A Dollar Rout

Good day… And a Tremendous Thursday to you! No health talk today… Let’s get to the major rout on the dollar that took place yesterday!

Where’s the Plunge Protection Team? They were nowhere to be found on Wednesday as the dollar selling that started late in the day on Tuesday, got all wound up in the overnight markets, and then just let loose during the day, especially the early morning here in the United States. The U.S. received more bad data… Some very disparaging words on the economy from Big Ben… And a shot across the bow from former Fed Chairman Big Al Greenspan… There was nowhere to hide for the dollar.

The Wall Street Journal Online called me, and wanted to know what was going on in the currencies. I told them that the markets were finally waking up to the fact that the Fed was going to cut rates to 2%, and that interest rate differentials are really taking the bull by the horns in the currencies. The high yielders have ruled the roost this week… It wasn’t two hours later, and my talk with the Wall Street Journal Online writer was on the net!

So… Here’s the scene yesterday… The euro (EUR), when I left you, was 1.5045… And then more sour data hit. Durable goods orders fell 5.3% in January! Yes… January durable goods orders came in weaker-than-expected falling 5.3% compared to expectations of a 4.0% decline. This report fanned the flames of recession…

Then new home sales in January printed a larger-than-expected 2.8% drop! Even falling prices aren’t helping now… And the inventories of unsold homes continue to trend sharply higher… This report fanned the flames of what I’ve said for two months now, that the Fed would cut 50 BPS at their March meeting.

Then came Big Ben… This guy actually had the cajones to say that the “Fed would continue to cut rates in the face of rising inflation.” GET OUT OF HERE! He really didn’t say that, did he? OH YES HE DID! That’s our central bank leader folks… Leading us down the road of destruction caused by soaring inflation! He went on to deliver Congress an economic forecast fraught with risk…

And finally, overnight on Tuesday came word that Big Al Greenspan had told the Gulf State Nations that they should abandon their dollar peg. Talk about a shot across the dollar’s bow… A slap in the face! All those types of things rolled together… The former Fed Chairman – who had his hands deep into the mess that started all this – is telling people to abandon the dollar!

Talk about things mounting up on the dollar! I actually felt sorry for it one point yesterday the selling was so strong, and by noon yesterday the euro was trading 1.5140! And all the currencies joined in… In the old days of football (when I played) this was called “piling on”.

OK, so let’s stop for a minute and take a breath… I’m going to be the first one to tell you that this has gone too far, too fast! The euro spent less time in the 1.50 handle than it takes for you to read the book about “what a man knows about a woman”… So… If the markets stop, take a pulse, and go back to fill in the gaps, that certainly seems in order right now.

And that’s exactly what the markets are doing this morning in Europe. The euro has backed off to just below 1.51, and there’s talk that the move was “excessive” yesterday… I would go along with that!

Alright then, now doesn’t that feel better? Take a breath, and read the pulse… And then get ready to deal with rising energy prices. Oil hit $102 yesterday before slipping back on profit taking… And now, even natural gas is hitting a topside. After breaking through a multi-year congestive trading range yesterday, natural gas prices are now poised to move even higher. This is all technical stuff… But it makes sense to me because they go with the fundamentals!

Do you know what’s happening on March 11th? No… It’s not my birthday! That comes 11 days later when I’ll be in Jupiter Florida! On March 11, the Bureau of Labor Statistics will come clean (yeah, right!) with an adjustment to their labor statistics. OK, so all those months the economy was slowing – while the BLS kept adding fictitious jobs to the monthly payrolls – will come crashing down around them on March 11. I suspect this adjustment to payrolls will be negative… And it will be LARGE! If it’s not… Then I give up all hope and throw in the towel on the BLS, and I’ll never talk about them again, because that dog ain’t gonna hunt, folks!

OK… Enough of the “scary stories”… I saw last night that Singapore posted a big surge in inflation for January… Singapore inflation surged to 6.6% annualized, which obviously would be well above the “experts” forecast. The Monetary Authority of Singapore (MAS) hasn’t commented yet, so the markets are trying to fill in the void, and speculate what MAS will do. Review & Focus readers might recall us writing about Singapore in a recent edition, and the fact that the MAS would allow a stronger Sing (SGD) dollar to combat inflation. Well… I don’t think they were of the thought that inflation would be 6.6%! So… MAS will have to raise interest rates, which will drive more investment into Singapore, and thus push the sing dollar higher. The combination of higher interest rates and a strong currency should help the MAS.

Someone sent me a note the other day, and was just a little upset with me that I hadn’t talked about Iceland lately. Come on… I’ve said so much about Iceland that I feel like a broken record… I mean a scratched CD… But… Ask and you shall receive! The Icelandic kroner (ISK) continues to be driven by the perception of “risk” in the markets. Last week, risk aversion was a BIG thing, and the kroner suffered, losing ground to the dollar in large chunks… This week, risk has been tossed aside, and the high yielders rule the roost again, which obviously includes Iceland.

I continue to tell customers that as long as the carry trade exists, and high yielders rule the roost… Iceland looks good. But take those underpinnings away, and I don’t think Iceland looks so good. However, the carry trade is like a cat with nine lives… So… It all depends on your outlook for the carry trade and high yielders. If you think they are going to carry on for some time… Then no worries, eh?

The New Zealand dollar (NZD) took a backseat to the movements to its kissin’ cousin across the Tasman, Australia yesterday… Aussie dollars (AUD) kicked some tail and took names later, while kiwi backed off… And rightly so, given the results of the most recent Business Confidence report, which painted a different picture for the New Zealand economy for 2008, than it did at the end of 2007… 44% of businesses expect business conditions to deteriorate in 2008… December’s report had just 25% of businesses with that kind of pessimism.

The reason for their pessimism? The strong kiwi… And that report was put together before kiwi hit a 22-year high this week! But kiwi is resilient… It normally takes shots like this, backs off, and then recovers stealth like, and before you know it, the currency is hitting 22-year highs!

My friends at critical factors sent me their latest chart on the business cycle for the United States and the chart shows we are well into a recession, with much further to go… So we have that to look forward to, eh? But then I’ve said that for sometime now… And one of the reasons I was able to say that before the pundits, media, or government gets around to admitting we’re in a recession is that I get to review charts like this on critical factors.

So… Today we’ll see the latest revision to fourth quarter GDP. It’s still expected to stay below 1% growth… Quite anemic, eh? And we’ll see personal consumption for the fourth quarter. I’m sure personal consumption remains in line, because its from the fourth quarter… I don’t think it will be holding up so well come first quarter… But that’s for much further down the road… I don’t think any of this data today does much either way for the dollar.

OK… Time to head to the Big Finish! Big trading day on the desk… So, Jennifer and I need to get going and sharpen our pencils!

Currencies today: A$ .9425, kiwi .8140, C$ 1.0230, euro 1.5095, sterling 1.9810, Swiss .9415, ISK 65.25, rand 7.1125, krone 5.2120, SEK 6.2050, forint 171.80, zloty 2.3320, koruna 16.70, yen 106.40, baht 29.70, sing 1.3950, HKD 7.7850, INR 39.85, China 7.1125, (that was a huge move for renminbi overnight!) pesos 10.70, BRL 1.67, dollar index 74.26, Silver $19.18 and Gold… $956.69

That’s it for today… Almost didn’t answer the bell this morning. I just couldn’t get myself to leave that warm bed! But here I am, as I let out a huge yawn! Next week at this time I’ll be in Clearwater Florida for a company meeting, then I go directly to Colorado for another company meeting… So I won’t be around for over a week! But that’s just the start of my travels for March… Chris will be busy filling in for me for sure! Then… We have the last week of March when both Chris and I will be enjoying spring break with our families. Haven’t figured out what we’re going to do about the Pfennig that week… I just know that I’m not taking my laptop to Jupiter with me! Could the Pfennig go on hiatus for a week? Hmmm… I don’t think so… Oh well, we’ve got a month to figure it out! I hope you have a Tremendous Thursday!

Chuck Butler
February 28, 2008