The Yen is Back!

Good day… And a Happy Friday to one and all! A Friday that leads us into Mother’s Day weekend! It’s been a wild and wacky week, and I’m glad it’s coming to an end! One day up, the next day down… But, that’s the markets!

Well… The dollar put down its mighty hammer yesterday, as the Bank of England (BOE) and the European Central Bank (ECB) both left their interest rates unchanged, as I expected them to do. This non-move by the ECB was used as a reminder to the traders who had been marking down euros (EUR), that the interest rate differential between to the two countries is remaining at +225 BPS.

I have to smile this morning when I look at the currency screens and see Japanese yen (JPY) back below 103. I explained this all when yen was losing ground last week, that it was all tied to the stock market performance and carry trades. I warned then that the stock market rally was a house of cards, that would collapse, and thus leaving those who sold yen and bought dollars holding on to losses. That’s what we’re seeing folks. I just love it when a plan comes together!

The euro saw some nice gains yesterday too. You know, as I was driving home yesterday, I was thinking about this market scenario… And it came to me, that the market’s attention has switched from the U.S. structural imbalances to cyclical factors. So, all the “bad” stuff I talk about all the time is being swept under the rug right now, as the markets get all warm and fuzzy with the Fed’s moves to shore up the mortgage-credit-liquidity meltdowns.

And, maybe, just maybe, I’m wrong here… But I still think this taking on the same assets that brought on this whole mess, onto your balance sheet is not the way to go about it. But if it works, then salutations! I just can’t get my arms around the idea that it will work.

And then that will lead us back to the U.S. structural imbalances. One of those structural imbalances is the trade deficit, which will print this morning for the month of March. Get this… The “experts” think the trade deficit “narrowed” to $61 billion, from the awful $63 billion in February. I guess technically that would be “narrowed”, but come on! $61 billion still works out to over $700 billion annually.

The weaker dollar has really helped the export part of the trade deficit… So, I have to ask those that want a stronger dollar this… Are you ready to see the trade deficit swell to $70 billion each month? Because, if you slow down the exports part of the numbers, all you’ll have left is imports… Uh-Oh! And yes, imports should slow given the recession, but slow enough to correct this imbalance? I doubt it…

Oh, and one final thought here… I was looking at past data releases and saw that durable goods had declined in the last print. That doesn’t bode well for the exports… And thus, I’ll make a call here that the experts have overdone the “narrowing”. I think it will be minimal at best! And that will help the dollar bulls keep the dollar swinging its mighty hammer.

I was shaking in my boots yesterday (actually I don’t wear boots; just wanted to make that clear), when I read what Bill Bonner wrote here at The Daily Reckoning and his piece on the end of consumerism. Here’s a snippet…

“Signs of the stretched consumer include the following stunning facts:

– Home equity loans have a seven percent delinquency;
– Subprime mortgages, past due over 60 days, are pushing 14 percent;
– Over one million homes are in foreclosure and three million more are empty, and up for sale;
– Ten million homes have mortgage balances greater than their value. (No wonder some homeowners are walking away from them);
– In the auto market, 25 percent of all car loans are higher than the car is worth. (The average balance these cars are underwater for is $4,300!)

“Jobs are also falling off a cliff. If it hadn’t been for the Birth Death computer model at the BLS creating service jobs out of thin air, the payroll data would have shown over 280,000 people actually lost their jobs in April. Currently, 2.7 million workers have exhausted their unemployment benefits, and with no job prospects or income, hello collector!”

Well… All this stuff and still those that are thinking we’re not in a recession? HA! Even a blind squirrel can find an acorn! When will these people see the trees in the forest?

I just heard on the radio that the legendary Chubby Checker is coming to St. Louis… How old is this dude? Let’s twist again… Like we did last summer…

OK, I’m back now… Did you see the loss that AIG posted yesterday? $7.81 billion in the first quarter… They also announced that they would seek $12.5 billion in new capital. I’m not picking on AIG… Just pointing out that the losses from the subprime credit-default swaps and other mortgage related investments continue to haunt those companies that did partake in this mess.

We’ll look at the latest Canadian jobs data this morning… I would look for a slight gain in jobs created in April. This might be enough to keep the Bank of Canada (BOC) from cutting rates at their next meeting… But I doubt it… The BOC is bound and determined to keep pace with the Fed… Of course, I find this to be the wrong model to follow, especially with oil prices setting new records every day… Soaring oil prices will put inflationary pressures on the Canadian economy, and cutting rates at this time is not on my list of things that a Central Bank should do… But that’s just me… AND EVERY ECONOMIC BOOK I’VE EVER READ!

But… As I keep saying, the loonie (CAD) will get pulled higher by strong commodity prices, and pushed lower by BOC rate cuts… Thus a wash…

It seems like a daily occurrence lately, but oil posted another record level this morning, rising above $125, as the weaker dollar this morning has given black gold, Texas tea, even more reason to rise…

The weaker dollar this morning also has the price of gold rising. I hope you all enjoyed that note from Jim Sinclair yesterday regarding gold.

OK… Did you see the Financial Times story yesterday? The report says that the United States and Europe have common views on the merits of a stronger U.S. dollar. I didn’t actually read the whole article, just snippets of it… And didn’t get the feeling that the United States and Europe were wanting to see the dollar stronger versus the euro, but instead, stronger versus the Asian currencies. But, maybe I’m just reading what I want to read into the story!

Well… Anyway… Who cares what the government expresses what they want to see for their currency? How well has that worked for the dollar/renminbi (CNY) in the past three years? It’s the markets that set the valuations… Not governments!

I’ll head to the Big Finish, but first… I’ll leave you with this thought from Keith Fitzgerald of…

“The so-called ‘dollar rally’ is illogical, irrational and is unfolding at precisely the wrong moment – which means that many investors who are long on the dollar could get a nasty surprise if they don’t temper their enthusiasm a bit in the months to come.

“Granted, there are a lot of things that happen at the wrong time when it comes to the financial markets… But the prospect of watching the dollar rise at the same time that oil and gold are advancing (a scenario that we don’t have right now, given gold’s retreat, but one that I won’t be surprised to see, given current conditions) is downright disconcerting – if for no other reason than the history books show a pronounced negative correlation over time between these assets.

“Couple that concern with the reality that the Bush Administration’s policy for the dollar has been one of benign neglect and you can come to only one conclusion: Absent an increase in interest rates by the U.S. Federal Reserve, any increase in the value of the dollar must be viewed as an anomaly.”

Currencies today 5/9/08: A$ .9420, kiwi .7710, C$ .9930, euro 1.5465, sterling 1.95, Swiss .9610, ISK 79.95, rand 7.7150, krone 5.0750, SEK 6.01, forint 163.50, zloty 2.20, koruna 16.27, yen 102.90, baht 31.95, sing 1.3680, HKD 7.7950, INR 41.62, China 6.9875, pesos 10.58, BRL 1.6960, dollar index 73.12, Oil $124.85, Silver $16.99, and Gold… $888.15

That’s it for today… It was “boys night” last night, as my beautiful bride was not home… My little buddy Alex and I just hung out, ate dinner, watched some basketball, and some conversation, which with a kid ready to become a teenager can be difficult at times. Like I said above, it’s Mother’s Day weekend… Should your mother still be around, give her a hug. I sure wish my mom was still around to hug… Hey! I’ll be on the road all next week… You know how much I love writing on the road! NOT! But, neither rain, nor sleet, nor snow, nor travel will stop the Pfennig from going out! (Let’s not talk about technical difficulties!) I hope you have a Fantastico Friday, and your Mother’s Day weekend is grand!

Chuck Butler
May 9, 2008