Monday, August 31, 2015

Stronger US Dollar helped by China currency devaluation

There has been no activity by the PBOC (People's Bank of China) regarding the Renminbi as “the people’s money” has been very quiet and there has been no need for action by the central bank there. The foreign exchange dealing world then breathes a collective sigh of relief at that fact. We remain of our oft stated opinion that this is a long term bull market for the US dollar and that we are, in baseball terms, only in the middle innings of the game. We can imagine the US dollar quietly but consistently heading higher vs. the Yen sufficiently to take the Yen/dollar to 150 and beyond, while the political confusion in Europe shall weigh heavily enough upon the EUR… along with more aggressive monetarily easier policies there than here in the US… sufficient to take the EUR to and below “par.”

The “Big Economic” news is out of Japan this morning where the government has reported that the economy in the 2nd quarter fell 1.6% in annualized terms, and although this is slightly better than the -1.9% that was the consensus this is still very clearly to the dismay of Mr. Abe and the Liberal Democratic Party there in Japan. Further this is a stunning drop when compared to the rather robust 4.5% expansion of the economy in the 1st quarter of the year. We can try to spin this number in any number of manners, but the only reasonable and common-sense spin is that the government shall have to increase deficit spending and the Bank of Japan shall have to expand the supply of reserves to the system at an even greater pace. Try as we might, we cannot see this developing in any other fashion. Indeed, the only bright spot at all is that the guess-timates on the Japanese Street going into the report were worse than the number itself. However, we suspect that there were those within the Abe Administration who “leaked” that -1.9% expectation number in order to make the official report look somewhat less onerous. We know that were we at the helm there in Tokyo that is what we would have done.

Worse for Japan, most of the weakness came in its export arena. Exports to other Asian nations… particularly to China… were down, and the only reasonable remedy for that situation is to allow the Japanese Yen to fall and to fall quite sharply. With China, however, already taking the lead on this question, Japan shall have to rush to the fore to weaken the Yen even more aggressively.

Regarding gold, we are quietly but seemingly inexorably turning away from being overtly negative of gold in US dollar terms to being at least reasonably neutral of Gold/dollars and may even find ourselves quietly positive of it. The “specs” are not bullish; indeed, they have been in recent weeks modestly net short. At the same time, the “commercials”… who are usually quite heavily net short of futures as they hedge their inventories of gold… are holding their smallest net short position in modern memory. When the “specs” are short and the “trade” is barely so it is historically unwise to be short and is historically reasonable to err bullishly. We find ourselves doing precisely that. Keeping things technically simple… and over the decades we’ve always found that “simple” trumps “complex” almost every time.