A Peak in the Dollar's Rise?

Good day… And a Fantastic Friday to you. It would be nice to have some of that warm weather they have in Jacksonville make its way north, but hopefully its right around the corner…patience. Yesterday was a wild ride so hopefully you had that seat belt fastened tight and both hands on the wheel. I have a lot to talk about so I’ll get right to it…

We were greeted yesterday morning with some big news out of Switzerland where they not only cut rates to .25% from .50% but also decided to take matters into their own hands. Chuck sent me some thoughts before he left for vacation, so here you go. “The Swiss National Bank (SNB) intervened in the markets yesterday with a bang! The SNB sold francs for euros and dollars to further reduce the price of money (since they’ve already cut interest rates to the bone). Francs went from 86-cents to 84-cents in one day! UGH!”

We don’t know exactly how much the SNB sold off but I saw a report that estimates 2 billion euros were purchased and that doesn’t take into consideration other currencies that may have been bought. This was their first intervention in the foreign exchange market since 1992 spurred not only by internal economic pressures but also its appreciation against the euro and pound by 10% and 30% respectively since the end of July.

As these central banks paint themselves into a corner by dropping rates to virtually zero, there really isn’t any other choice but to use “creative” or “alternative” measures in order to provide pressure relief. Since 80% of Switzerland’s trade is within the European Union, this imbalance in exchange rates basically offset the rate cuts we have seen thus far. The franc traded as low as .8356 but recovered a bit to .8440 before I left for the night as the currency market actually finished higher after that surprise. If the other European currencies begin to appreciate, I would think the chances of another intervention would become lower.

As I just mentioned, the markets seem to have just shrugged that off and went on with business. Now all of the sudden we had euros trading well into the 1.29 handle (which was, in part, supported by the SNB buys) and the emerging markets posting gains. The Mexican peso and South African rand were the top two currencies, which would seem counter intuitive given the intervention and market turmoil. Risk was up but the dollar index was down, is this pattern setting a stage…lets see what Chuck thinks…

“Does this all begin to look like the peak in the dollar’s rise? Could be, folks, for all this week, even with the profit taking, the currencies have moved higher VS the dollar led by the euro… (except of course francs which were sold by the SNB!) The failure of the dollar to launch is beginning to look like it could weigh on the green/peachback. Just like at the beginning of December, when I gave you the wink and nod that we could see a Santa rally in euros, and dadgummit we did, this is beginning to look a lot like Christmas… Every where I go… The dollar’s can’t rise here, and the euro is gaining there, but do we really know for sure this is the end of the dollar’s run? NO! we don’t know for sure, but… If you were looking to get in on the ground floor, the bottom if you will, this could be it! But then, it could be a false dawn too… Which means you won’t have gotten in on the ground floor… But, at least it will be a cheaper level than in December!”

Well, you heard it here, folks. Maybe, just maybe this is a sign the roadies are finishing their mic checks and the stage is ready for the opening act. I don’t know about you but I found my seat and am sticking around to see what kind of show this will bring. The currencies held their own in the overnight session and are right where I left them last night, so lets see which way the US markets decide to take the ball today.

February retail sales did fall, as indicated by the Butler Household Index (BHI), by .1% but January’s number was revised up to 1.8% from 1.0% so the media ran with that story claiming the pullback in consumer spending may be nearing an end. I would think its difficult to make that call right now given that unemployment remains on the rise. Initial jobless claims remained above 600,000 last week for the 6th straight time, coming in at 654k and the week before that was revised up to 645k.

Where is the money going to come from to support sales if more people are losing jobs. Not only that, Americans’ net worth fell in 2008, erasing 4 years of gains, as the value of their homes and investment portfolios declined. According to the Federal Reserve, household net worth was $51.5 trillion, down $11.2 trillion or 18%, from 2007 and marks the first decline since 2002.

We have the January trade balance due out today and is expected to narrow by $1.9 billion from December’s figure to $38 billion. True, the number is moving in the right direction but not because we are taking steps to correct it but because trade flows are falling…not exactly what you’re looking for. The University of Michigan Confidence measurement comes out today as well and is expected to fall from last month. Until the jobs and housing markets show signs of stabilizing, I really don’t see much that would provide support for consumer confidence.

Chuck spent quite a bit of time yesterday on business inventories explaining how a decrease points toward inflation once things do turn around, so here are the results. We saw a 1.1% drop for January and then a revision down to -1.6% from -1.3% in the December figure. I guess the point about this data is that its reactionary so as demand rises, there won’t be enough supply on hand at first causing the inflation he so eloquently described. I hope I brought that full circle for you.

Gold, the uncertainty hedge, had a nice showing yesterday climbing all of the way to $930 and has held around $920 so far today. There was enough uncertainty flying around so it provided a nice place to roost for the moment. That sub $900 level from a couple of days ago doesn’t look so bad now. Anyway, before I head to the big finish, here are some final words from Chuck before he heads out: “There are a lot of questions in the box regarding my statement yesterday about the IMF and Gold… Here’s the skinny… First of all, if the IMF sells large quantities of Gold, I believe Gold will take a temporary hit, maybe providing some good buying levels… If the IMF does sell though… I Believe that it means the Obama campers are scared about liquidity and cash, and they need to have some on hand… That’s the whole gist of my statement, sorry I was a bit confusing to some, and probably all, but shoot Rudy! Now I get to talk to you all another day, when I thought I was finished!

BTW… I forgot to mention yesterday that this is it for me! I’m officially on vacation right after breakfast this morning… You’re in good hands with Mike, he’s wanted to do this for so long! I’ll be speaking at the Oxford Club Investment U Conference March 26th, and then I go back on vacation! So… See you in April!”

Currencies today 3/13/09: A$ ..6585, kiwi .5235, C$ .7822, euro 1.2901, sterling 1.4047, Swiss .8435, rand 9.9552, krone 6.8445, SEK 8.5804, forint 229.09, zloty 3.4718, koruna 20.5138, yen 98.30, sing 1.5416, HKD 7.7537, INR 51.6525, China 6.8381, pesos 14.7097, BRL 2.2957, dollar index 87.37, Oil $46.69, Silver $12.98, and Gold… 921.35

That’s it for today…the Asian and European equity markets were all up so we’ll see if that feeds into another rally today in the US. Other than that, not much to report from overnight. Its going to be a busy weekend for me but I’m looking forward to relaxing a bit at some point. We had our St. Louis Blues win a big one last night as they are still fighting for a playoff spot and the Missouri Tigers had a win the in Big 12 Tournament. Speaking of that, I saw where Syracuse and UConn went into 6 Ots…talk about a long day at the office. Well, its time to get Friday started so have a great weekend and a Fantastic Friday.

Mike Meyer