Currencies Play Catchup With Treasuries.

* Dudley, Weak ISM, and maybe something else sends dollar down!
* Biggest two-day rally for euro since 2009!
* Russian ruble is best performer overnight!
* Did the PPT make a cameo appearance yesterday?

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

Good Day. And a Tub Thumpin’ Thursday to you! Badfinger greets me this morning with their song: Come and Get it.. This was a Liverpool band, that was heavily influenced by the “other band” from Liverpool, The Beatles, and this song, Come and Get It, was written by Paul McCartney, and given to the young band to kick start their careers. There you go, a little rock music history for you this morning! I love reliving history that I lived through. I sure wish Paul McCartney would have given my band a hit song to kick start¬†our careers!

Front and Center this morning, the dollar has had its biggest two-day drop in a year, and it appears that there’s nothing to stop the drop at this point, but you would have to think that the PPT would be lurking in the shadows. So, I bet your wondering what brought about this drop in the dollar that seemed to be going along nice and strong. Well, it’s about sentiment with a little fundamentals sprinkled in. But basically, we’ve seen the 10-year Treasury’s yield drop through 2% and was as low as 1.85% yesterday morning, but sits today at 1.90%… What this drop in bond yields is telling us is that bond traders have seen enough of the weak economic data prints, and are saying that the Fed can’t hike rates 4 times this year.

It took a couple of days for the Currency Traders to “get the memo from Bond Traders” but the message was finally received, and when it was, the currencies soared, along with Gold, and the dollar got pummeled. So, the Currencies are playing catchup with bonds, and I think they have some more catching up to do! Oh, and for those of you keeping score at home, Fed Funds Futures are seeing traders place traders that are signaling that the Fed will NOT hike rates in 2016. WOW! Nice that they’ve come around to Chuck’s way of thinking, eh?

And leading the currencies in their charge against the dollar, is the Big Dog. Yes, just like in days of yore, when the Big Dog would get off the porch and chase the dollar down the street, all the little dogs would follow, and some would run faster than the Big Dog, but the little dogs wouldn’t dare run off the porch without the Big Dog getting them started. I remember when I would talk about the dogs on the porch just about every day back in the day before PIIGS, and GREXIT, a global slowdown, and global deflation. Recall last week I talked about the Plaza Accord, and how there had been some calls for a new Plaza Accord to take place to help the Russian ruble. I said last week that I didn’t see how a new Plaza Accord could happen these days, with just about every Central Bank in the world attempting to weaken their currency.

But maybe, just maybe there was something going on. Maybe finance ministers around the world didn’t have to meet at the Plaza Hotel in NYC, to discuss the strong dollar like they did in 1985, maybe phone calls worked this time, to have a coordinated move to weaken the dollar? It all looks that way to me folks. Because this strong move in the currencies has been unabated, with no profit taking, no going back to fill gaps, it’s been a very strong move that could only come about if BIG Money was in the markets selling dollars.

But in reality what probably started this snowball rolling down the hill, were comments by Fed N.Y. president, Dudley, who is also a voting member, was talking about the prospect of rate hikes this year, and said that: “said financial conditions are considerably tighter and a weakening outlook for the global economy would have to be taken into account.” And then add in the weaker than expected ISM Services print (more on that later) and the snowball was gaining size as it was sent rolling down the hill. Oh, and there’s another Fed member readying to speak today. Mester, who is normally a hawk, will speak, and it will be interesting to see if he has any dovish tones, for if he does, you can bet your bottom dollar that the Fed is greasing the tracks to not hike rates further.

The Big Dog, euro, has seen a two-day rally that represents its biggest jump since 2009. I don’t think this move by the euro is going to allow European Central Bank (ECB) President, Mario Draghi, the ability to swallow his steak so easily. (does anyone in the room know the Heimlich move?) Remember, a month ago, Draghi could have come out and just ripped through the euro’s value, but using that economic stimulus bazooka he’s always talked about? But he didn’t, he used an air rifle with stimulus instead, and the euro hasn’t looked back. Yes, it has bounced around, up and down, but go back to that day the ECB met, and track the euro from there, I think you’ll see what I’m talking about.

So, if Draghi, really wants the euro to weaken, he’s going to have to come out with both side arms blazing with dovish talk and stimulus. Barring that, the euro is free to move about the path used by rallying currencies.

The euro isn’t the only good story today. The Russian ruble is the best performing currency overnight, and the Chinese renminbi was allowed to appreciate in the fixing. In fact, as I view the currency screen this morning, there’s not one currency or metal that is trading with a loss VS the dollar this morning. The markets have proven that they have a short memory, for the Japanese yen, which at the end of last week, was getting tossed around like a salad, has put together a nice run in the past few days.

Bank of Japan (BOJ) Gov. Kuroda, isn’t happy about this move in the yen, and came out with comments that were meant to stop the yen’s rally. Kuroda told the markets that the BOJ is not limited in their ability to move rates more into the negative territory, like the Riksbank or the Swiss National Bank. It was like he was saying, if going with negative rates wasn’t good enough to keep the yen weak, I can take rates deeper into negative territory, so stop buying yen! But his words are falling on deaf ears right now.

In China overnight, the Chinese announced that they were loosening the rules on the limits of foreign investment into and out of the China.. This is another baby step toward more capitalistic markets in China, which are going to be needed when the country decides to float their currency. I like this move by the Chinese, because basically what they are telling us is that despite the turmoil in their stock market and the depreciation in the renminbi, the Chinese are not going to stop, but continue on instead, on the path toward more open national markets.

The price of Oil jumped higher by nearly $3 in the last two days. I had a very nice lunch yesterday with a longtime Oil man. He shared with me a report that he pulled that had information regarding Oil supplies. the report that can be found on the Bloomberg, reflected a viewpoint that Oil supplies will be falling this year, as the shale Oil producers deal with the low price of Oil. According to the Energy Information Agency (EIA) Oil production will fall by 600,000 barrels a day in the U.S. this year.. And it will all be from the Shale Oil Producers.

In addition, it is believed that Russia wants to meet with Saudi Arabia about cutting production.. Remember the Saudi’s have the only Oil production costs that can deal with $30 Oil, as their costs to get Oil out of the ground are the cheapest in the world. So, Russia is going to have to be very compelling and have something that the Saudi’s might need to get them to cut production. But the Russians have been known to twist an arm or two in negotiations, so I wouldn’t put a cut in production out of the question at this point, which would add more girth to the price of Oil. And the Bloomberg report forecasts that the price of Oil will rise to $46 by year-end.

I told this longtime Oil man that I believed that the drop in the price of Oil was brought about by two things. Oversupply, and the strength of the dollar. Well, if you take away the oversupply and the strong dollar, I could very well see the price of Oil rising again!

The Gold price is considerably higher this morning, and could have been even higher if not for some suspicious trading late yesterday afternoon.. I saw a graph this morning in Ed Steer’s letter that showed the dollar index and it was in a free fall until 2 pm and suddenly it stopped on a dime and went higher a bit and then evened out the rest of the day. Was this the PPT in action?

So I came across an article on Reuters yesterday, that caught my eye. The article talked about how Chinese production of Gold last year, was down 0.4%, but consumption of physical Gold was up 3.7%… Hmmm. OK, well, we all know that China is the number one producer of Gold in the world, and their production was down, marginally I might add, but down in 2015. Was the drop due to the price of Gold not rising? And by that same measure, was the rise in consumption due to the price of Gold not rising? Yes, would be the answer to both questions. Strange, eh? Sort of like the price of Oil for the shale Oil producers here in the U.S. Their production of shale Oil is dropping because of the loss of low price of Oil, and the consumption of Oil is stronger because of the price of Oil.

The U.S. Data Cupboard yesterday, had the ISM Services print, and unfortunately, the print was not very good, as the index number dropped from 55.8 to 53.5. and the important components of the index: Business Expectations and Employment both saw erosion. The ADP Employment Change showed an increase of jobs created in January of 205,000 (195,000 was expected). So mixed data, but the ISM far outweighs the ADP at this point. I think people/ investors have grown tired of hearing about the “jobs recovery” when there are still not the same amount of people working than there were before the financial meltdown.

Today’s Data Cupboard has some good stuff in it.. the December Factory Orders, along with Durable Goods Orders and Capital Goods Orders. These three data prints are part of what I call “real data that is important to an economy”. I expect all three of these to print negative for December. And that will close out the 4th QTR GDP, which will probably drop from the initial print of 0.7% to 0%.. (yesterday, I told you my GDP tracker had 4th QTR GDP at 0.5%, and that was before the trifecta of negative reports today)..

To recap. The trap door was sprung underneath the dollar yesterday, and the two-day rally in the currencies is something to see! It’s the best two-day rally for the Big Dog euro, since 2009. BOJ’s Kuroda attempts to stop the yen rally with talk of moving deeper into negative rates, to no avail. The price of Oil jumps $3, and the Russian ruble is the best performer overnight! China opens up its Capital Markets even more, and allows the renminbi to appreciate. Chuck thinks the currency rally is just Currency Traders playing catchup with bond traders who have been calling the Fed’s bluff for a week now, regarding the Fed’s call that they will hike rates 4 times this year.

For What It’s Worth. Well, longtime readers know my penchant for always attempting to find someone else to give his opinion on something I’ve beaten the dead horse over and over again about. So, it pleased me to see this report in my MarketWatch email yesterday. You can read it all here:

Or opt to read the snippet. “The 10-year U.S. Treasury yield hit a one-year low on Wednesday-a sign the market believes that interest rates will remain lower for longer, according to analysts.

Benchmark 10-year yields TMUBMUSD10Y, +0.91% have moved lower a nearly straight line in 2016, even though the Federal Reserve has begun to normalize monetary policy from ultralow levels. Yields were widely expected to rise further as the Fed followed through with further rate increases.

Yields and bond prices move in opposite directions.

“The bond market is pricing in a lot of bad news,” said Anthony Valeri, investment strategist at LPL Financial, referring to falling inflation expectations and worries about slower economic growth world-wide.

The fed-funds futures market is now pricing in just a 37% probability of a rate increase in December, 10 months from now, according to CME Group’s FedWatch Tool.”

Chuck again. Yes, when an national media outlet like MarketWatch sees what’s going on with bonds, it’s almost too late, and that’s why I said above today that I thought the currency traders had more catching up to do with bonds.

Currencies today 2/4/16. American Style: A$ .7215, kiwi .6710, C$ .7310, euro 1.1185, sterling 1.4575, Swiss $ .9995, . European Style: rand 15.8305, krone 8.4940, SEK 8.3920, forint 277.25, zloty 3.94, koruna 24.1570, RUB 76.55, yen 117.60, sing 1.4045, HKD 7.7875, INR 67.56, China 6.5419, pesos 18.05, BRL 3.8595, Dollar Index 96.74, Oil $32.67, 10-year 1.90%, Silver $14.75, Platinum $888.42, Palladium $508.39, and Gold. $1,146.24

That’s it for today. I see the sun rising, looks like another beautiful day is in store for us down here, but with the sunshine you need a little rain, and I guess that’s on its way, along with cooler temps for next week. UGH! Sunny and 80, that’s my style. I look and feel real good with Sunny and 80.. Thanks to longtime reader Gil for a great lunch yesterday. It’s always fun and fantasy for me when I get to see how the “well to do people live”.. I went to pick up my tickets for spring training games yesterday. It seemed strange being at the ball park and not seeing the sea of red that is all the Cardinals fans. I really wanted to go inside the park and just walk around, it was a sunny day, and I could already smell the newly cut grass. Oh well, another month, and it will all be back to normal. 13-days until Pitchers and Catchers report. And with that, I’ll skedaddle. and leave you to working on making this a Tub Thumpin’ Thursday!

Chuck Butler
Managing Director
EverBank Global Markets
Editor of A Pfennig For Your Thoughts