A Big Sell Off in Currencies and Commodities

Good day. Well, I sure hope all the ladies enjoyed their Mother’s Day, yesterday. The weather here was more like March 14th instead of May 14th. So, most activities had to be moved indoors! I sure hope it warms up for Father’s Day! If not, we’ve got a lead story!

The U.S. trade deficit in April “narrowed” to $62 billion. If you look at the last two month’s reports of March and April, you see the monthly trade deficit falling from a record high of $68 billion to $62 billion. The dollar rallied on the news and took the euro back below the 1.29 handle -which was fine with me, as the euro’s move had been tearing up the league!

However, if a weaker dollar has helped exports recover, why then would traders and investors rally the dollar, taking away the fuel for the export recovery? Because, it’s human nature. These guys don’t ever look at the fabric of what they’re buying. They buy on appearance! However, sooner or later, they do indeed take a closer look. That’s when they’ll see the fabric and decide to hold or sell.

Hey! Volatility in a currency; traders live for these moments! And to that end, I just can’t go on without saying that a correction in the currencies is probably something we should be looking for. Look at the euro; just two months ago, on March 15th, 2006, it stood at 1.2070. When I signed off on Friday, the euro was trading 1.2926! That’s 7% in two months! With the majority of the move coming the last three weeks! So, in my opinion, look for a correction, and then – well, you know what to do!

All the commodities are getting sold: copper, zinc, etc. It’s a real “barn burner.” It’s seems to be spilling over to the commodity currencies of Australia and Canada. Commodities, just like the euro, had been taking liberties with the dollar for some time now, and this sell off doesn’t surprise me at all. That is, as long as it is short lived, and allows the commodities to form a new base!

Well, the Chinese renminbi did finally move below the psychological eight figure last night, as the central bank set the reference rate at 7.9982, but it didn’t last long. The long-renminbi holders took this move below eight to book profits. At least we now know that the Chinese are willing to allow the renminbi to trade below eight. Sooner or later, that’s going to bring about a stronger move down to 7.50 at some point this year (my call from months ago).

It sure looks as though that smoky back room deal between the United States and China is working out! Recall, I said that I thought the Chinese and United States would make a deal that would allow the renminbi to gain versus the dollar faster, if the United States would call back the “currency manipulator” dogs.

You know, after further review, last week’s Fed meeting had more info to offer than first reported by the media. A currency strategist sent me this note:

“Not sure why the news media overlooked the FOMC statement’s reference to the slowing in the housing market. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices. I can’t remember the last time the FOMC last mentioned housing. This paled in comparison to the March 28 statement, which was much more upbeat and had no reference to a slowdown.

“The fact that the Fed is shifting its housing market assessment from Greenspan’s ‘apparent froth’ last August to Bernanke’s ‘significant uncertainty’ (last month’s Congressional testimony and yesterday’s FOMC reference) shows that the Fed has managed to rein in the housing market, to an extent that merits a pause in tightening in June.”

I agree. That’s really an important statement the Fed made, and the media and markets just flew right past the 52nd floor on it! It’s my opinion that G-7 finance ministers and Big Ben Bernanke have redirected the market’s attention back to the risk of the U.S. dollar. To that I say: Why not? Its risk is real, and even though Big Al Greenspan never really talked about the dollar, it sure lost a ton of value throughout Big Al’s tenure as Chief Fed Head.

Now we have a Chief Fed Head that might be trying to direct the dollar lower. Hmmm…

This morning, we will see the Net Foreign Security Purchases (NFSP) for March. This data has been a market mover in the past and I see no reason for it to stop today. Last month, we had a big surprise when it bounced much higher ($86.9 billion) than expected. For those of you new to class, the NFSP is important because it measures the amount of security purchases (bonds, stocks, etc.) foreigners made. These purchases are used to finance the current account deficit. Basically, if the purchases don’t measure up to the current account deficit, then historically, the dollar falls in value, so that exports can make up the gap.

NFSP is expected to fall a bit to $79.7 billion in March. For now, that looks to be enough to finance the deficit. There is also a ton of other data this week. I’ll try to stay on top of it all, as I write to you from Las Vegas.

Currencies today: A$ .7625, kiwi .6215, C$ .8965, euro 1.2815, sterling 1.8815, Swiss .8260, ISK 71.20, rand 6.40, krone 6.07, forint 208.91, zloty 3.06, koruna 22.15, yen 110.20, baht 38.20, sing 1.58, INR 45.40, China 8.00, pesos 11.15, dollar index 84.56, silver $13.25, and gold $687.50

That’s it for today. Chris and I get on a plane in a couple of hours and head to the Las Vegas Money Show. I’m speaking twice – Tuesday and Thursday. Tomorrow’s talk will be with the Big Boss, Frank Trotter, while Thursday I’ll be flying solo!I had a great time at the ball park on Friday night watching my beloved Cardinals win! And then, we had the big 50th wedding anniversary party for my wife’s parents on Saturday. A fun-filled weekend!

Now, don’t forget that I’ll be in Las Vegas this week. Because of the time difference, the Pfennig will be going out later in the morning. So, you’ll have to have a second cup of coffee! Have a great Monday and week!

Chuck Butler
May 15, 2006

The Daily Reckoning