's doing that now. It used to be us. now it's China. They finance our debt, and have been buying Eurozone debt to support them. Well, any old way, the Chinese renminbi is trading at a 17-year high (VS the dollar) this morning. And the State Administration signaled for more appreciation of the renminbi. So. the green light has been illuminated folks.

And what's good for the Chinese renminbi, is good for the Singapore dollar. The Sing dollar has actually outperformed the renminbi this year, but if you go back to July 2005, when the renminbi peg to the dollar was dropped, these currencies have basically traded on top of each other. And China "trusts" Singapore. so much so, that the Singapore Central Bank is allowed to hold China's new deliverable currency, the CNH and settle trade bills, using the CNH And Sing dollars.

Well. The Bank of Canada (BOC) did leave rates unchanged as I suspected they would, yesterday. The BOC did release a statement afterward that plays well with my thought that the BOC will hike rates next month. Here's what I'm talking about, from the statement. "some of the considerable monetary policy stimulus currently in place will be withdrawn."

This is a step up from the May statement which projected that stimulus would be "eventually withdrawn." And I liked it. but more importantly, so did the markets, which then went about putting wind in the Canadian dollar/ loonie's sails. The loonie never looked back yesterday, and it was as if the BOC had actually hiked rates! So, if this is the reaction we get from the markets now, I would think that the actual hike, if it does come next month, would see a muted reaction.

And yesterday, I was talking about the Aussie dollar (A$) looking for some wind for its sails. So, I spent a bit of time looking at stuff going on in Australia. what I did notice is that even though the deposit rates of the U.S. and Australia haven't moved, with Australia still enjoying a wide positive margin. The yields of Gov't bonds between the two nations are narrowing. How can this happen, I hear you asking? Well, remember when I told you that the interest rate futures had reflected a rate cut in Australia? Well, the bond markets try to act on their own, and look forward.. so the yield of Aussie bonds narrowed.

The good news though is that even with the rate differential narrowing (hey, it's not all about deposit rates) the Aussie dollar (A$) has remained strong VS the U.S. dollar. Back "in the day" when I traded foreign bonds (& currency) for the old Mark Twain Bank, I would look for yield differentials all over the world. Back then you could cross German bonds for Greek T-Bills and pick up 300 Basis points or whatever, that's the kind of stuff I'm talking about here in Australia.

And going north from Australia, we get to Japan. Remember a couple of years ago, before the first round of Quantitative Easing (QE) and it was all about the dollar, yen and Swiss franc? But then with QE, the dollar went right back to the underlying weak trend, but a funny thing happened to Japanese yen. It gained VS the dollar too! I commented at the time that Japan was enjoying the best of both worlds. Getting bought when it was all about risk aversion, and then getting bought again when it turned to risk on. Well, that's what yen's moves have been reminding me of now. The Risk Aversion has been taken off the table, but yet yen moves to a 78 handle.

The rumor there is that Japanese retail investors are covering their yen short positions, having waited far too long for the yen to suffer from the Tsunami's devastating destruction. As I've said before, folks. currency investing is more of an "ugly contest" than anything these days. The problems in the U.S. make the dollar ugly. The problems in the Eurozone make the euro ugly. But. since these two are offsets to each other, one has to be more valuable than the other.

At presentations, I used to show people a warehouse of broken down, wrecked cars. and say these are all currencies. the thing you want to find is the broken down car that's going to start in the morning and get you to work. Apparently, the Aussie dollar, Swiss franc, New Zealand dollar, Brazilian real, Swedish krona, Canadian dollar, Singapore dollar, Chinese renminbi, and Japanese yen, are all cars that start, eh?

The U.S. announced its next Auction numbers yesterday. Looks like $35 Billion 2-years, $35 Billion 5-years, 29 Billion 7-years, with new net cash raised of $39.1 Billion.

And the dollar isn't getting the you know what kicked out of it this morning? I shake my head in disbelief!

Then there was this. from Bloomberg. "Five of the 15 states with top bond ratings from Moody's Investors Service may be downgraded because their dependence on federal revenue makes them vulnerable to a U.S. credit cut should talks to raise the debt limit fail.

Maryland, South Carolina, New Mexico, Tennessee and Virginia are under review, Moody's said today. The action affects $24 billion of general-obligation and related debt, it said. The states are rated Aaa, Moody's top municipal grade.

To recap. Risk Aversion is off the table, but that could change on a dime at any time, so stay tuned! There appears to be a debt ceiling deadlock deal to cut $4 Trillion over the next 10 years. Hey! It's something! But watch out for those tax hikes. they're coming. The Bank of Canada left rates unchanged yesterday, but set the markets up for a rate hike next month with their statement. The loonie was well bid after the markets saw the wording of the statement. And the Chinese renminbi hit a 17-year high VS the dollar overnight.

Currencies today 7/20/11. American Style: A$ $1.0745, kiwi .8550, C$ $1.0555, euro 1.4220, sterling 1.6140, Swiss $1.2195, . European Style: rand 6.90, krone 5.4880, SEK 6.4480, forint 189.25, zloty 2.8120, koruna 17.2165, RUB 27.95, yen 78.80, sing 1.2135, HKD 7.7915, INR 44.45, China 6.4580, pesos 11.65, BRL 1.5635, dollar index 74.84, Oil $98.48, 10-year 2.93%, Silver $38.65, and Gold.. $1,587.95

That's it for today. I have been remiss in not announcing this, so here it is. Congratulations to Ty Keough. His over 50 soccer team won the world championship in Orlando a couple of weeks ago. Ty downplayed his participation, but it never hurts to have a former World Team soccer player on your team! And a great BIG HAPPY BIRTHDAY to my all-time fave guitarist, Carlos Santana, who turns 64 today. I have secured two tickets to see Carlos Santana in a couple of months, and I'm going to take Alex with me, so he can see a "real guitar master". (Alex doesn't know it yet, so don't tell him!) I was really belting out the Righteous Brothers' song, Unchained Melody this morning, along with my I-Pod. Good thing no one was here! Got my "eye" all polished up and shiny clean yesterday, so I've got that going for me! HA! OK. so, let's go out and make this a Wonderful Wednesday!

Chuck Butler


EverBank World Markets



Posted 07-20-2011 12:19 PM by Chuck Butler