Atlanta Fed President Lockhart boosts the dollar.

* Factory orders rebound in June…
* Atlanta Fed President Lockhart boosts the dollar.
* IMF review paper says to keep the SDR basket as is…
* Aussie dollar continues to recover…

And Now. Today’s A Pfennig For Your Thoughts.

As has become our custom while Chuck is out, Frank will get things started off this morning with another of his ‘road reports’:

August 5th, 2015 – Edwards, CO. Heading back to the office tomorrow and like Chuck back on the desk Thursday. We’ve been at opposite ends of the country at times and the writing styles are dissimilar as well. Expect you’ll be excited to be reading Chuck again soon. I’ve started the reentry checklist by peeking at a few emails, checking up a little on news and generally starting to gear back up. Being in Vancouver last week at the Sprott-Stansberry Conference was like drinking from an information firehose so a few days of considering the next painful step have been a good transition for splash down.

One of the things that we’re all asked often is – when will it turn? “It” might be the price of a currency, the stock market, gold or silver, or maybe the economy as a whole. Even a cursory look at research clearly shows that this is a fools game but we all participate not unlike making declarative statements about the weather. The one I’ve been thinking about a lot is the resource sector – extraction and distribution of commodities. The sector as I have noted over the past week is down about 95% over the past 5 years. When is it too low and when is the time to consider entering the market? Do we wait for a small upturn or enter now? I wonder if we can create a MarketSafe(r) to cover this opportunity – stay tuned as the financial geniuses go to work.

After dinner tonight we went upstairs from the restaurant to the home of one of our table partners. “What was the most physically difficult job you ever held?” was the question. Cleaning fluid storage tanks on a Navy vessel was one. Heat treating metals in a hot summer factory another. Spraying insulation in a HAZMAT suit. Cleaning oil and gas storage tanks. Filling bubble bath containers for weeks. Many of these are now outsourced activities, others cannot be moved overseas – ever. We wonder how these and all the other activities in the economy filter through to economic recovery. How does the estimated 250k jobs lost when the 1,300 or so rigs shut down in North America in the past year figure in? How does this compare to booming car sales? I’m betting on an unsteady, unbalanced, but growing recovery that really doesn’t gain much strength until next year or beyond. The counterpoint is a 70’s style stagflation – but at lower nominal levels. Hoping for the former.

Thanks as always to Frank for getting things rolling this morning, and rolling is exactly what the US$ has been doing the past two days.

Tuesday brought us another round of data regarding the US economic recovery, and the news was positive. Factory Orders for June increased by 1.8% following a revised 1.1% drop in the previous month. While most of this increase was due to aircraft orders, the Ex Transportation number was also positive at .5%. But on the negative side, May’s Ex Trans number was revised down from .1% to – .1%.

The US dollar began to strengthen after the Factory orders data was released, but really got going on comments made by Federal Reserve Bank of Atlanta President Dennis Lockhart. Lockhart is a voting member of the FOMC and is seen as a person who typically votes with the majority. Lockhart told the WSJ that data would have to show a ‘sharp turn for the worst’ to change his view in support of a rate hike in September. This gave the dollar bulls all they needed to charge back into the market, pushing the dollar higher against all of the major currencies except the Australian dollar.

We have been writing a lot about the Chinese currency, and focusing on the possibility of it being added to the SDR basket in October. But a review paper written by the staff of the IMF suggests the basket should remain as is until September 2016. This paper effectively ended the Chinese currency’s chances of being added to the SDR basket this year. While the Executive Board of the IMF still needs to vote on any change later this month, the report suggested the Renminbi did not meet the criteria of being ‘freely usable’.

“If the RMB were determined to be a freely usable currency, it would play a more central role in the Fund’s financial operations going forward, and it would qualify for inclusion in the SDR basket,” the report said. But the report did go on to recognize the huge strides Beijing has made in getting the RMB used in trade, noting that it is already the fifth most used currency for international trade.

Ultimately, the report said the implementation of any formal decision to add the RMB (yuan) to the SDR basket should be delayed until 2016 so as not to disrupt financial market trading during the end of 2015. While it is a bit of a blow for the Chinese leadership who have really pushed for inclusion, the report definitely gives an indication that it will be added in September of 2016.

This morning we will get a ‘first look’ at the employment numbers with the release of the ADP Employment change report which is expected to show an increase of 215k jobs. Some view this report as a preview of Friday’s anxiously awaited Nonfarm Payroll data; but the ADP report has not been a very good indicator as of late. This just in – the ADP numbers were disappointing, showing an increase of just 185k jobs in July. This has the dollar on its heels a bit and has sent Gold up slightly, but again this has traditionally not been a very good indicator of the monthly numbers.

The market will be focusing on Friday’s numbers to see if there is any indication of a firming labor sector as Chairman Yellen has repeatedly said this would be a key factor in the decision to begin raising rates. A strong number on Friday could lead another shift toward a September rate increase, while a weak report would likely push any rate rise off until the end of the year.

Following the ADP numbers we will get the Trade Balance for June which is expected to show a deficit of $43.00 billion. The trade data has been impacted by the strong dollar which is hurting exports. Later in the morning we will get the Markit US composite and services PMI data for July, both of which are expected to show no change from last month’s readings of 55.2 and 56.2.

The Aussie dollar was the best performing currency over the past 24 hours, as opportunists took advantage of the recent sell off to pick up the currency at rock bottom prices. These investors are banking on the RBA to not take any additional steps to weaken the currency after they dropped that language from their recent policy statement. The Aussie dollar is up just over 1% this week, and is the lone ‘major currency’ which has a positive return vs. the US dollar.

To recap, Factory orders rebounded in June after a disastrous reading in May. ATL Fed head Lockhart, who typically votes with the majority, said a rate hike in September is a pretty good bet. His words sent the dollar higher vs. most of the currencies. An internal IMF paper suggests they will NOT add the Chinese currency to the SDR basket this year, instead they will look to add it in September of 2016. Falling ADP numbers put into question the Labor number which we will get on Friday, and the Aussie dollar continued to trade higher as opportunists saw value.

Currencies today 8/5/15. American Style: A$ .7382, kiwi .6554, C$ .7593, euro 1.0907, sterling 1.5645, Swiss $1.0229. European Style: rand 12.7184, krone 8.2448, SEK 8.6877, forint 283.03, zloty 3.8196, koruna 24.74, RUB 62.83, yen 124.05, sing 1.3816, HKD 7.7517, INR 63.70, China 6.1186, pesos 16.24, BRL 3.4558, Dollar Index 97.922, Oil $45.93, 10-year 2.22%, Silver $14.60, Platinum $949.74, Palladium $596.25, and Gold $1,090.66

That’s it for today. We got some rain showers this morning, which made my run a bit more interesting than usual. I actually like running in the rain occasionally, as it mixes things up a bit. The data sure seems to be mixing things up for the FOMC – not really pointing to an easy conclusion as to the strength of the recovery. It should be some interesting trading going into September’s meeting. I hope everyone has a Wonderful Wednesday and thanks as always for reading the Pfennig.

Chris Gaffney, CFA
EverBank World Markets