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Currency Trends 101.

* Bias to sell dollars remains.
* But no conviction to sell also remains.
* Did the BOJ have a stealth-like meeting?.
* Is Volatility returning to the markets?

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

Good Day.And a Tom Terrific Tuesday to you! Well, here we are, the last day of January. One month down for 2017. Seems like we just turned the calendar to January 2017. Time flies when you’re having fun, eh? And who on earth wouldn’t think that waking up in the middle of the night, and writing a letter isn’t fun? HAHAHAHA! It got chilly here overnight. I crack up at the TV weather people when it gets chilly here for a day or two in the winter, they begin to warn parents to wrap up their kids with scarfs and gloves for their bus stop wait. Back home, when the temp rises to what they call chilly temps here, we wear shorts! The Charlie Daniels Band greets me this morning with his song: Long Haired Country Boy.. A poor girl wants to marry, and rich girl wants to flirt. A rich man goes to college, a poor man goes to work.. Well, at least that’s how it used to be, eh?

This should be short-n-sweet this morning, but one never knows what the “stream of consciousness” brings us, now do we? I’ll start today with some that sounds familiar, and that is, the bias to sell dollars remains. However, while the bias to sell dollars is there, the conviction to actually do it is lacking. I did read where dollar long positions in the IMM Futures market were reduced for the second consecutive week, last week. Now that’s interesting don’t you think? Yes, I know it’s not the spot market where price discovery takes place, but when these guys that buy and sell futures start to realize that they are holding the “hot potato” they dump it quickly and that carries over to the spot market eventually, because there won’t be the contracts, long or short, to execute and turn into actual currency. So, two consecutive weeks the long dollar contracts were reduced.. and I don’t mean by 50 contracts either!

Most contracts never see the light of day to be a real currency, as the contracts usually get sold ahead of maturity and rolled.. But I still think that this news plays well with the idea that I’ve sprung on you this week, that the bias to sell dollars hangs over the currencies, but the conviction to actually sell dollars is lacking.

Well, it’s January 31st. That means the 5% rallies in both Aussie dollar (A$) and kiwi this year, will come to an end today. That is if history tells us anything! I was reading a research paper from a dealer, where it was pointed out that consistently for the past 20 years, these two currencies overshoot in January and then spend Feb and March reversing the move higher. Now, there’s something that I don’t think I’ve ever heard or read anywhere, or even figured out for myself! UGH! And this is where junior analysts would say, “but this year it will be different”. But I’m not “junior analyst”, in fact, I’m far from that! So, what to do, what to do? Well, if you’re a bonafide “trader” then you might want to take profits before we turn the calendar. But if you’re a “currency investor”, which I believe that most of us fall into that category, then all you do is batten down the hatches, and if there’s anything to do, it’s look to buy more at cheaper prices!

Currency investing is a far cry from currency trading. We do currency investing to diversify our investment portfolios so that not 100% of the portfolio is denominated in dollars. Currencies move in long sweeping moves called trends, and these trends have to run their course, exhaust all avenues of rallies, and eventually either correct the fundamental reason it entered the trend, or have something outside of its control force the new trend.. For instance, in 2011, the dollar was in a long term weak trend that interrupted in 2005 and 2008, but for the most part the dollar would return to the underlying weak trend after each interruption. And there was nothing in 2011 to fundamentally reveal a reversal of the weak dollar trend, but. In the Eurozone, the PIIGS (Portugal, Italy, Ireland, Greece and Spain) were found to have enormous debt that couldn’t be sustained, and suddenly, the flight to dollars out of euros became the trade du jour. And that’s when we switched to a strong dollar trend.

It’s now 2017, so 6 years later. Since Richard Nixon closed the Gold window and thus removed the Gold backing of the dollar in August 1971, there have been 5 completed trends. 1971-1978 weak dollar, 1979-1985 strong dollar, 1985-1995, weak dollar, 1995-2002, strong dollar, 2002-2011 weak dollar, and now 2011- ? strong dollar. Now, trends are not One-Way Streets, there is volatility inside the trend, but when you draw a line from the start date of the trend to the near end date of the trend, the move is usually very defining. So, what will be the thing that reverses the strong dollar trend?

I’m glad you asked. Here’s my opinion, which could be wrong. First of all, I’m a believer (and not the Monkees version) of the idea that the U.S. economy is teetering and one slip could cause the economy to begin to stumble, bumble, fumble and fall flat on its face. How did it get there? Fed rate hikes. and any narrowing of their balance sheet. And the fact that the strong dollar trend is getting long in the tooth. I see that by the end of this year, that the Fed will have to be reversing their rate hikes, and when that happens, the strong dollar trend will end. I have experience it viewing these reversals folks. In 2001, I wrote a white paper called: The Decline of the Dollar, for I saw the strong dollar trend reversing soon. And it did in Feb 2002. I do have to admit I fought the 2011 reversal, for I kept saying that the U.S. had larger states than the PIIGS that had bigger problems, like California, New York, and Illinois, but the markets weren’t buying that and the reversal was in place. So, there you go! History and forward looking all in one letter, where else can you get stuff like this for free?

Well, we will begin to see some data today from around the world. Eurozone Jan. Flash CPI, will print, and probably be Steady Eddie with the previous months’ print of an annualized consumer inflation rate of 1.5% (previous print was 1.4% annualized) The Eurozone will also print their latest Unemployment report, which should also see a Steady Eddie print of 9.8% Unemployment.. (they don’t play games with hedonic adjustments in the Eurozone).. With 1.5% CPI, one would think that European Central Bank (ECB) President, Draghi would be entertaining thoughts of tapering bond buying and get out of the negative deposit rates business. But Draghi insists that the CPI gains have been nothing more than Oil influenced.. I agree that the rising price of Oil is pushing the envelope here, but what happens if the price of Oil goes to $60? Then Draghi and the ECB will behind the inflation 8-ball, and trying to play catch up.. The euro remains just below 107 this morning.

In Canada, they will print their November GDP (I know, I know really late, eh? ) which is expected to reverse the Rocktober -0.3% drop, with a 0.3% gain.. If GDP can gain 0.3% it would put the annualized GDP for Canada at 1.5%, which would be bang on with the Gov’t’s forecast to start the year. 1.5% GDP for Canada with the price of Oil, albeit on the rise, still lagging, is not too shabby, and should be able to underpin the Canadian dollar / loonie. Speaking of the loonie, on a lessor plane than A$’s and kiwi, the loonie also does the old January rise and then spends the rest of winter getting reversed.

The Bank of Japan (BOJ) met last night, and left everything unchanged, and didn’t hold a press conference afterward. So, it was almost like the BOJ meeting didn’t happen! And so yen rallied! I just chuckled out loud after thinking and writing that yen had rallied. I see yen traders saying “YAHOO” the BOJ didn’t say or do anything, let’s markup yen!

The price of Oil slipped back below $53 in the past 24 hours. What the heck is going on here? One day it appears that the price of Oil is going to shoot higher, and day it’s shot down. Reminds me of the Frank Sinatra song. That’s life. that’s what people say. You’re riding high in April, Shot down in May. And you thought I was just a Rock-n-roller! HA!

The good thing about the Petrol Currencies not participating in the Oil rallies when they bump higher, is that then they don’t have to get sold when Oil prices slip.

Gold was able to carve out a $4 gain yesterday. Friday it was $3, yesterday it was $4.. Well you would have to put a lot of $3 and $4 gains together to make up for the whackings Gold took last week.. But I’m a patient man, I’ll wait for it to happen! I just laughed out loud at the statement that I’m a patient man.. Boy, times have changed. I’m not proud of the impatient Chuck that I was when I was much younger, I’m just glad didn’t beaten and bashed when I was a young man!

I would think that market participants would be watching what’s going on in the new Trump Administration, and thinking that they had better load up on the inflation fighter. Gold. For instance, yesterday Trump signed an executive order requiring that for every new federal regulation on businesses, two existing regulations must be removed. Trump said that “he wanted to create an environment for small businesses like we haven’t had in many, many decades.” Now that would be nice wouldn’t it? Get the economic engine, of small businesses, back on track.

The U.S. Data Cupboard wasn’t as bad with its prints yesterday as it was last Friday. Yesterday, Personal Income and Spending for December had an accelerated pace than the prints in November. December Personal Income was 0.3% (consensus was for 0.4%, but last month was only 0.1%) and Personal Spending was 0.5% (consensus was 0.5% and last month was only 0.2%). So, you can see that once again, we spent more than we made. But it was December. one could look at it and say Spending was up because of the Christmas shopping season. But then why did Retail Sales print so weak? One could also say that income should have been greater, given the year-end bonuses that are traditionally paid. Core Inflation only showed a 0.1% gain for December. That’s a bunch of horse dookie as far as I’m concerned!

Today’s U.S. Data Cupboard has the 4th QTR Employment Cost Index (ECI) Which is expected to show a 0.6% rise. And the Case/Shiller Home Price Index for November will print. Not much here to move the markets today, so it appears that the scenario played out for you yesterday and this morning so far, of watching a bias to sell dollars, but no conviction to do so remain the soup du jour today.

To recap. Not much has changed in the currencies yesterday and overnight, as the bias to sell dollars remains in the market, but unfortunately, the conviction to sell the dollar lacks conviction. It’s the last day of January today and could it be the last day of rallies for the A$, kiwi and loonies, and they consistently through the past 20 years overshoot in January, and then give back those gains in Feb and March. CPI and a labor report will print in the Eurozone today. Canada will print their Nov GDP, and the Bank of Japan met last night, but no one noticed! The price of Oil slipped below $53 again, and Gold gained $4 on the day.

For What it’s Worth. Well, it does appear that volatility is making a comeback. Volatility as measured by the symbol VIX has recently begun to pick up steam, as the new Trump administration keeps everyone guessing, and stirring up the hornet’s nest. I found this on MarketWatch, and you can read it all here:

Or here’s your snippet: “The CBOE Volatility Index VIX, +2.02% which measures Wall Street expectations for large swings in the S&P 500 SPX, -0.60% climbed by 12.3% to 11.88, marking the sharpest percentage jump since Nov. 3, according to FactSet data. The gauge of market anxiety had risen by as much as 20% at its peak on Monday.

The moves in the VIX takes it closer to 12, which is still very low for the metric by historical standards, with levels of 20 typically considered the clearest sign that fear has gripped the market. A reading around 12 still signals relative complacency.

However, the gauge has hovered at historically low levels since Trump’s election victory Nov. 8 sparked a jump in euphoria and appetite for assets perceived as risky, like stocks. Trump has fostered expectations that his administration will be business friendly and therefore good for stocks. But Trump’s recent executive orders on trade and immigration are causing investors to reassess the benefits of his more protectionist agenda, including building a wall along the U.S.-Mexico border and retooling trade agreements to put “America first.” Investors also are worried that the president may be prioritizing other legislations over tax cuts and other economic policies that he pledged to enact.”

Chuck again. Some volatility, I think, could be good for the markets, at least we would see some movements, and not have the currencies trading in the same clothes as the previous day!

Currencies today 1/31/17. American Style: A$ .7550, kiwi .7276, C$ .7633, euro 1.0693, sterling 1.2445, Swiss $1.0036, . European Style: rand 13.5527, krone 8.3180, SEK 8.8413, forint 290.43, zloty 4.0490, koruna 25.2580, RUB 59.90, yen 113.88, sing 1.4184, HKD 7.7579, INR 67.75, China 6.8810, peso 20.80, BRL 3.1327, Dollar Index 100.40, Oil $52.40, 10-year 2.49%, Silver $17.14, Platinum $989.95, Palladium $741.50, Gold $1,194.85, and SGE Gold.. $1,209.93 (no change due to holiday week in China)

That’s it for today. Out of sight, out of mind.. I’m just saying. Yesterday, I talked about an old employee, and then I heard from one of my fave people in the world, Kathy Glowski (Butcher now) telling me she had forgotten about the old employee. The three of us all had worked together at the old Mark Twain Bank. It’s Super Bowl Week! I kid, because the hype for this game begins so early, and by Sunday, there will be so many pre-game shows that will analyze what shampoo the players used, or what they ate for breakfast, etc. really stupid stuff. And they’ll bring back the old players, who played the game in a different era, and the game today doesn’t look much like the game they played, but they still et brought back to comment on the game.. I heard a rumor that my wife is having a big party Thursday night back home. Hmmm, she must be celebrating the fact that I’m not there! HA! 14 days till pitchers and catchers report to Spring Training. just a fortnight away. Chicago takes us to the finish line today with their song: Make Me Smile. And with that I hope you have a Tom Terrific Tuesday. Be Good To Yourself!

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

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