An Attitude Change

Good day… And a Terrific Tuesday to you! Welcome to September! I hope you had a Wonderful Holiday Weekend. I sure did! It was the end of four weeks of treatments. We have beautiful weather. I enjoyed a day of football on Saturday, with my little buddy Alex, playing Saturday morning, and my beloved Missouri Tigers playing Saturday night. Sunday was fantabulous, as I hung around the backyard, and neighbors and friends all stopped by to spend the day… Just great! I had to rest up my leg yesterday, as it was swelling a bit from all the walking and standing, but back to normal today, so, it’s all good!

Not so for the euro (EUR) and other currencies this morning. Front and center this morning, the euro has fallen further, all the way through the 1.45 handle! Seems that Hurricane Gustav didn’t disrupt the oil production as many had feared, and the price of oil has fallen to $115, after trading as high as $119 on Friday, ahead of the storm. Gold too has taken on gallons of dollar water, and has diluted the price of the shiny metal to $805, after traded near $845 last Thursday. And commodities? That’s not a pretty sight. The free fall of commodities, and thus, the commodity currencies of Aussie (AUD) and Kiwi (NZD) – and even the Canadian dollar (CAD) – have all seen the trap-door opened up underneath them by this dollar move.

The dollar has it all going for it these days. Even the Big Boys, Goldman and Morgan Stanley, have flipped their dollar bear stances to dollar bull stances. Morgan Stanley’s Stephen Jen had this to say…

“Like many in the market, I was surprised by the magnitude of the dollar move, but it just seems to keep going. It’s not that the U.S. economy is doing better, it’s that everyone else is doing worse.”

Well… I would take exception to the statement, and say that everyone is NOT doing worse. Everyone else might be slowing down, but they don’t have the debt, financial institution bad debt problems, and a war going on. But that’s just me, looking at it from the cheap seats… I don’t have the HUGE research divisions that Goldman and Morgan Stanley have!

You know… This latest move by the dollar has been driven by the second quarter GDP print from last week. Recall that I called it for what it was: export driven… But the markets just don’t get it. Exports were strong because the dollar had finally reached a weakness that allowed it to be competitive! But that’s all been wiped out by the dollar rally… So… The markets that are so “smart”, are just seeing this one fly right over their collective heads!

But, it looks as though the market participants’ “attitude” regarding the dollar have changed. And as I’ve told you before… These are all fiat currencies, so when the markets want to stray away from fundamentals, and change their attitude, there’s nothing to stop them. But, this move has really gone too far too fast. Shoot Rudy, the euro saw a 6.4% decline versus the dollar in August, which happened to be the worst performance month on the euro’s books. Even worse than when it was on the slippery slope from $1.17 to 82-cents in the 1999-2001 time period.

So… The attitude, as seen by Goldman and Morgan Stanley flipping their dollar stance, has changed. What to do now? (I hear you asking… ) Hmmm… I just can’t “flip” my stance like the Big Boys, as I have always been a believer of fundamentals, and trends. I can’t just flip flop like a fish that’s just been pulled into a boat! I’m not that kind of guy! So… All I can do at this point is batten down the hatches, for it’s not a fundamental change; it’s strictly an “attitude” change.

Now, there is a product at EverBank that allows the holder to take advantage of dollar strength, so if your attitude has changed, and you want to run with the Big Boys, it’s called “dollar bull”…

But… There’s something strange going on with Japanese yen (JPY), as it has not succumbed to the dollar’s strength, and has completely ignored the resignation of their Prime Minister this past weekend. Yes, while the charcoal was burning everywhere and pools got a workout, Japan’s PM decided to call it quits… And yet, in the face of that and the dollar move, the yen has remained untouched.

I’ll tell you why I believe this is happening… So many Japanese investors held Aussie and kiwi (the high yielders) versus their base currency (yen)… And when commodities started their free fall, these Japanese investors began to close out those positions, which meant they sold Aussie and kiwi, and bought yen.

Even the most recent Belle of the Ball, Brazilian real (BRL), has gotten caught up in the commodities free fall. The real is the weakest it has been in several months this morning… And the other “runner-up” Belle of the Ball, Mexican peso (MXN), has gotten the snot knocked out of it by this dollar move.

So… Japanese yen, is the lone wolf bucking the dollar’s rally.

With this “attitude change”, watch what happens with the data releases. The U.S. data is going to be looked at with rose-colored glasses. (I know it has begun to be that way before, but wait-n-see what happens now!)

Today, we’ll see the color of August’s ISM (manufacturing) Index, which stood right smack dab at the 50 level, which is the line in the sand – the demarcation between contraction and expansion. Remember, when this index fell below 50 back in February, I said that I was sure that the economy had fallen into recession, I didn’t care what the NBER, the folks assigned to “officially” call recessions, said. Well… The index is forecast to remain right at 50 for August, but any blip above will be cause to celebrate in the media and markets.

This Friday will be the Jobs Jamboree for August’s payrolls. This could be the piece of data that causes the dollar to take a step back. We’ll get an indication of the rot on the job creation, tomorrow with the Challenger job cuts data. I fully expect job creation to be void in August. I fully expect it to show negative jobs… Which means job losses not creation! Right now, I think the number will be at least -75K. That’s nothing to get all excited about for the dollar bulls, so, as I said, maybe it causes the dollar to take a step back… But that’s on Friday – four days away!

Until then the data cupboard is pretty empty, except for the Fed’s Beige Book results, and factory orders tomorrow. So… It’s a “data risk” week… And whenever the Jobs Jamboree is involved, it’s especially full of “risk”.

With the dollar making this run, there’s little else to talk about, so I’ll just head to the Big Finish and get started on my day’s work, as my longtime right-hand colleague, Jen, has sent me a note that she will be late today!

Currencies today 9-2-08: A$ .8335, kiwi .6850, C$ .9345, euro 1.4495, sterling 1.7820, Swiss .9005, ISK 84.15, rand 7.8115, krone 5.5180, SEK 6.5245, forint 164.80, zloty 2.3145, koruna 17.16, yen 108.75, baht 34.45, sing 1.4325, HKD 7.8075, INR 44.39, China 6.8405, pesos 10.39, BRL 1.6495, dollar index 78.17, Oil $115, Silver $13.20, and Gold… $805.59

That’s it for today… It was nice being able to taste all that good food this past weekend. My beautiful bride was laughing at me carrying on about how good something tasted. I said, “Well, when you get your taste taken away, you appreciate the taste of things more than ever!” In two weeks I head out on the “Currency Tours”. The first week, (9-13 thru 9-19) I’ll be in Seattle, San Diego and Dallas. Then in October, (10-13 thru 10-20) I’ll be in Philadelphia, Chicago, St. Louis, Jacksonville, and Fort Lauderdale. If you live in or near any of these cities, and want a one-day seminar on using currencies as an asset class, call: 866.584.4096.

This past weekend was my old Latte buddy’s, (Michelle’s), birthday… I miss going for latte’s on Fridays with Michelle, but caffeine was on my list of things to give up last year… So, one of life’s simple pleasures, gone… But, not forgotten! Hope you had a great birthday, Michelle!

And… I hope you have a Terrific Tuesday!

Chuck Butler
September 2, 2008