IMF Executive Board Approves Renminbi For SDR’s!

* Ruble is best performer overnight.
* Dollar has conn for the most part this morning.
* Chuck explains SDR’s.
* Why isn’t Gold stronger?

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

Good day. And a Marvelous Monday to you! We’re half-way through my most despised month, so that’s a good thing, and getting better every day! Chris Issac greets me today with his song, Wicked Game. What a haunting sound this song has, and was used in the TV series, Twin Peaks. Remember that? Back in the late 90’s, I saw Chris Issac in concert, and he had on a pick suit with rhinestones. Made our shiny Gold pants we wore back in the day of the Soul Wonders Revue look pretty tame!

Front and Center this morning there was news over the weekend that the Executive Board of the IMF have recommended that the Chinese renminbi be added to the IMF’s SDR’s (Special Drawing Rights) which is a basket of the currencies that the IMF considers to be “reserve currencies”. The dollar, yen, sterling and euro currently make up a SDR. The announcement by the IMF is supposed to take place on November 30th, and the renminbi would begin taking part of an SDR in October 2016. Basically, by putting the actual addition off by a year, the IMF is delaying the shift of weighting of the current currencies in the basket. This shift should be huge for the current currencies, as they will see a percentage of their weighting dropped and added to the renminbi weighting. It has long been thought that that since the basket is so heavily weighted with dollars, that it would be the dollar that saw the largest percentage of sells. What this ends up meaning for the dollar is up in the air. One would look at this and say, “well, it can’t be good for the dollar seeing all that selling”, but one never knows, what back room deals will be worked out ahead of that time.

So, I would just like to point out here and now, that “technically” my call in 2010, that the renminbi would be a reserve currency by the end of the decade is about to come to reality. Of course, I could hang my hat on that, but I won’t, because I truly meant the reserve currency in terms of its use in the terms of trade around the world. The other question that gets brought up regarding this announcement by the IMF, is what does this do to Gold? Well, initially I don’t think the big picture is seen, and therefore Gold continues to struggle. But in the BIG Picture of things, one would think that with China now on board with the IMF, and in a much better position to make decisions about things in the world, that this could be nothing but good for Gold. But when that Big Picture scenario plays out, is anyone’s guess.

Well, the other Big News from the weekend had nothing to do with the currencies or metals, and it was the terrorist attacks in France. How awful. There are times that I’m at a loss for right words to say, and this is one of those times. I guess all I should say about this, is that thoughts and prayers should go out to the people of Paris and hopes that those that were killed rest in peace, and those that were hurt are able to heal their wounds and their mental scars.

Alrighty then. Speaking of words. There is superstitious, writing on the wall. Yes, superstitious is the word I was looking for on Friday. My legal reviewer figured it out, and told it to me in a riddle. He told me it was a Stevie Wonder song! So, see there, people with “clear heads” think better than people with “chemo brains”! HA!

So, Gold has found a bid this morning, and certainly that would make sense given what happened in France on Friday. But the bid is watered down. I really thought I would see Gold up at $25 to $50 this morning. But it has found its way to only an $8 gain, as I write. And the shiny metal is still trading below $1,100. I view this to be a continuation of the “let’s keep Gold at a reasonable price so everyone can get in” trading pattern. Of course the Gold bears would say that this is a consolidation of the price before it heads lower. I guess we’ve come to a fork in the road here haven’t we? The great Yogi Berra would say, when you come to a fork in the road, stop and pick it up! But with Gold, we’ve got to decide what path we will take. I know which one I’ve been on, and not ready to change!

The Currencies, for the most part are losing ground to the dollar this morning. There are a couple of currencies carving out gains like the Russian ruble, the Singapore $, the Indian rupee, and Canadian dollar / loonie. But that leaves quite a few on the other side of the ledger giving blood to the dollar..

You know. I was thinking about this yesterday, as my Rams got their butts kicked by Da Bears, and that is I don’t know if I’ve ever really explained to the readers what an SDR is and how it works, etc. I’m sure I told you that it’s the IMF’s way of supplementing reserves at member Central Banks, but let me tell you the “Whole Story”. SDR’s (special drawing rights) were created by the IMF in 1969 to supplement member countries’ reserves. And SDR is made up with dollars, yen, euros and sterling, and right now there are approximately $280 Billion worth of SDR’s allocated to members.

The SDR is not a currency, nor is it a claim. And the way SDR’s end up in a member country’s reserves is interesting. The member country can voluntarily exchange currencies for SDR’s, and the other way is strange. The IMF designates members with strong external positions to purchase SDR’s from members with weak external positions. And now you’re wondering just why the IMF created SDR’s. Well, it was back in the day of the Bretton Woods Agreement of fixed exchange rates VS Gold, and SDR’s were created to support that system.

The IMF paper that recommended the renminbi to be added to the basket of currencies that make up SDR’s, mentioned that their preliminary estimates had the renminbi at a 15% allocation in the basket. So, you can do the math. But I told you that $280 Billion is the approximate value of the outstanding SDR’s, so 15% of that $280 Billion will have to 1. Have current currency holdings in the basket reduced by a total of 15%, and then 15% of $280 Billion will have to allocated to renminbi. Those will be HUGE trades folks. But the idea here is that the holders of the SDR’s don’t have to do this all at once. They can pick a day, time, etc. to do the swap.

Individuals, institutions, hedge funds, and any other non-Central Bank, cannot buy or hold SDR’s. It’s strictly a Central Bank reserve currency deal. But one that has long been rumored to take over the world. Yes, I know I’m not supposed to talk about conspiracy stuff, and this really isn’t that, yet. But you can check it out on the internet, there are tons of thoughts about how SDR’s will be the next world currency. I find them very interesting, but not something that I’m ready to pin my colors to, just yet.

Well, that was nice an neat for an explanation, eh? I’m glad I was able to help out with that! HA! Alright then, meanwhile back at the ranch. For those of you who are keeping track of things in Ghana (HA, HA) the Ghana Central Bank hiked rates to 26% from 25% this morning. That almost sound preposterous doesn’t it? 26% interest rates? Crazy. Not that I would touch those interest rates with your ten foot pole! Hey, Chuck! Let’s get back to “real currencies” that are traded with liquidity! OK. I see your point, twin Chuck!

Well, it’s more of the same for the dollar. I read this weekend that the rate hike is now 70% price in.. Boy that would sure upset the applecart if the Fed decided to pass on a rate hike in December wouldn’t it? So, one has to wonder just how much more mileage the dollar is going to get out of the rate hike talk? I don’t think it will come in the form of economic data. Well, we do have one more BLS Jobs Jamboree to print, but other than that, I just don’t see the economic data coming to the dollar’s aid.. Tomorrow’s Data Cupboard has the stupid CPI, and given the drop in the PPI last week, one has to figure this data will be weaker, but then the CPI data is so crazy with hedonic adjustments, only the shadow knows.

Also tomorrow, two of my fave data prints will show up. Industrial Production and Capacity Utilization, and this is where the weakness in the economy and the economic data show up.

While we’re talking about data. Well, how about that data from Friday? In the first real Tier 1 data to print in over a week, Rocktober Retail Sales disappointed yet again! The actual number was below the expectations which were 0.3%, and the actual was 0.1%, and last month’s 0.1% disappointing print was revised downward to 0.0%… And if you take autos out of the picture, Retail Sales were down -0.3%… I know that these numbers just don’t sound like much to you, but in the whole scheme of things, what they show is that the consumer in the U.S. isn’t spending like the economy needs for them to spend. Of course we’re heading into the spending season for consumers, so this data is sure to pick up, as the stores fill up with potential buyers of stuff for Christmas and other holidays.

But that’s not all! The Rocktober PPI printed too. Recall that I told you on Friday that I thought that the stronger dollar was going to show up with deflation in PPI sooner or later. Well, I guess it was sooner, because this data printed with a negative -0.4%, month to month, and year on year it was down -1.6%.. Deflation, deflation, deflation. And yet the Fed members were out in force talking about the rate hike. Hmmm. Well, stranger things have happened, right?

And going deeper with data from Friday. Well, stranger than fiction is the way we calculate GDP, folks. I’ve gone through this before, but when you get down the nuts and bolts of it, it’s just plain stupid! Stupid is as stupid does. Thank you Forest Gump! But when you can goose up GDP by having Businesses report a buildup of inventories, (a buildup I might add because they can’t sell what they’ve produced!) then you’ve got stupid is as stupid does. I’m a logical thinking kind of guy, and this just isn’t logical to me. I even remember arguing with my economics professor many, many years ago that this didn’t make sense to me, but to no avail. So, what I’m saying is that Business Inventories for September were huge, and therefore the 3rd QTR GDP should get goosed upward from the original print of 1.5%.. Aye, yay, yay. Sing it Joe South. Oh, the games people play now. every night and every day, never saying what the mean, now, and never meaning what they say.

And that’s why I’ve advocated many times in the past that the U.S. adopt using Final Sales data instead of GDP data as their pulse on the economy. And Oh, since 2007, Final Sales have averaged 1% per year. Now, doesn’t that feel more like what’s going on in the economy than the GDP numbers?

Before we head to the Big Finish this morning, I mentioned above that the Russian ruble is carving out a gain VS the dollar this morning, and in fact, it’s the best performing currency overnight. The strong move must be sentiment driven, because the price of Oil has slipped again. Brent Oil’s price tried to rebound on Friday, but was pushed back. And the WTI (West Texas Intermediate)Oil Price, that we follow here in the Pfennig, has slipped below $42.. OUCH! I guess it’s time to go out and buy me a big gas guzzler again! (OK, no emails telling me how wrong that is for the environment, I’m just having fun here) But getting back the ruble. I really continue to think that this currency is going to be range trading for some time, until the sanctions can be removed, and the country can get back to trying to deal with a cheaper Oil price without having to deal with sanctions too.

To recap. The dollar has the conn for most of the currencies this morning. The Russian ruble is the best performer overnight, and Gold is up $8, when Chuck truly thought that given the events in Paris last Friday, that Gold would be up much more when he got to his writing desk this morning. The IMF Executive Board approved the renminbi to be added to the IMF”s SDR basket of reserve currencies, and the final approval will be announced on November 30th , with the actual data of inclusion to begin in Rocktober 2016. Then Chuck goes through just what is a SDR, how they came about, what they are used for, and what it means for the renminbi to be added, it’s riveting stuff folks, you won’t want to have missed it! HA! U.S. Retail Sales disappointed again in Rocktober. And PPI printed negative. deflation, deflation, deflation, and the Fed keeps talking about a rate hike. Hmmm.

And then there’s this little thing I just have to share with you before we head to the Big Finish. So.. Braden Charles was at the house on Friday, because he had gone home sick the previous day. Sure didn’t look sick or sound sick to me, as he was going, going, going all day on Friday. But I have to share something with you that he said, that had me laughing so hard, I almost fell out of my writing chair! Kathy asked him if he knew what his address was. He was very adamant in his response. “Mimi! I don’t wear a dress!”

Currencies today 11/16/15.American Style: A$.7105, kiwi .6480, C$ .7510, euro 1.0730, sterling 1.5195, Swiss $ .9935, . European Style: rand 14.3920, krone 8.6765, SEK 8.6790, forint 290.55, zloty 3.9495, koruna 25.1860, RUB 65.79, yen 123.10, sing 1.4220, HKD 7.7505, INR 65.99, China 6.3750, pesos 16.69, BRL 3.8305, Dollar Index 99.07, Oil $41.28, 10-year 2.26%, Silver $14.39, Platinum $869.60, Palladium $551.97, and Gold. $1,091.39

That’s it for today. Well, the Chicago teams sure beat on the St. Louis teams this weekend. We had the Blues lose to the Blackhawks in hockey, and the Rams lose to the bears in football. UGH! I have visitors this weekend. Good friend Kevin came over to watch our beloved Missouri Tigers finally win a game. Kevin’s son, Drew played football at Mizzou. And then yesterday, good friends, Mike and Duane came over to watch the Rams game with me.. It was good to see them all, as I hadn’t seen them in a month! Little Delaney Grace was so darn cute on stage Friday night, as a munchkin and a jitterbug for the youth production of the Wizard of Oz. She truly belongs on stage with that huge smile, and twinkle in her eyes, and what a dancer! So, that was enjoyable Friday night. As I actually went out in public. Well, I might as well get this out there for you all. the drug that I fought so hard to get, didn’t work after all of that. So, we’re off to another. I was really dejected about that drug, because I really agreed with the doctors at MD Anderson Cancer Clinic that it would be the right one. So, I’m really not looking forward to changing gears again, but it is what it is. There are alternatives, but they are so darn expensive folks, so please don’t tell me about this or that, I’ve looked into them all. And I might still opt for one and buck up, but for now, let’s see what happens. The good news is that I don’t think I’ll have to fight with the insurance company with this new drug. Thank the Lord for life’s little mercies.. And with that, now you know what I know. so that means it’s time to find the send button, but not without first telling you that I hope you have a Marvelous Monday!

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