Euro Tracks Toward $1.55

Good day… It was a slow day in the currency markets yesterday as the dollar just range traded throughout the NY trading session. Most of the market participants were probably focused on the breaking news about the Governor of New York. But unlike all of the financial media, I will stay focused on the markets and won’t give any time to the latest scandal involving another of our politicians.

While the currency markets were pretty flat during U.S. trading, the euro (EUR) ran up to another record high falling just shy of $1.55 during early European trading. A report showing an unexpected increase in German investor confidence fueled the rally by the euro. The ZEW Center for European Economic Research said its index of investor and analyst expectations rose in February while economists had predicted a fall. This ZEW report reinforced a series of reports showing that Germany’s expansion is holding up. German exports rose also surprised the so-called experts as they rose more than three times faster than economists forecast in January.

ECB council member Axel Weber also gave the euro some love as he said there’s ‘no room’ to lower rates in the current environment. Mr. Weber is taking over the party line from ECB President Jean Claude Trichet who has recently begun to try to talk the euro down. Trichet has been letting the markets know that he is ‘concerned’ about the euro’s appreciation. “We’re concerned about excessive exchange rate moves in the present circumstances,” Trichet told reporters in Basel, Switzerland this morning. It’s the first time Trichet has specifically expressed worry about the currency since November, when he opposed ‘brutal’ moves.

But the markets know Trichet’s words are just an attempt to slow down the euro’s appreciation, and his ability to use interest rates to stem the rise will be limited. The strongest European inflation in 14 years is preventing the ECB from cutting rates while the Federal Reserve is expected to continue to slash away at interest rates. Interest rate differentials alone will help propel the euro to new records over the next few months, and jawboning by the ECB President will have little impact on these moves.

While there is little talk of intervention in the markets by the ECB, there continues to be growing concern that the Bank of Japan will soon enter the markets to slow the appreciation of the yen (JPY). The Japanese yen moved close to 101.50 last night before moving back up above 102 in European trading. I read a report this morning that states a major trend line is at 101.15, and if this is broken, the next move would take it through the 100 mark. As readers know, we are not big on the technical analysis here, but I still read the techies analysis and watch closely as we approach these major trend lines. Chuck was also watching the yen yesterday and sent me this note from Vail, Colorado:

“An Eight Count! No, I’m not talking about boxing… I’m talking about Japanese yen, which hit an eight-year high versus the dollar yesterday at 101.75! It’s been a long… Time coming… It’s going to be a long… Time gone… Yes… After all these years of saying that the yen was going to rally versus the dollar, I’m finally looking good on this one! There’s been a lot of teeth gnashing, and hand wringing, and name calling, but we’re finally seeing it… A bonafide yen rally! YAHOO!

“How long has this been going on? Well… It’s been awhile… But at this point it’s been one of those old, good things come to those who wait! Pretty soon… U.S. rates are going to be darn near Japanese rates. I read yesterday, that there is a brokerage house calling for yen to go to 80! Bring it on!”

Both Chuck and I have had positions in Japanese yen for some time now, so you will have to excuse us if we seem a little excited (relieved) that the yen is finally moving up. But as always, the move in yen won’t be a one-way ride. News released last night could put an end to this recent rally, as there are now the makings of a political standoff in Japan. Japan’s main opposition party said it would reject Prime Minister Fukuda’s candidate to lead the central bank only a week before the current governor’s term expires. This may lead to the central bank’s top post becoming vacant, but is that really so bad? I can think of a few central bank heads that we would probably be better without!!

I haven’t touched on the Indian rupee (INR) in a long while and some readers have requested an update, so here it is. The Indian rupee has been falling throughout the year, down approximately 2.58% versus the U.S. dollar. The rupee’s fall has mainly been due to a sell off in their equity markets. Recent data has turned this selling around, as global investors are again betting on India’s strong fundamentals. Industrial production growth in India probably accelerated to a three-month high in January on the back of stronger exports. The Indian economy is Asia’s third largest, and is seen as an interest-bearing alternative to China and Japan.

China’s inflation continues to accelerate as producer prices increased to the fastest pace in more than three years in February. China will continue to battle inflation with interest rate increases and further strengthening of the Chinese renminbi (CNY). Results of the renminbi’s slow appreciation versus the U.S. dollar are finally being seen in trade. The combination of a slowdown in the U.S. economy and the appreciating renminbi narrowed China’s trade surplus to $8.6 billion in February, the first drop in a year. The gap narrowed 64% in February from a year earlier and was less than half the $22.5 billion median estimate of economists. If the slowdown in the Chinese economy continues, commodity prices should slow their meteoric rise.

Our good friend John Nadler of metals dealer Kitco was on TV this morning talking about gold and commodities in general. He believes we could see one more dramatic move up, but expects a correction toward the end of the year, which could bring prices back closer to $800 and ounce. He said long term investors should maintain positions, as it is an excellent diversification; but short term traders should look for an opportunity to lock in some gains and wait for better buying opportunities. John believes the supply and demand picture does not support the levels for gold, platinum, and especially oil which shot up to another record overnight.

The metal markets, like currencies, tend to exaggerate moves and then move back down to ‘fill in the gaps’ left by these dramatic moves. In my opinion, the key to investing is making sure you take a long-term approach, and use proper diversification. I am a big fan of having a percentage of my portfolio invested in several different asset classes, with only slight adjustments as the markets move. Right now I would continue to carry a little heavier weighting in the currencies, metals, and short-term cash alternatives and lighter positions in equities and fixed income. But long term you should continue to have investments in all of these asset classes, holding them for the longer term.

This reminds me of something I heard Warren Buffet say in an interview which was re-broadcast Sunday night. When asked about his currency investments he said something like this. ‘I don’t try to pretend that I can know where the U.S. dollar will be tomorrow, next week, or even next month. But I do think I have a pretty good idea on the direction it is heading for the longer term and that is down.’

The interviewer then said the dollar is down dramatically and how could it continue to fall? He countered, ‘The reasons the dollar started to fall in 2002 and continued to slide for the most part of the last five years continue. Americans are spending more than we are making, and we are accepting loans from overseas to supply our overindulgence. Until this reverses, the U.S. dollar will continue to drop.’ These were not direct quotes from Buffet, as I am going from my memory, but he definitely continues to believe the dollar is headed lower.

Currencies today: A$ .9263, kiwi .8002, C$ 1.009, euro 1.5479, sterling 2.0167, Swiss .9838, ISK 68.05, rand 7.9253, krone 5.1033, SEK 6.0756, forint 169.26, zloty 2.2868, koruna 16.2430, yen 102.25, baht 31.57, sing 1.3868, HKD 7.7889, INR 40.46, China 7.1027, pesos 10.818, BRL 1.7051, dollar index 72.581, Oil $108.84, Silver $20.26, and Gold… $984.20

That’s it for today… It was great having everyone back on the desk yesterday, but the phones continue to back up as business is booming! I guess everyone is finally realizing the importance of diversification. This is the last day for investors to take advantage of our March MarketSafe CDs, so we will probably be pretty busy. Off to work, hope everyone has a Terrific Tuesday!!

by Chris Gaffney
March 11, 2008