Global Growth Is in Swing

Front and center, The Reserve Bank of Australia (RBA) did indeed raise interest rates last night (their December 1st!), India’s economy posted a strong third quarter, and China posted a strong manufacturing number… And! The Dubai thing is waning… But I want to talk to you about something that I wrote in the Pfennig about a week ago… So, we’ve got a lot on our plates to go through today, so let’s get started!

The non-dollar currencies really got a lift overnight as the Reserve Bank of Australia (RBA) did as I said they would, and lifted rates higher by 25 BPS (0.25%)… This now brings the interest rate differential to the US, Japan, Canada, and any other county that cut rates to the bone willy nilly… To 350 BPS! That’s a full 3.5% for those of you at home keeping score!

The following rate announcement didn’t give anyone a warm and fuzzy about further rate hikes as we head into 2010… But I think that’s prudent. The RBA has hiked rates 75 BPS in the past three months; time now to sit back and see what happens… I also want to crow a bit, as I was all over this rate hike like a cheap suit, saying that the RBA would not want to wait until their next meeting, which doesn’t take place until February!

As I’ve said for many years now… Australia is the proxy, if you will, for global growth… And if the RBA thinks that interest rates need to move higher, then they see growth, and do not want to have to deal with inflation pressures later! The Aussie dollar (AUD) took this news and moved above 92-cents…

The proof of global growth comes to us from Asia, but from two different 800-pound gorillas of economies! First, India… Asia’s third-biggest economy grew at the fastest pace in six quarters, for the third quarter. This GDP print probably will motivate the Indian Central Bank to increasing interest rates later this month. It looks like the annualized economic growth in India will reach 6% this year! WOW! No wonder they bought the IMF’s gold, and are in talks to buy the rest of the IMF’s gold! The Indian Central Bank sees this growth… And sees the inflation that will come right behind the growth, and instead of owning dollars, they are opting for gold! Doesn’t that tell you something about your own personal investment portfolio?

More proof of global growth comes to us this morning from China! China’s manufacturing grew at the fastest pace in 5 years, in November… This marks the ninth consecutive month of manufacturing growth in China… The PMI Index (manufacturing, just like here in the US) stands now at 55.2… And just like here in the US with our ISM Index, anything above 50 represents expansion of the manufacturing sector.

Now… We’ve been through this before, where I tell you that a customer that used to have a business in China, explained to me that you can only believe half of what China says regarding their economy… So… Even taking that into consideration, their manufacturing sector would remain on the “expansion” side of the ledger.

And finally… Canada posted a 0.4% gain in their third quarter GDP, and thus exited their recession, just like I said they would. The Canadian consumer is driving this economic expansion, which makes sense, given that Canada didn’t have the rot on the banking vine like in the US and didn’t experience the depths of the mortgage meltdown like in the US. Now… All the loonie (CAD) needs, to boost it back to parity with the US dollar, is for oil to get on its horse! But you, me, and the guy down the street don’t want to see oil get on its horse! But… We can’t continue to leave our fingers in the dams holding oil back.

In the Eurozone this morning, their jobless rate remained steady at 9.8%, which is a good sign for them.

The Bank of Japan (BOJ) is back at the drawing board once again, trying to prop up the Japanese economy. They’ve been on this ride since the early ’90s… You would think that they would get the picture, sooner or later, and get out of this business of meddling in the economy… Instead they decide to keep rates at near zero… And to undertake new steps aimed at easing monetary policy, including the provision of a new 10 trillion yen ($116.07 billion) lending facility.

Japan’s central bank made the decision after an unscheduled meeting Tuesday, following intense pressure during recent weeks from the government of Prime Minister Yukio Hatoyama to make extra efforts to buttress the increasingly fragile economy.

Hmmm… How familiar does all that sound to you?

OK… Let’s get back to something I talked about a week ago, that I didn’t get many “contra-emails” from… Here’s what I said on Tuesday November 24th… “I got a great note from a reader yesterday that said… ‘With all the emails you get wondering about the euro collapsing because of Italy, Spain, etc… Why don’t you just tell them, “If you think that’s the case, then the dollar will collapse because of CA, NY and IL all running huge deficits”? In addition to the national deficits?’”

California is the 8th largest GDP in the world… And traders got all scared when Dubai announced they couldn’t meet their loan obligations? Dubai isn’t anywhere close to the size and debt problems of California! But why doesn’t the financial media talk about this? We saw gold drop $25 in one day on the Dubai news. We saw the non-dollar currencies get taken to the woodshed on the Dubai news… But where’s the taking of the dollar to the woodshed on the California problems? Last time I checked they were part of the Union, right?

OK… So… That was something that was brought to my attention by a reader yesterday, he said that I had touched on it last week, but didn’t really stress the comparison… Well, I hope I did now!

Well… Hold on to your hats this morning, for gold has added $14 to its price, to now price at $1,194! The story on the Bloomie talks about how gold futures reached $1,200 overnight. For those of you new to class, gold futures and spot gold are two different creatures… When you buy physical gold, or even an ETF, you use spot gold… And that’s the price I use when I quote gold… Gold futures are just what they say they are, and have nothing to do with spot gold… However, one can usually get a good feel of where gold is headed, by following the gold futures price!

Yesterday, I told you about gold being a safe haven from the nutcakes running around the world… Well… This past weekend, Iran announced that they had 10 new locations for uranium enrichment… So, that’s just great. Iran is expanding their nuclear capabilities… And people are still not buying gold? Hmmm…

Did you see that a survey of money managers by Goldman Sachs came back with an average expectation that gold would reach $4,000 in this cycle? YIKES! Now, I’m a gold holder, and while $4,000 gold would look mighty fine in my investment portfolio… I wouldn’t want to see what the economy looked like here in the US, for sure! In fact, I cringe at what it would look like if gold went to $2,000! So… Let’s just hold to our convictions that gold is a store of wealth and value; it has never gone to zero, and… It’s an insurance policy that you have to hope you never, ever have to use!

So… All-in-all, we’ve got the non-dollar currencies (except yen) rallying this morning, along with the precious metals and commodities… The Japanese yen (JPY) – which normally has the best of both worlds as it gets to rally when the dollar rallies, and when the dollar gets sold – was thrown overboard, by the news that the BOJ was holding that “special meeting” to announce more government intervention in the economy.

Then there was this… Last week, I mentioned that Russian officials were hinting that they were interested in buying Canadian dollars/loonies, converting their US dollars doing so… Well, there were further developments to this story… Russian Central Bank Deputy Chairman Ulyukayev referred to the loonie, saying, “We are discussing adding loonies to reserves. It will be in several months’ time. Its share will be insignificant.”

Traders have yet to take this information in, and trade accordingly… But maybe they’re not aware that an “insignificant share” of Russia’s $444 billion gold and FX reserves could be fairly significant for loonies…. This is all central bank parlance to throw traders off the scent of a significant purchase of loonies by Russia… Sooner or later traders will get the memo…

To recap… Global growth is in swing, as witnessed in India, China, Canada, and Australia overnight. The RBA hiked rates 25 BPS, and the non-dollar currencies are on the rally train this morning, except Japanese yen. The Bank of Japan deep-sixed yen, with more government intervention in the economy. They’ve been doing this since the ’90s… When will they ever learn? When will they ev-er learn? And gold is sneaking up on $1,200!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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