A Dollar Reversal Morning

Good day… And a happy Tuesday… Not much in the way of large moves yesterday as some markets were still on holiday, but that is certainly not the case today:

Sales of existing homes in February surprised most on the upside yesterday as the annual rate increased to 5.03 million, which is up from last month’s figure by 2.9%. From what I could find, the general outlook is still to the downside so the markets didn’t pay too much attention and are looking for sustained data before getting excited.

A further look into the numbers reveal that the median price of single family homes dropped 8.7% from a year earlier and represents the largest drop since the National Association of Realtors began keeping records in 1968. Home foreclosure filings shot up 60% and bank seizures doubled from a year ago as interest rates on ARMs rose and those in that position couldn’t find buyers before the bank was knocking at the door.

Inventories may remain high with the continual increase of foreclosures and represents a problem for sellers looking to get top dollar. We currently have a 9.6 month inventory supply, which needs to be around 5 or 6 months to help stabilize the market, and gives builders less incentive to start new projects. I think Mickey Levy at Bank of America represents the general sentiment with the following statement “If you look at the outstanding inventory of homes and the negative psychology, I think housing activity and prices will fall further.”

Now that we’ve seen a feeling that these results may be a one month spike, we’ll see how the general public views the situation with the release of consumer confidence today. As Chuck has mentioned many times before, there really isn’t that much to be confident about right now. One of the few things that I’m confident about at this point is spending more at the pump each time I fill my car with gas.

Speaking of confidence, the stock market ticked up yesterday to the highest levels this month as JP Morgan quadrupled its bid for Bear Stearns to about $10 a share. What happens when we see a rise in the stock market…we see a rise in the appetite for risk. I think you know where I’m going with this.

Yes, you guessed it… Both the Japanese yen (JPY) and Swiss franc (CHF) sold off yesterday with each giving up about 1% from Friday. That’s ok, it just gave some a cheaper price to buy and get in position for the next crisis that pops up. The carry trade was on yesterday.

All four of the Commodity Index CD currencies rose against the dollar yesterday, with kiwi at the top of the list followed by the Canadian dollar, the Australian dollar, and the South African rand primarily as a result of the carry trade. The loonie isn’t necessarily a carry trade currency, but it appreciated a bit as last week’s 3.3% drop encouraged some to get the feeling it was oversold.

As I turned on the screens this morning, I saw that just about every currency gained against the dollar overnight as concern of lower consumer confidence has spread among the markets. Here’s an interest headline from the Bloomie: ‘Dollar Falls as Stock Rally Boosts Higher Yielding Currencies’. It seems the scenario Chuck brought to our attention last week about the US dollar being sold as a result of the carry trade is starting to rise. The dollar fell against the euro as a rally in Asian stocks encouraged investors to buy higher yielding assets with loans in the US currency. It should be interesting to see how far this will go…we saw what happened to the yen and franc.

Another surprise this morning was Iceland’s central bank unexpectedly raising its benchmark interest rate to 15% at an unscheduled meeting after a slump in the krona threatened to fuel inflation that is already running at more than twice the bank’s target. The krona is up about 5% against the dollar as of this morning, just showing you how volatile this currency can really be, both on the positive as well as the negative.

With full trading desks after the two day holiday for some, volatility has certainly picked up as the trading volume gets back to a more normal pace. It looks like Friday and Monday were days to catch our breath before jumping back into the pool.

Currencies today: A$ ..9141, kiwi ..8039, C$ ..9839, euro 1.5580, sterling 1.9927, Swiss ..9890, ISK 75.02, rand 8.0375, krone 5.1920, SEK 6.0442, forint 164.45, zloty 2.2637, koruna 16.3310, yen 100.51, baht 31.57, sing 1.3822, HKD 7.7795, INR 40.1250, China 7.0444, pesos 10.6782, BRL 1.7446, dollar index 72.376, Oil $101.02, Silver $17.6350, and Gold… $932.91

That’s it for today… Just another crazy Monday on the desk yesterday. I want to thank those for the kind notes on giving you some news updates while Chuck is away, they are much appreciated. It’s getting late this morning and I still have a ton to do before the phones are on. Enjoy the day and have a Terrific Tuesday.

Mike Meyer
March 25, 2008