Notes From Underground

This afternoon the little bank from down under announced it was raising its overnight cash rate (OCR) by 25 basis points to 2.75%. There is no question that the New Zealand economy has been growing (as has private credit for housing) but the KIWI has been elevated by the strength of the economy and the huge global demand for New Zealand commodities–dairy and other agricultural products. Previously, the RBNZ has refrained from raising the OCR because of the strength of the KIWI versus the Aussie dollar and other commodity-based currencies. But the improvement in global financial conditions gave Governor Graeme Wheeler reassurance for increasing the interest rate. Wheeler noted that “the high exchange rate remains a headwind to the tradables sector. The bank doesn’t believe the current level of the exchange rate is unsustainable in the long run.” The market had been expecting the Bank to raise rates  so the initial market reaction was a short selloff but within two minutes the KIWI was trading higher and actually closed on its high of the day in the spot market. If the RBNZ doesn’t intervene, which it shouldn’t, the NZ currency should hold up on the crosses, especially with the high yield on its 10-year note. Finally, one bank breaks out of the pack, even in the face of a potential slowdown in China.

***The price of copper has been under pressure as of late and most probably for reasons we have discussed in Notes From Underground. The Chinese credit markets have been using commodities as collateral for loans. This has been a lucrative position as long as prices were rising but as prices begin to fall and the economy slows, borrowers either have to raise more capital or the collateral will be liquidated. The problem for global markets is the opacity of the Chinese financial system makes it difficult at best to have any real idea of much copper is in storage versus the actual utilization rate. (A quick hat-tip to Dennis Gartman, who picked long gold/short copper as one of his favorite trades.) The uncertainty due to lack of solid information from China is causing jitters in the global markets. There were rumors today that the Chinese authorities were going to reduce reserve requirements on Chinese banks and if this occurs copper OUGHT to rally in response. The question is how high this very SHORT-positioned market will rally. Do your work and check the technical levels for major support and certain overhead resistance.

Another clue will be to watch SILVER. Currently, silver is being treated as an industrial metal as much as a precious metal, which is keeping silver weak versus the GOLD. The SILVER is holding above the 200-day moving average but it needs to gather momentum to provide support to a more robust precious metal rally. In terms of the GOLD, the gold/currency charts have all rallied to reside above the 200-day, giving an area of support. The gold/swiss broke above the key moving average today. More importantly, the gold/yuan chart has been a beautiful indicator for gold. Last July, I pointed out on Santelli’s segment that the gold/yuan price of 7150 yuan to an ounce of gold was critical for that was where the gold price was when the IMF made that deal to sell 200 tons of gold to the Indian Central Bank November 2, 2009. Time to regroup and gain perspective.

***A major theme of Notes From Underground is to never accept things as they are and to constantly try to understand the machinations of the global political economy. While on with Rick Santelli yesterday (and later with Kathleen Hayes and Vonnie Quinn), I raised the issue of Gerhard Schroeder’s whereabouts. This is not a rhetorical question but rather an effort to reveal that Russia and Putin’s designs on Crimea, Eastern Europe and the control of Europe’s energy supplies has been long a long process. Germany’s former Chancellor Gerhard Schroeder went to work for Russia’s Gazprom shortly after losing the election in 2005. But this is not as clear as it looks. Schroeder lost an election that he called even in spite that he was secure in his position and had two years left to serve. Yes, Germany was “the sick man of Europe” but was in quick repair as it was Schroeder who put forth the labor reforms (Hartz IV) that paved the way for Germany’s recent economic success.

Schroeder forced the German labor unions to accept a 10-year wage freeze in return for the promise of German corporations not to move jobs to Eastern Europe and other locales. Schroeder could get cooperation from the unions because he was a Social-Democrat and had the ability to persuade his constituency. Just prior to the chancellor heading off to run Gazprom’s pipelines, Herr Schroeder signed the agreement for a direct pipeline from Russia to Germany, which the German partially guaranteed the funding for. This has led to Germany being heavily dependent on Russian energy. This will become an even greater problem for Germany as Chancellor Merkel moves to shut down Germany’s nuclear reactors as a response to Fukushima. So as the G-7 threatens Russia with sanctions be prepared.

***Send any questions about events of the last three weeks and I will try to answer them in the blog over the next few days as there’s still much more to discuss. But I pose this question for you, dear readers: If Japan is on the mend, why are Japan’s bank stocks trading in a weakened state?

Tags: Aussie Dollar, China, copper, Gazprom, Germany, Gold, Japan, Kiwi, Putin, RBNZ, Schroeder, silver, Ukraine

This entry was posted on March 12, 2014 at 6:24 pm and is filed under China, Commodities, Germany, RBNZ, Russia. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.