The Data Cometh

Good day… The dollar stayed in a fairly tight range yesterday as the markets wait in anticipation for the plethora of data we will get over the next two days. The only data released yesterday in the United States was the incredibly volatile Empire State Manufacturing number, which came in well above expectations. This number has been so volatile that even the dollar bulls largely ignored the unexpected increase in the NY-area manufacturing index.

Today we will get a little better picture of the inflation situation in the United States, along with the very important TIC flows. But the data doesn’t stop there, as industrial production, capacity utilization, NAHB housing market index, and the ABC consumer confidence numbers will all be released this morning and early afternoon. Producer prices are expected to show a slight decrease in June, with the year-on-year numbers expected at 3.6% compared to last month’s 4.1% increase. If the numbers come in as expected, the dollar will see more selling, as there will be less reason for the FOMC to consider raising interest rates.

We will also see just how many U.S. financial assets foreigners are continuing to purchase. Foreign net buying probably slowed in May to $70 billion from $84.1 billion the previous month according to a Bloomberg survey of economists. Last month’s report showed international demand for U.S. Treasuries slowed to a net increase of $376 million in April, the weakest demand since investors sold a net $3.5 billion of bonds and notes a year earlier. This information is critical for currency investors, as our dollar has been propped up over the past two years by foreign buying of U.S. assets. We have been warning investors for years that if, or rather when, the foreign investors start to reduce their purchases and diversify their reserves, the U.S. dollar will get sold off. The moves we have seen in the past few months are just the beginning of what will likely be another long let down in the overall dollar trend which began in 2002.

One of the reasons governments have wanted to keep a majority of their reserves in U.S. dollars is that the greenback is what is demanded for one of the most precious commodities, oil. Ty Keough, along with a few of our readers, pointed out a story on Friday afternoon, which I forgot to share with you yesterday. It said Iran wants Japan to pay yen (JPY) for oil. We have seen a number of stories on Iran and other Mid-east nations who want to start receiving euros for oil, but this is the first one that talked about yen for oil. At $10 billion (USD) per year, this isn’t a big deal for Japan, but it would cause less selling of yen for dollars to buy oil. It also illustrates the shaky ground the U.S. dollar is on as the “world’s reserve currency”.

U.K. inflation, as reported this morning, fell less than forecast in June, which strengthens expectations of another rate rise by the BOE. Consumer prices increased 2.4% from a year earlier after gaining 2.5% in May. Excluding food and energy, prices climbed 2% in June, the most in a decade. The pound (GBP) ran back up and is trading at a 26-year high as additional interest rate increases are now being priced into the currency.

The euro (EUR) didn’t move with the pound this morning and actually traded off a bit as German investor confidence fell. The reasons given for this fall in confidence was the euro’s appreciation, rising oil prices, and higher interest rates. But don’t expect the ECB to adjust their hawkish stance on inflation just because of investor worries. The ECB has signaled it’s ready to raise borrowing costs further to contain inflation risks. With the lowest unemployment rate in 12 years bolstering household spending, any slowdown from the fastest economic expansion since 2000 will be limited.

Chuck continues to recover, and sent me the following to include with today’s Pfennig:

“Another day, another day stronger for your old Pfennig writer! As I sit here and doze in and out I see lots of things happening in the markets that are quite interesting to me. First and foremost is the performance of the euro, sterling and commodity currencies. Second is the performance of the U.S. stock market.

“OK… I just finished putting the final touches on our monthly newsletter, the Review & Focus that is sent to customers. In it, I glowingly talk about the commodity currencies of Australia (AUD), New Zealand (NZD), and Canada (CAD). Let’s just look at these for a moment. Sure commodity prices are firm, especially oil, but as a locally famous pitch man used to say… Don’t Be Confused! These currencies are not being driven strictly by the commodity prices. All have these in common: Strong economies; prudent central banks attempting to remain ahead of run-away inflation with rate hikes; and either narrowing or greater than interest rate differentials to the U.S. dollar.

“So, you have to ask yourself. Could we see Canadian dollar/loonie parity to the greenback? Could we see Aussie at 90-cents? Or how about kiwi at 80-cents? Chances are, ’cause I wear a silly grin, the moment I talk about these currencies… Chances are your Chances are they certainly do have a chance to come through.

“WOW! Did I just say that? By gosh, by golly I did! Oh, I know if it doesn’t come true, I’ll have so many hatred emails calling me names and accusing me of not knowing anything. But, here’s the point… What I’m trying to say, is that with all the negativity following the dollar around these days (I mean you don’t have to look under rocks to find someone or some reason to sell the dollar), and with the reasons for currency strength that I just talked about, these are things that COULD HAPPEN! I’m NOT saying the will happen… Just a clarification, because in my current state of mind and body I don’t think I want to see any of those nasty emails.

“OK… The U.S. stock market seems to be like the Energizer Bunny these days… I can’t help but think that this is all irrational exuberance to borrow a phrase from Big Al! So… Be careful out there!”

I know everyone appreciates Chuck sharing his thoughts on the markets and I will continue to pass them on as he sends them to me.

The phones were busy yesterday with callers wanting to take advantage of their final opportunity to invest in our Japanese REIT MarketSafe CD. Unfortunately it is too late for any investors who don’t already have an EverBank account. But for those of you who have accounts already and have been thinking about this excellent opportunity to take advantage of possible appreciation of Japanese real estate; call the trading desk at 800-926-4922 and get your money moved into this final Japanese REIT MarketSafe CD.

Now that our Japanese REIT offering is ending, it is time to announce our newest offering in our MarketSafe series. We have been offering a gold-based MarketSafe CD for several months, and it has been very popular with investors wanting to allocate some funds into precious metals. But ever since we first announced the gold MarketSafe CD, investors have wanted one denominated in silver. Before leaving the desk last month, Chuck worked hard to figure out a way we could hedge our exposure, and we are excited to announce the creation of the Silver MarketSafe CD. The terms of this CD will be identical to our gold MarketSafe CD. It has a five-year maturity and the returns will be based on the average price of silver over this five-year term.

We will be offering both the gold MarketSafe and silver MarketSafe CDs with a minimum investment of just $1,500.00. I don’t know of any other investment that gives you the opportunity to participate in the appreciation of these precious metals with absolutely no risk to your deposited principal.

You can also just call the trade desk to ask for additional information.

Currencies today: A$ .8739, kiwi .7917, C$ .9573, euro 1.3768, sterling 2.0445, Swiss .8320, ISK 60.13, rand 6.9797, krone 5.7248, SEK 6.6475, forint 178.57, zloty 2.7240, koruna 20.5465, yen 121.99, sing 1.5175, HKD 7.8196, INR 40.355, China 7.5629, pesos 10.7801, dollar index 80.531, Silver $12.91, and Gold… $663.35

That’s it for today… Another busy day on the desk yesterday as investors scrambled to get into our Japanese REIT MarketSafe CD. Summer has returned to St. Louis with temperatures in the mid 90’s and humidity so thick you feel like your in a steam room. Today could be pretty exciting with all of the data coming out this morning. Hope everyone has a great Tuesday, try to keep cool!!

Chuck Butler — July 17, 2007