The kiwi shoots higher after RBNZ cuts rates???

* New Zealand cuts rates, but kiwi moves higher…
* Existing home sales climb to 8 year high.
* Greeks approve the new austerity proposals…
* Gold edges back above $1,100…

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

With Chuck out for the next couple of weeks, Frank Trotter, Mike Meyer and I will be working together to bring you the Pfennig each morning. As usual, Frank will lead things off today with short missive on Chinese transparency (or lack thereof):

July 23rd, 2015 – Saint Louis, Missouri. My mother, a great value investor back through the 60’s, 70’s, and 80’s would have been on top of it. ‘The Chinese,’ she would say, usually adding ‘Communists’ to suit the era, ‘make things true simply by repeating them so often one forgets that there was ever any other version of the truth.’ Chuck has reiterated many times in this journal that when the Central Committee says there will be 7.5% growth or whatever target, that there will be one way or the other.

We were shaken (not stirred) along with the rest of the market with the apparent signs of bubble in the Chinese stock market a few weeks back. Like most who pay attention to this economy we have heard the stories. Tales of empty cities or massive apartment blocks. Investigations of business counted but not undertaken. Rumors of too much leverage. All too hard to count with transparency still on the wish list.

But now it has stabilized and the world has moved on to other problems. We are asked often when the Chinese currency will become the globe’s reserve currency. Not soon I say, but it might be coming. They have to become more transparent and forthcoming with their reporting. Assets around the globe need to be priced in the currency. The central bank must clearly report on a regular basis what it does and doesn’t own (think the weekly Federal Reserve reports), and many more items. But it’s on the agenda of the Party and I’ll bet that they will continue to set the value ever higher for quite some time to come – repeating over and over that it’s better every day until we all just know it’s true.

Thanks to Frank for getting things started this morning, transparency has been a bit harder to come by in these markets lately. Just yesterday Ty likened recent market movements to ‘Bizzaro World’ after the New Zealand dollar was the best performing currency vs. the US$ following a rate cut. Yes, the Reserve Bank of New Zealand cut rates by 25 basis points and the kiwi reacted by jumping over half a cent. And not only did the New Zealand central bank cut its benchmark rate to 3%, but they suggested further cuts are on the way. You would expect that this kind of news would weigh heavily on the New Zealand dollar, but in what seemed like an old episode of Seinfeld the kiwi started moving higher after the announcement. It is rare that a central bank can cut rates and their currency rallies over 1.5% in reaction!

We struggled to make sense of the currency movements reading over the news on the wires – but I finally came across a poll which suggested many of the market makers had priced in a larger cut. The Reuters poll stated that all 14 economists polled expected further cuts by the RBNZ before the end of the year. So while the kiwi had a good day it certainly doesn’t look like something which will become a ‘trend’.

RBNZ Governor Graeme Wheeler left out any mention of the ‘overvaluation’ of the kiwi in his remarks after the rate announcement, which could have added to the positive reaction in the currency markets. The RBNZ has joined its commodity linked comrades in Canada and Australia in trying to stimulate their economies with lower rates following the recent drop in the price of their largest exports. These commodity have been some of the worst performers during the first half of 2015 as the price of their main exports have fallen. And with the current expectations of a continued slowdown in China the commodities (and these commodity linked currencies) look to remain under pressure.

The Canadian dollar certainly remained under selling pressure yesterday, testing multi year lows against the dollar as oil prices continued to slide. Data showed US crude inventories rose last week, while the Iranian nuclear deal also put pressure on the price of oil.

Here in the US we had a surprisingly strong piece of housing data released. Sales of previously owned US homes climbed to an eight year high in June, climbing 3.2% to 5.49 million. Another piece of data showed the median price of an existing home rose 6.5% from June of last year, another good piece of news for US investors who are looking to housing to help boost what is currently a lack luster recovery. The housing recovery may give the Fed more ‘cover’ to raise interest rates off of the near zero levels during the second half of the year.

This good piece of news for the housing sector helped the US dollar recover across the board, with Kiwi and the pound sterling the only currencies which looked to gain vs the greenback. The Pound Sterling was one of the best currencies vs. the US$ yesterday after minutes of the BOE last meeting suggested a rate increase is back in the cards. The minutes of the meeting held July 8th showed a ‘number’ of policymakers viewed the decision on the timing of a rate increase ‘becoming more finely balanced’. The minutes showed that many of the members felt inflationary pressures were on the rise which could give additional motivation to move rates higher in the coming months.

The Greek parliament approved Prime Minister Alexis Tsipras proposals of further austerity in return for additional bailout funds. The measures approved by the Greek political leaders satisfied the terms required by the nation’s creditors for the release of an additional 86 billion euros in aid. The euro was fairly steady in overnight trading, holding just below the $1.10 level.

Gold edged higher after falling below $1,100 yesterday, but the recovery may be short lived as a stronger dollar and increased expectations of higher rates in the UK and here in the US will probably add to price pressures. The precious metals recovered a bit in overnight trading, but there didn’t seem to be any direct reason for the recovery other than the fact that the ‘selloff’ was just overdone.

Today we get the weekly jobs numbers along with a reading of the leading index. Markets will be looking for any sign of a recovering labor market here in the US which would support a September rate increase by the FOMC.

To recap, The RBNZ cut rates but in an unexpected reaction to the news the kiwi rallied by over 1.5%. Housing data showed an increase in existing home sales along with higher prices – leading to a recovery for the US$ vs. most currencies. The BOE minutes suggest they will be close on the heels of the FOMC in a possible rate increase. And gold seemed to recover slightly after the dramatic fall of the past few days.

Currencies today 7/23/15. American Style: A$ .7412, kiwi .6679, C$ .7704, euro 1.099, sterling 1.5606, Swiss $1.0476 . European Style: rand 12.4315, krone 8.1518, SEK 8.5658, forint 281.00, zloty 3.7526, koruna 24.567, RUB 57.4425, yen 123.77, sing 1.3654, HKD 7.7509, INR 63.76, China 6.1172, pesos 16.0843, BRL 3.2201, Dollar Index 96.989, Oil $49.23, 10-year 2.31%, Silver $14.86, Platinum $984.75, Palladium $628.65, and Gold. $1,100.53

That’s it for today. What a game the Cardinals had last night – congrats to Yadi Molina who hit a two out three run triple in the 8th to give the Cardinals the win over the Chicago White Sox. Unfortunately the night was not as good for the US Mens Soccer team who got stunned by Jamaica losing 2-1 last night in Georgia. Mike will have the conn on the Pfennig the next few days as I head up to Canada with my family for a few days. The morning sun is starting to stream through the windows, and my co-workers have also started to stream in so it is time to hit the send button. Hope everyone has a good day, and thanks for reading the Pfennig!

Chris Gaffney, CFA
EverBank World Markets