China Reduces Treasury Holdings...
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In This Issue..

* TIC data shows negative flows...

* Risk is On today...

* A$ recovers again!

* German ZEW is disappointing...

And Now... Today's Pfennig!

China Reduces Treasury Holdings...

Good day... And a Terrific Tuesday to you! What a morning! It's normal temps, which means the morning air is cool, and every traffic light was green for me this morning! Talk about Smooth Sailing! See, how even little things like that can get me all lathered up? Well... We've got a ton of stuff to get through this morning, so let's get going, eh?

Front and Center this morning, the TIC Flows data from June was very interesting yesterday... Before we get into this, let me explain what I'm talking about for the new "kids" in class... TIC stands for Treasury International Capital, and it's just a fancy way of saying that someone is tracking the Net Security Purchases... Why is this important? Well... Security Purchases by foreigners is how the U.S. finances its ever growing deficit. For, example... The Trade Deficit and foreign direct investment makes up the Current Account... But just to keep this simple, the Trade Deficit in June was $49.9 Billion... The net security purchases to finance that deficit in June was... $44.4 Billion...

So, we were net negative in financing in June... What happens now? Well, we kick the can down the road even further... The U.S. rolls this negative forward... How long can they do that? Well, they can do it as long as foreigners keep lining up to buy... Not until foreigners say "no mas" does it all come crashing down...

So, what's the Big News from the TIC data yesterday besides the fact that we were negative in June? Well... And this is for the guy that keeps writing me telling me I'm wrong about China... According to Bloomberg... China cut its holdings of Treasuries by the MOST EVER in June! Total Chinese investment in U.S. debt declined 2.8% in June, following a 3.6% slide in May...

You might recall that it was June that China made the announcement that they would once again allow more flexibility in the renminbi... Hmmm... You don't think, nah... That couldn't happen, could it? Well, yes it could! China could have very well decided to allow more flexibility, and reduce their reasons for buying Treasuries... Turning instead to Europe and Japan... It's all there in the TIC report...

I haven't always agreed with economist Art Laffer...

But when responding to a question posed to him about China taking over #2 in the World's economies, he said, "China is not our enemy"...

We need to remember this... China has to do what's best for China, just as the U.S. does what's best for the U.S....

So, let me go through this exercise on what happens when the deficit financing comes crashing down... The Gov't has two choices... It can aggressively raise interest rates to make the Treasuries attractive again, or... It can allow a depreciation of its currency, which acts as the "clearing mechanism" for trades... In this case, if the dollar is much weaker, then when foreigners buy Treasuries and convert their base currency for dollars to purchase the Treasuries, they get to buy the Treasury at a "discount" because of the weakness of the dollar.

Now... Which one do you believe the Gov't will choose? What's behind door number 1? Or door number 2? One, brings your economy to its knees, and 2 deep sixes the purchasing power of the currency...

Which one do you believe the U.S. will opt for, given the current state of the economy?

OK... Now that we've gone through all that... The dollar is weaker this morning, along with Japanese yen, and Swiss francs, which tells me that so far, in the Asian and European sessions, it's been a "Risk On" Day... Stocks in Asia and Europe did well overnight, and U.S. stock futures are up, so one would have to think that this dollar weakness would continue once the boys and girls in NY arrive with their Starbucks, and begin their trading days.

The euro briefly traded above 1.29 overnight, as the results of an Irish bond auction were not as bad as some feared, but then was smacked back below 1.29 when German Investor Confidence, as reported by the think tank ZEW, dropped more than forecast to a 16-month low this month... I would have to think that this drop in Confidence stems from the recovery of the euro during June and July... For those of you keeping score at home, check your scorecards, they will show that the euro recovered from a low of 1.1877 on June 7th, and ended July at 1.3179...

Why would Germans get all jiggy with a strong euro? Well, you see, Germany is a manufacturing country, and depends on exports, and those exports suffer when the euro begins to gain against not only the dollar but other currencies as well...

The Aussie dollar (A$) is back above 90-cents this morning... I truly believe the "light" went on for traders yesterday who realized that the A$ was below 90-cents, but had one of the highest interest rates / yields in the world... And while interest rate differentials are not the "end all" of currency valuations, they do go a long way toward attracting investors, and after all, isn't that important? You bet your sweet bippie it is!

Unfortunately for the A$, the Resave Bank of Australia's (RBA) meeting minutes leads me to believe that the RBA is finished raising rates this year, unless, data demands they do so... Given the softer nature of recent economic data from Australia, I would have to say, chances are slim and none, and Slim left town, that the RBA will hike rates again this year... But... They've already done quite a bit a hiking rates this year, so I don't think the A$ will suffer from this revelation...

So... The Swiss franc spend 1-day trading with a better figure than the Canadian dollar / loonie VS the U.S. dollar... But, Oil is trending back up again, after dropping Big Time last week, and once again the loonie is in favor with traders.

In recent days, Gold has traded alongside the likes of dollars, yen and francs... So, one would think Gold to be getting sold this morning, alongside those currencies, as Risk Aversion takes a back seat today... But... As I look at the screens, Gold is up $1 this morning... Hmmm... Gold is at a 6-week high this morning, and I think this is where Gold takes the high road, while dollars, yen and francs, take the low road. And as I've always said I thought a rising Gold price would occur when investors realized the economy in the U.S. was a house of cards, and investors would need to protect their wealth...

I don't want to slight Silver... So... Don't forget about Silver as a protection of wealth too!

And then finally... I love it when I see the likes of Norway rally, for Norway is so fiscally sound, and their fundamentals are above and beyond most countries. Conversely, I also cringe the most when I see Norwegian krone weaken... Norway is too caught up in what the other European currencies are doing and shouldn't be... I think of Norway like I always told my kids when they would say, "but dad, the other kids are doing it" I would tell them, "but, don't you want to be better than the other kids?" "I sure expect you to be!"

Then there was this... One thing I want to bring to everyone's attention...

I get emails throughout the day, with questions as to what's gone on to move the market in a direction that day.

There's a way you may have instant access to currency news throughout the day, by simply going to our website: www.everbank.com then click on the Research & Planning tab, and then click the "Currency News" in the drop down box... Try it... I think you'll like it!

Currencies today 8/17/10: American Style: A$ .9020, kiwi .7090, C$ .9625, euro 1.2880, sterling 1.5630, Swiss .9590, European Style: rand 7.2510, krone 6.15, SEK 7.3355, forint 217.10, zloty 3.0870, koruna 19.2790, RUB 30.42, yen 85.40, sing 1.3545, HKD 7.7690, INR 46.63, China 6.7918, pesos 12.60, BRL 1.7540, dollar index 82.24, Oil $76.11, 10-year 2.61%, Silver $18.56, and Gold... $1,2227.20

That's it for today... And this week for me! I head out the door to San Francisco tomorrow, and Chris will have the conn, once again for the rest of the week. School starts today, and my buddy Alex was heard saying that he can't wait for Christmas Break! I don't think he's going to follow his siblings into teaching! I'll be spending the day today, putting together the Review & Focus, the Currency Capitalist, and my two presentations in San Francisco... Thank goodness Jen is back to take over risk management! I've got some great stuff for my presentations, hopefully it all comes together for me today... And good luck to Alex, as he begins his High School time in life... As I recall, it was a fun 4 years for me! And with that, I'll say bye, and have a Terrific Tuesday!

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837





Posted 08-17-2010 10:49 AM by Chuck Butler