The Risk Aversion Crowd Still in Control of the Currency Markets

There was another day of dollar strength, in this switch from risk assets to dollar denominated assets… Again, I question the mental giants behind all this, for the US is what caused this problem… And now traders turn to the US? Oh well, sure seems like it would be different if I were in charge! Of course, a LOT of things would be different if I were in charge! But that’s a discussion for another day!

Front and center this morning we have the news overnight from China that their fourth quarter GDP accelerated to the fastest level since 2007… Chinese GDP for the fourth was +10.7%! Talk about “nailing” that call! The annual figure for China comes in at +8.7%, but in reality, who cares about the first quarter, when in the fourth and most recent quarter, growth was kicking tail and taking names later! In addition, China posted a higher consumer inflation figure than expected at +2%… And retail sales in China soared 16.9%! WOW!

Chinese officials are now contemplating how to go about slowing this economic engine down before it overheats, and is left in a heap on the side of the road with the hood up! Yes, they’ll raise internal interest rates… They’ll raise reserve requirements… But if they are really serious about putting a lid on inflation before it hits 3%, they’ll look to the renminbi (CNY)… I’ve said time and time again that a strong currency can go a long way toward controlling inflation. So… If Chinese officials want to do something about this rising inflation before it gets out of hand, they should allow the renminbi to get stronger versus the dollar… Will they? Only the shadow knows.

So… In the past few months, China has taken over the title of biggest automaker from the US. They’ve taken over the title of biggest exporter from Germany… And… I thought that I had read a month ago that they had taken over the title of second largest economy from Japan… But, as I read last night, that officially didn’t happen, but is expected to happen this year.

All China needs to do now to be the Supreme Ruler of the World, is to overtake the US as the number one economy…

Now… One would think that after printing strong reports like these in China, that commodities and commodity currencies would be latched on to the coattails of China and having a Big Party this morning… But that’s not happening, for the grip that the risk aversion crowd has on the markets right now is just too strong!

Here in the US, the debt ceiling is getting raised again… This time it will be raised by $1.9 trillion, to $14.29 trillion… OH BOY! We’re really packing away the debt these days, aren’t we? Of course, long-time readers know that I’ve banged on the US government – no matter who was in charge – for eight years now, regarding the growing debt… But talk about accelerating in recent times… WOW!

You know… I’ve long been responsible and accountable for people in the workplace. I have never been interested in “who’s to blame” over “how we fix it.” I think the current people in charge could use a heaping helping of that way of working.

In other news here in the US, The Wall Street Journal is reporting that “the President is expected, today, to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return – at least in spirit – to some of the curbs on finance put in place during the Great Depression.”

Hmmm… I think the government is playing with fire, here… And you know what happens when you play with fire… You get burned! This is just like all the whining from lawmakers in recent days about how the banks are to blame for not lending money. Hmmm… Of course it was the same lawmakers last year that beat the banks to a pulp for lending money! The lawmakers made rules about lending, and so on… And now… With 17% unemployment and 1 out of 5 homes under water, they want banks to make loans… To whom? Hey! If they qualify, I’m sure they can get a loan! But, given the new parameters that the government set in place, not many are qualifying. So you see, the lawmakers played with fire… And now, they’re getting burned!

The Greek Finance Minister is shouting from the rooftops this morning that the European Union is not preparing a loan to help Greece’s budget deficit. The Fin Min said he doesn’t expect anyone to come to the rescue!

Well… Buddy… I’m afraid that if Germany doesn’t come to the rescue, than you will go down in flames…

Eurozone Manufacturing reported this morning that manufacturing in January is sliding unexpectedly, which, if it comes to fruition, would have a huge impact on the Eurozone’s nascent economic recovery…

Hey! Remember when I told you that Russia was talking about diversifying their currency reserves into Canadian dollars (CAD)? Well… It looks like they followed up on that “talk”! A reader sent me the story that appeared in The Financial Times…. Here’s a snippet…

“Russia’s central bank announced on Wednesday that it had started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves.

“Analysts said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and into investments denominated in other commodity-linked currencies, such as the Australian dollar.”

And then there was this quote by Adam Cole at RBC who said…

“If taken in isolation, Russia’s announcement that it was buying Canadian dollars was not significant, but if it was part of a broader trend, then it was an important step. If it is a barometer for the activity of other central banks, then its is structurally positive for the currencies of countries like Canada and Australia that have a commodity bias in their economies.”

Couldn’t have said it better myself! Although, that’s the message I’ve given you for years now!

The data cupboard will bring us the latest leading indicators today, which should point to more improvement in the economy. It’s Thursday, so that means the Weekly Initial Jobless Claims are on the docket, along with the Philly Fed Survey, which is a report on the pulse of business conditions for the Philly region…

To recap… Chinese economic growth for the fourth quarter hit 10.7%! Retail sales soared, and with all that economic activity, so did inflation. The risk aversion crowd is still in control of the currency markets, which means the dollar is on top of the world, right now… Of course it’s still down versus the euro, which stands at 1.40 and change this morning!

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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