Some Confusing FOMC Minutes!

Good day… Well, a basically dull day in the currencies, even though the Fed’s FOMC minutes caused a bit of a stir for oh, maybe 10 minutes. I finally broke down yesterday and accepted the company issued laptop that now ties me down, and does not allow me to do anything going forward. I was the last holdout in the company. But this move has been a major pain… Can’t find this, that and the other thing!

But that doesn’t stop me from getting the Pfennig to you! Neither rain, nor snow, nor tech problems will stop the Pfennig from its appointed rounds! So… You’re stuck with me again today!

So, like I said above, the currencies were quite boring, until the FOMC minutes were released and the dollar got bid… But that didn’t last long. Maybe, the markets’ participants are finally seeing the writing on the wall. Well… If so, it’s certainly ABOUT TIME!

OK, here’s the skinny on the FOMC minutes, I know you’ve been waiting patiently! All of the Fed Heads agreed the statement should indicate that the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. The Committee agreed that further policy firming might prove necessary to foster lower inflation.

The “further policy firming” is Central Bank parlance for “interest rates might need to go higher”… DUH! They certainly do need to go higher to combat inflation, and much higher than that stupid CPI report indicates… But THEY CAN’T GO HIGHER! I’ve explained this all in previous Pfennigs. The Fed is in a pickle here, and they know it, even though the minutes didn’t indicate it. Or, maybe they don’t know it, and they are clueless. OK, I’ll put my money on the latter!

The reason I say that is because of this statement from the minutes: “home-buying attitudes had improved and continuing job growth could be expected to support home sales. Fed Heads reported signs of stabilization in housing demand in most regions of the country. At the national level, sales of new and existing homes, while fluctuating in recent months, did not display declining trends.”

I don’t know what they were smoking… Or what rose colored glass they were looking through… But the subprime debacle’s tentacles are already extending to the Alt-A, and prime loan mortgages. Did you see that American Home Mortgage announced the other day that they would have to downgrade their earnings outlook, and their stock took a 16% hickey? American Home didn’t do subprime mortgages!

So… Whatever, eh?

The euro is knocking on the two-year high door again this morning, as the European Central Bank (ECB) is meeting while I type away here. And even though the markets (and myself for that matter) don’t expect the ECB to raise rates at today’s meeting, we do expect ECB President Trichet to say that higher rates will be needed to keep inflation under wraps, allowing the ECB to continue to provide price stability.

Obviously, the euro could climb to 1.35 if Trichet comes out with both guns a-blazin’ shooting at anything that looks like inflation fears, the markets would get the message. Rates ARE going higher in the Eurozone… Just not today!

In the United Kingdom, the pound sterling received good news and bad news this morning, leaving it unchanged. First the bad news… The U.K. trade deficit unexpectedly rose In February to 6.8 billion pounds (that’s $13.4 billion). The main contributor to the deficit was the fall in exports. But on a sidebar, wouldn’t it be nice to live together in the kind of world where we belong, no wait! Wouldn’t it be nice to see the U.S. book a trade surplus that’s workable like this one?

OK… The good news… Well, good news for the pound that is! The U.K. House Price Index continues to rise even after all the rate hikes by the Bank of England (BOE). U.K. House Prices rose at a faster pace, as homes for sale fell to the lowest level in almost three years.

This report will tell the BOE that they’ve still got work to do to get inflation under control, which means interest rates, as I’ve said over and over again, will be going higher. Most likely in the May meeting!

OK… I’ve been painting a bright picture for the Canadian dollar/loonie once again recently, as base metal prices put together a nice rally. But it’s more than base metals that are moving the loonie higher again. There are rumors flying around Canada that the Bank of Canada (BOC) will have to come back to the rate hike table.

And, reports from the housing sector like the one that printed this morning, will only fuel those rumors. Canada Home Starts rebounded from their lowest level the previous month to 210,900 in March. I’m not completely sold on another rate hike for Canada at this point, but I learned a long time ago, to get out of the way of a bus!

It looks like the loss of risk appetite that the markets felt at the end of February and beginning of March has gone away. That means the markets have forgotten the pain of that week, and are willing to take on risk again. This is showing up in weakness of the financing currencies of yen and francs. And on the other side of that trade, Iceland, and South Africa have seen their currencies rally again.

New Zealand and Australia are also seeing their currencies inch up on almost a daily basis these days. Base metals, and interest rate differentials are causing investors to flock to these currencies.

Currencies today: A$.8265, kiwi .7275, C$ .8795, euro 1.3460, sterling 1.9780, Swiss .82, ISK 65.90, rand 7.1850, krone 6.0, SEK 6.8825, forint 182.60, zloty 2.85, koruna 20.7750, yen 119.20, baht 32.40, sing 1.5175, HKD 7.8150, INR 42.86, China 7.7260, pesos 11, dollar index 82.55, Silver $13.87, and Gold… $678.50

That’s it for today… Still trying to get used to this new laptop, etc. Hopefully the IT people will put the problems to bed today, which would be a good thing, considering I’ll be heading to Jacksonville on Sunday!

I’ll end today’s Pfennig with a note about a friend and colleague that has decided to leave EverBank. Rob Foregger was one of the founders of, and has always supported the World Markets/Structured Products Group that I preside over. Rob will be missed. But he will be moving onto a fantastic opportunity to start another online bank at a huge, and I mean huge Investment Company! So… Good luck Rob.

Have a great Thursday!

Chuck Butler — April 12, 2007

Chuck Butler is the senior vice president of EverBank World Markets. He oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single-Currency and Index CDs .

Chuck is the author of The Daily Pfennig, which is reposted here at The Daily Reckoning. His respected analysis is frequently quoted in or referenced by: the Wall Street Journal, U.S. News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.