ISM Holds The Cards
"Today, we'll see the color of the ISM manufacturing index for September. It is expected to come in around 52, which obviously is just above the 50 level. This is the line of demarcation between expansion and contraction."
By Chuck Butler In this issue… Japanese Tankan disappoints Currency "pairs" Commodity Currencies holding on ISM holds the cards today
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five consecutive years and ranked #1 by Bankrate.com! --------------------- And now…today's Pfennig! ISM Holds The Cards Good day. I hope you all had a great weekend. I spent the weekend staining my deck. I Had help from most of my kids. I'm off to Chicago this morning, as soon as I hit the 'send' button on the Pfennig! I would normally tell you what the currencies did on Friday, but it's old news now that the euro has fallen below the big 1.20 level overnight. What has brought the euro back to this level that we saw over the summer? Well, it's all in the crosses. Here's the skinny. The Japanese Tankan report, which tries to give you the pulse of the Japanese economy, came in weaker than expected for the last 3-month period. This led to major yen selling, which crossed over to euro weakness. Recall that I've explained these crosses and "pairs" in currency trading before. But for new readers, the broad strokes are simply that when major buying or selling occurs in one of the "major" currencies - like yen, euro, sterling - versus the dollar, that trading action (buy/sell) will carry over to the other major currencies due to so many trades that exist in those "pairs." So, it is today with the selling of yen carrying over to euro and sterling. This is really significant for the euro in that 1.20 had provided a line in the sand, but not so any longer. And the yen? What can I say? The Japanese yen is now trading around May 2004 levels. UGH! Now, the tankan report wasn't exactly bad; it just wasn't as robust as expected. I think this selling of yen has gotten out of hand, and has really gone overboard. I expect a bounce very soon here. The commodity currencies haven't gotten caught up in the yen and euro selling, but if this doesn't turn around, it will eventually creep over to the Aussie, the kiwi and the loonie. Speaking of loonies, there was a confirmed story on Friday, that a large fund came in and bought 800 million loonies. You should have seen the loonie soar when that hit the screens! It was over 86 cents in a New York minute! The loonie has fallen back below 86 cents, but it remains within "spittin" distance of that level. A reader asked why I didn't mention the South African rand when I talked about the Commodity currencies. No real reason…the rand gets jerked around by the government's questionable actions, and also by the way the Central Bank gets manipulated by outside forces. I've mentioned several times over the years that the only way I would own rand would be in our Commodity Currency C.D., where it represents just 25% of the C.D. So, I don't deliberately leave rand out of the discussion of commodity currencies; it's just that not much happens in South Africa, and when it does, we see the wild swings. Let me also say that I believe that the rand is influenced by the euro. Gold has also fallen back from last week's high of $475 to this morning's $465. I think this selling of gold is also tied to the yen & euro selling. A lot of dollars are being bought on the other side of those trades. That stupid interest rate talk in the United States has a lot to do with the dollar buying, as hedge funds are betting that the higher interest rates in the United States are going to reap a stronger dollar. That's a really simplistic view. They (the funds) must not be aware of the structural problems in the United States and that the Fed is raising interest rates to fight inflation that already exists. So, what's the real amount of interest these funds will make on their dollar assets? Well, right now, inflation, according to the government, is 3.6 percent. The 10-year U.S. Treasury's yield has finally moved higher to 4.32 percent. So, the "real interest" they are earning is less than 3/4 of one percent: .72. So, go ahead fund managers, buy those dollar assets, and have fun with all that "real interest." Today, we'll see the color of the ISM manufacturing index for September. It is expected to come in around 52, which obviously is just above the 50 level. This is the line of demarcation between expansion and contraction. Recall, that I've told you that the Federal Reserve has never in their history, raised interest rates when this index indication contraction in the manufacturing sector. So, this piece of data will be closely watched by yours truly, as I expect this to fall below 50 sooner or later. Think about that for a minute: Dollar strength leads to a problem for manufacturers. So, fund managers buy the dollar and drive it up because they think higher interest rates are coming. But that stronger dollar hurts manufacturing and makes the Fed stop raising rates. Oh, the house of cards comes crumbling down. So, I'm going to go to the big finish, and then head out the door. I'll be back home later tonight, and in the Pfennig saddle again tomorrow! Currencies today: A$ .7625, kiwi .6915, C$ .8595, euro 1.1930, sterling 1.7550, Swiss .7685, rand 6.41, krone 6.61, forint 210, zloty 3.29, koruna 24.81, yen 114, baht 41.16, sing 1.6975, China 8.0920 (it's a holiday week for the Chinese!), pesos 10.78, and gold $465.38 That's it for today. Chris just came in (early for him) thinking he was writing the Pfennig today. You should see the smile on his face when he saw me sitting here! Thanks to Dawn, Jerry, and Alex for all their help this past weekend! The manufacturing report today holds the cards. So, have a great Monday! | 
