Currencies Rally On Bad U.S. Data

Good day… And a Wonderful Wednesday to you! I’m back. I just couldn’t answer the bell yesterday morning, as the night before was simply rough on your old Pfennig writer. I’m in my last week of treatment and it has been a tough row to hoe, and I feel bad that I was not able to stiffen the back and make it through the day. But, no biggie, I’ve got great people here to take care of things when I’m gone.

When I finally dragged myself out of bed yesterday, I saw that the dollar was taking liberties with the euro (EUR) and other currencies once again. It was another game of “your economy is worse than mine”, as German Business Confidence took a ride on the slippery slope down. You should have seen the “bandwagon jumpers” falling all over themselves to write about how cool it was to own the dollar. I chuckled, no big laugh as that might upset my stomach! But, their claim to be cool, was quickly squashed like a bug, when the housing numbers printed, and then later in the day, with the latest FOMC meeting minutes… More on this in a minute…

The euro has continued to rally overnight on news from European Central Bank (ECB) member, Weber, who said, “there’s no scope for interest rate cuts and the bank may even need to raise borrowing costs again once the economy emerges from its slump.”  So… The beat goes on from the ECB, providing price stability, and not falling into the “Bernanke trap” of being the stock markets’ “best friend”. Of course the part about possibly raising rates once the economy emerges from its slump is standard central bank parlance… Any central banker can say that, and not be stepping outside the lines. Because… Once any economy recovers, even the likes of Japan, the central bank may raise rates! Anyway… I like that he came out and spoke about there being no scope for rate cuts. That was BIG for the euro this morning. Let’s see if it carries weight all day, or is just a quick blip for the single unit.

OK… So, now back to the data yesterday… First of all, I wanted to touch on the FOMC meeting minutes. Here’s what the Wall Street Journal had to say about the minutes…

“U.S. Federal Reserve officials downgraded their economic forecast at their last policy-setting meeting, according to meeting minutes, and said they expect inflation to fall in coming months. And while officials expect the next change in interest rates to be an increase, most did not see the current stance of policy as particularly accommodative,’ the minutes said, suggesting that interest rates are likely to remain steady for the foreseeable future.”

So… What’s all the hubbub about higher rates in the United States? It’s not going to happen this year! When will these knuckleheads get the memo? Nevertheless, the dollar has lost some ground because of these minutes; now we have to wait-n-see if the currency rally has any legs to it.

The housing data was not as “great” as I heard the cheerleaders on TV carrying on about… Here’s the way I see the data… July New Home Sales rose 2.4%, and that’s the number the cheerleaders were shouting about… But what they failed to mention is that a good piece of that 2.4% rise came about because of the downward revision in the previous months’ numbers! It breaks down like this… June’s number was revised down to 503,000 from a previously estimated 530,000. As a result, the level of sales in July of 515,000 was below market expectations of 521,000. Not so good looking now, eh? And June’s revised number of 503,000? Well, the revised June number represents the lowest level of activity since 1991! But you I bet you didn’t hear that on TV did you?

The piece of data yesterday that WAS good for the dollar came in the August consumer confidence data, which showed a very nice increase in confidence from 51.9 to 56.9. Yes, gas prices are down (thank goodness), but apparently, the people surveyed didn’t go to see my friend, Addison Wiggin’s movie, I.O.U.S.A.!

Or, they didn’t read my friend, John Mauldin’s, latest “Out of the Box” newsletter, where he has guest writers put forth “out of the box” ideas, research, information… It’s all there each week. Yesterday’s letter was from a gentleman named, Bennet Sedacca, who is the president of Atlantic Advisors in Winter Park, Florida. Mr. Sedacca researched financial institutions, and came up with a list called, “Dead Man Walking”… And one called, “Limping but not dead yet”. It’s pretty scary, the number of names on this list, folks… But he sums it up like this…

“I am certain that I have missed a bunch of names on the ‘Dead man Walking List’, but the pattern is rather easy to discern. As I stated early on, when we have one or two firms in trouble, we can deal with it. But when we add rising unemployment, explosive debt growth in recent years and non-performing assets to many hobbled financial institutions with trillions of dollars of exposure, it is hard not to be concerned.”

And yet… Consumer confidence rises! Oh! And the Wall Street Journal also had this little ditty that you may have missed… “The FDIC may need to borrow money from the Treasury to cover cash flow problems, which would be the first such borrowing since the early-1990s…”

And why would the FDIC need to borrow money? Oh, you know why… I don’t need to go into the bag of bad news again.

Today, we’ll see the color of the July Durable Goods Orders, which is forecast to have gone flat versus a 0.8% rise in June. This is a second tier piece of data that shouldn’t hold much water with direction for the currencies today, but is still important in my mind.

There was a report on Reuters yesterday that the Swedish Central Bank (Riksbank) announced a gold sale of 15 tonnes that will take place from September 27, 2008 through Sept 26, 2009. That’s not good news for gold, as the shiny metal has been able to sidestep central bank gold sales for the past few years as it rallied stronger and stronger.

This morning, Swedish consumer confidence this month, has risen from a 13-year low. I don’t think the gold sale announcement had anything to do with this bump in confidence, unless Swedes don’t own gold! I find that to be preposterous!

In Norway, this morning, the July unemployment data showed that the country’s unemployment rate would remain near the lowest levels in two decades! Unemployment did rise 2.6% in the past three months, but the previous quarter’s 2.4% was the lowest level, as I said, in two decades! With regard to the rest of Europe… Norway’s economy continues to be the belle of the ball!

And in Iceland… Inflation is rising again, and that’s not a good thing, given the banking crisis, and lack of liquidity that’s still going on there. The reason I say that, is that the central bank will probably raise interest rates again, but it won’t help deposit rates because of the lack of liquidity!

Currencies today 8/27/08: A$ .8625, kiwi .7020, C$ .9575, euro 1.4760, sterling 1.8475, Swiss .9160, ISK 82.30, rand 7.7710, krone 5.3725, SEK 6.3660, forint 159.75, zloty 2.2550, koruna 16.64, yen 108.80, baht 34, sing 1.4275, HKD 7.8080, INR 43.75, China 6.8375, pesos 10.13, BRL 1.6280, dollar index 76.77, Oil $117, Silver $13.73, and Gold… $832.06

That’s it for today… Cardinals take one in the gut last night, getting whomped 12-zip! UGH! Good thing college football begins this week! Which reminds me, ESPN says that this Friday is “wear your college colors day”. This public service announcement was brought to you by… HA! My little buddy, Alex, is really working hard juggling homework and football practice. I told him to get used to it, and work on managing his time better… He’ll get it figured out; he’s a smart kid! Well, Mary Owens just walked in, which means this is late! So… I had better get it out the door! I hope you have a Wonderful Wednesday!

Chuck Butler
August 27, 2008