Let the Money Flow

Good day… Bernanke rode to the rescue of the stock market again yesterday as the Fed opened up the spigots and let the money flow into the markets. Chuck sent me some good info on the newest attempt by our Fed to fix the credit markets, so I won’t go into much detail here, but the package seemed to be just what the credit markets ordered. (For now!)

The dollar rallied after the fed announcement, but the rally reversed overnight once the Asian markets started trading. It seems the markets first viewed this as a rate cut in different clothes, and that it may keep the Fed from having to cut dramatically at their next meeting. But after analyzing the details, traders reverted back to their thoughts the FOMC will cut by as much as 0.75% at their next meeting.

As I mentioned above, Chuck sent me his analysis on the markets yesterday so here they are:

“OK… Well, after I talked about the yen rally so much yesterday, the Fed threw cold water all over what I said! The Fed’s $200 billion lending package made the markets ‘feel better’ about the current lack of lending situation, and that sent stocks on a rally, which sent yen (JPY) down… But only for a day! Yen is back to 102 after spending most of yesterday falling to 103 and change. I feel like I gave yen a bad omen if you will, by talking so much about how it had climbed to 101, etc. But… The rally is still on, folks. Don’t be discouraged by this one-day deal…

“Speaking of the Fed’s announcement… Here’s the skinny… The Fed announced that it was establishing a Term Securities Lending Facility, by which it would lend Treasuries for 28 days to primary dealers in exchange for a range of collateral widened to include mortgage backed securities. This move will provide liquidity to primary dealers under pressure to make loans to other dealers/banks. This really got the ball rolling for stocks, and the fixed income spreads tightened.

“What had happened was critical to the markets, and that is… Banks had stopped lending to other banks. The Fed had to step in… And they did… OK… But at the end of the day, this announcement by the Fed, in my humble opinion, was nothing more than an inter-meeting rate cut. They accomplished it with the lending line… Good for them… Sort of.”

I agree with Chuck that the step taken by the Fed was the right move to make at this time. This will do more to shore up the credit markets than another 75 basis point cut in the Fed Funds rate. These types of creative solutions are what the Fed needs to continue to focus on, and not just sit back and needlessly cut the Fed Funds rate. Problem is, the markets are going to continue to demand further rate cuts, and U.S. inflation will continue to rise. Further rate cuts by the Fed will cause a further drop in the dollar; there is no way around it.

More and more economists on Wall Street are coming around to our way of thinking, according to a monthly survey conducted by Bloomberg. The economic slowdown in the United States will be deeper, and the recovery will be weaker than previously forecast, as the U.S. economy is not projected to grow at just 0.3% during the first half of 2008. Economists now believe the Fed will cut the benchmark interest rate by another percentage point and keep it at 2% through the end of the year. This is what Chuck and I have been saying all along and unfortunately we feel their 0.3% growth prediction is still a little too rosy. We are currently in a recession (that is negative growth), and will remain there through most of 2008. But it is nice to see these economists starting to move toward our side of the fence.

One of the Wall Street analysts who has ‘seen the light’ is Tom Fitzpatrick, Citigroup’s head of currency strategy. In an interview yesterday, Fitzpatrick suggested that investors buy the Norwegian krone (NOK). He believes the krone will strengthen to a five-month high versus the euro (EUR) in the ‘short term’, as accelerating inflation spurs the central bank to lift interest rates. Norges Bank lifted the country’s key interest rates to a five-year high of 5.25% in 2007 to combat inflation, as the rising price of oil fueled the country’s fastest economic growth since 1971. Norway is the world’s fifth largest oil exporter, and as such, the Norges Bank will likely have to continue to raise interest rates over the remainder of the year, as oil remains above $100 per barrel. The country’s central bank is set to release their interest rate decision tomorrow, and is expected to leave rates unchanged. “It is unlikely that the Norges Bank will abandon its tightening bias given the resilience of the Norwegian economy,” Fitzpatrick wrote in a report yesterday. “The krone remains firmly among our favorite currencies, it’s hard to find any reason to bet against the Norwegian krone.”

The Financial Times had a short paragraph in their currencies section yesterday that caused a stir among currency traders. It told of a report which indicated that the central bank of the United Arab Emirates had set up a taskforce to help implement a possible depegging of the country’s currency from the U.S. dollar. This is something Chuck had written about months ago, but the talk of depegging jumped back up onto the trader’s radar yesterday.

There is a meeting scheduled next week by the six Gulf Cooperation Council states, including Saudi Arabia and the United Emirates. The committee meets four times a year and will be discussing the formation of a Gulf Central bank and other technical matters related to a proposed single currency. The meeting won’t be attended by any central bank governors, so I don’t expect an announcement of an agreement to drop the dollar peg at this time; but just the discussion is putting additional downward pressure on the U.S. dollar.

The commodity currencies looked rallied as the Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD) all rose versus the U.S. dollar. Canada’s currency rose from its lowest in almost two weeks after surging prices for commodity exports widened the trade surplus more than forecast in January. The surplus swelled from a nine year low to C$3.26 billion, over 1 billion more than economists had forecast.

The Australian dollar also benefited from these rising commodity prices as a mining boom is expected to have pushed employment up. The nation’s 16-year economic expansion has pushed the jobless rate to the lowest since 1974, suggesting that additional interest rate increases are on the horizon.

Brazil’s real (BRL) rose for the first time in four days as the move by the Fed caused investors to move back into the emerging markets. Brazil has a lot going for it right now, as record commodity exports are bringing in money, which is being used to pay down international debt. But the good news regarding the Brazilian economy may actually end up limiting the upside potential of the real. Inflation is now under control and shouldn’t lead the central bank to further increase rates this year. In fact, interest rates in Brazil have started to move down.

Currencies today: A$ .9291, kiwi .8012, C$ 1.012, euro 1.5468, sterling 2.017, Swiss .9775, ISK 68.13, rand 7.8175, krone 5.0998, SEK 6.0763, forint 167.80, zloty 2.2817, koruna 16.2051, yen 102.56, baht 31.55, sing 1.3853, HKD 7.7873, INR 40.33, China 7.1010, pesos 10.7663, BRL 1.6917, dollar index 72.673, Oil $108.74, Silver $19.66, and Gold… $973.71

That’s it for today… Springtime weather returned to St. Louis yesterday, and with daylight savings time extending the evening hours I was actually able to spend some time outside with the family last night. The weather is supposed to remain nice again today with a predicted high of 69 degrees. You gotta love the springtime!! Chuck will be back in the saddle tomorrow, but I’ll pick up the Pfennig again next Monday. Hope everyone has a Wonderful Wednesday!!

Chris Gaffney
March 12, 2008