BNP Paribas weighs on the euro…  China and Treasuries…  Euro forming a base?  Gold continues its rally… And Now… Today’s Pfennig!
OK, right out of the starters blocks this morning, we have the fear of such rotten data due this week, that the Trading Theme that rewards the dollar for this deep, dark, more dangerous data (strange thinking, I know, and against all that I’ve ever learned about what makes up a value of a currency, which leads me to believe this will end at some time), should be set in stone this week… The euro is trading below 1.30 this morning, but stronger than it was on Friday morning. Let me tell you about a story that hit the news wires (wires that I can’t see this morning!) on Friday mid-morning…

A Chinese newspaper reported that Chinese officials are calling for Beijing to sell U.S. Treasuries… Whoa! This is completely different than people outside of China giving them their 2-cents worth of opinions on how they should run their economy (read, Schumer, Graham, Bernanke, Paulson, and now Geithner a.k.a “the cheater”)… Let’s go to the story…

“BEIJING (Nikkei)–Calls are growing in China for the government to reduce its holdings of U.S. Treasury securities, as some observers expect their prices to decline amid heavy issuance to fund U.S. economic stimulus plans.

Such sentiment — in part motivated by indignation over recent American assertions that China is partially responsible for the global financial crisis — threatens to cast a cloud over relations between Beijing and the new U.S.
administration.

“China should sell some of its U.S. government bonds and increase its euro and yen assets,” Yu Yongding, a former member of the People’s Bank of China’s policy board, wrote in a Chinese newspaper earlier this month. Yu warned that the supply of Treasuries may far exceed demand in the future.

Such remarks by Yu, who currently serves as director-general of the Chinese Academy of Social Sciences’ Institute of World Economics and Politics, has sparked discussion within the government on how to manage its foreign reserves, according to a source familiar with the matter.”

I told the boys and girls on the desk about the story, and Ty noted that the markets weren’t really picking up on it… But by noon, you could tell something was going on, as the euro traded to 1.30 (+2 figures), Gold was up $40, and the Long Bond in Treasuries was down 2 whole points!

Now, I’m not saying that “this is finally the last shoe to drop” You see, just because a Chinese official calls for Beijing to sell their Treasuries, doesn’t mean Beijing does. However, look at the damage done to the dollar, and Treasuries when we have a single individual within China calling for this!

So… Judging from the currency reaction overnight… There’s been no follow up to the NIKKEI story… But what a performance from Gold! WOW! The shiny metal traded over $900 for a short time on Friday… I do see the Gold futures on the internet, and they are showing Gold will be over $900 today…

Pound sterling has bounced off its lows from last week, after Barclays announced they did NOT need Capital from the Government… This is the first “good” news from the U.K. in weeks, but I suspect it won’t last too long, as this is just one Bank… There are plenty others in the U.K. that won’t be able to make a statement like that!

And speaking of Banks… I see where BNP Paribas posted a huge loss in the 4th QTR on their investment banking woes… So, it’s not just U.S. , and U.K. Investment Banks with losses… The key here is “investment” banks… The ones that got deep into the subprime bonds, credit default swaps, and didn’t manage the “risks” correctly… Any way, this news from BNP Paribas is probably weighing heavily on the euro this morning, and one of the reasons the single unit has given up it’s gains from Friday…

So… As I said above, the Trading Theme for the dollar is in place, which means… The euro gets sold along with the other alternative euro currencies like Norway, Sweden, Denmark, and Switzerland… But the High yielders, like Aussie, kiwi, Brazil, and South Africa, really take shots to the chin… On the other side of the coin, the Japanese yen rallies like there’s no tomorrow…

The U.S. data cupboard is chock-full-o-data this week, and the Fed’s FOMC meets tomorrow, but won’t announce their rate decision until Wednesday. I’ve always wondered just what these Fed Heads do during these two-day meetings… I’ve always contended that they most likely played board games… Or Battleship! I can hear Kohn, telling, Bernanke, “Ben, by Joe, you’ve sunk my battleship!” (if you do it in an English accent it’s funny)…

We begin the week with Existing Home Sales and Leading Indicators… I keep saying over and over again that if the markets had 1. read the Pfennig… Or more likely 2. paid attention to the Leading Indicators they would have not been blind sided by this recession! Leading Indicators have told us for months now that things were not going to be all seashells and balloons for the economy… And voila! Well… I think Leading Indicators will continue to tell us there are more problems ahead, as they are forecast to be negative -.3%… And Existing Home Sales? The rot on that vine has been exposed for over a year 1/2 now…

Tomorrow we get the Case-Shiller Home Price Index, and Consumer Confidence… Wednesday, we’ll get the Fed’s rate decision, which I told you last week, to forget about any more rate cuts, they are so close to zero, they are at zero… Thursday brings us the Weekly Initial Jobless Claims, which last week, got very close to 600K, Durable Goods Orders, and New Home Sales… And then finally on Friday, we get 4th QTR GDP… Which I told you, and a Huge crowd at the Wealth Masters Conference in November, that 4th QTR GDP would be a negative -5.0%…

Well, it looks as though it probably will be an even greater negative than I forecast back then…

OK… Let me give you a bit of a lesson on what’s happening with the economy and this recession… You see… Every other time in the modern era that the U.S. economy has contracted more than 5% in a quarter, falling inventories have been a major reason, if not the single biggest factor. Unfortunately, the really bad recessions, like this one is going to turn out to be, get worse by the Companies getting rid of all their inventory, you know, stuff that isn’t selling! Then… Once the inventories are sold off, the economy can grow quickly again, but at the cost of inflation, as the Companies sold off their stuff, and now there’s demand for it again.

But so far in this recession, falling inventories haven’t been the problem. Of course you have to forget about housing here… NO, this recession is a direct result of the Credit Crisis that was first exposed in August of 2007… Which, I’m afraid, doesn’t bode well for a turn around in the recession, that a lot of economists are calling for in the 1st QTR of this year… The recession is deep rooted, and will be protracted until someone figures out how to get this credit crisis unlocked!

I’m still holding out hope that by summer, we see an unlocked Credit market… Then it would take a couple of months before the economy could get some “legs”… Then… We could see this spiral of demand again, and inflation rising, like in previous recoveries from recessions… And this is why I believe that in the 2nd half of 2009, we’ll see a return to the fundamentals, and all this awful debt creation that was done to “stop” the correction, will be on display again, and a dollar sell off, along with U.S. Treasuries should be in store…

But, if the Chinese jump the gun, and begin selling ahead of that time, then the dollar sell off could obviously move forward on the calendar!

I think what the markets are looking for these days, and especially after the NIKKEI story on Friday, is some sort of hedge against Treasuries… All that safe haven buying, that I’ve been talking about for months now, has created what I call the last balloon / bubble in this cycle…

And then finally before we head to the Big Finish… There’s this… A story that Ty found the other day, and sent to me… When I went to read it, I saw that the writer is a young man, that used to swim against and play water polo against my oldest son, Andrew! The lad’s name is Jamie Saettele, and he’s now the Senior Currency Stategist for DailyFX.com…

Jamie is a stategist, so he works with charts… And he believes that the euro is forming a base for a Large Rally… He points out that each time the euro rallies, and then drops, the drop is less than the previous drop… You may recall that I pointed this type of information on Gold a couple of weeks ago, and said that it looked like it would rebound to $900, and voila! Here it is… So… Let’s see if the charts work for the euro, the same way, eh?

Currencies today 1/26/09: A$ .6570, kiwi .5290, C$ .8190, euro 1.2970, sterling 1.3870, Swiss .8625, rand 10.1820, krone 6.8750, SEK 8.1750, forint 222, zloty 3.3815, koruna 21.5920, yen
89.30, sing 1.4980, HKD 7.7580, INR 48.90, China 6.8465, pesos 13.93, BRL 2.3140, dollar index 85.69, Oil $45.90, Silver $12, and Gold… $898.30

Source: Chock-Full-O-Data Week!