A Green Light to Risk Taking

Good day… And a Wonderful Wednesday to you! I’m feeling somewhat like a pincushion these days… But hey! It’s only “little” needles! The swelling in my operated “bionic” leg is finally beginning to go down, which means less pain for me! So, I’ve got that going for me!

The currencies, led by the Big Dog (euro), rebounded versus the dollar yesterday. It was a nice slow, steady move upward all day long, culminating in getting back to the 1.41 level late yesterday. The rally continued in the overnight markets with the Big Dog euro (EUR) moving higher into the 1.41 handle and taking all of the other little dogs out for a good car chase versus the dollar.

There really wasn’t much of anything news-wise for most of the day, until the FOMC meeting minutes were printed late in the day. So, let’s go to the tape on the minutes and see what the Fed Heads had to say last month when they did an about face and turned their collective backs on inflation.

The participants were generally more confident that inflation pressures had moderated. In fact, it was stated in the minutes that “it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown”. Oh boy! Here we go again! Just what are the Fed Heads looking at to give them the idea that inflation pressures have moderated? That stupid CPI report? Inflation is as evident as an elephant in your driveway, but apparently not to the Fed Heads!

All they’ve done is fuel more talk of interest rate cuts, and taking on more risk! No wonder the dollar has taken a ride on the slippery slope ever since the minutes were printed! Anyway… I’m not wasting any more of my time or yours ranting about the Fed Heads and their inability to admit that inflation exists! Instead, I’d rather congratulate them for seeing the elephant… (It obviously must have sat down in their collective laps!) Here’s their comment… “The staff marked down its GDP forecast for 2008 and expected the curtailment of construction activity to last through the middle of next year. In addition, they also felt that consumer spending would be restrained in 2008.”

That sure sounds different than the cocky minutes from a month earlier… But, hey! I learned a long time ago that fundamentals change… And when they do, I need to change to!

And before I go on… I have to mention that Fed Head Poole was trying his best to talk up the dollar yesterday afternoon… Here are some snippets from his talk…

Poole calls recent U.S dollar forecasts “idle speculation”, and says that currency forecasting models “aren’t worth a damn”. And then finished up with this… “The dollar’s drop is something that’s not explicable.”

Not explicable? You run a country that requires $3 billion a day in foreign financing and you think your currency’s drop is not explicable? What planet are you from? OK, I had better stop there; I don’t want to get into trouble…

OK… I put the spotlight on the Singapore dollar (SGD) yesterday, and then it soared to a 10-year high! No, I’m not taking credit for this move. The Monetary Authority of Singapore said that they would extend their current three-year running policy to allow a stronger currency to fight inflation. They even upped the ante by increasing the slope of the policy board… That’s Central Bank parlance for giving them a scotch more room around the waist! Something I should be working on!

And just about the time you think the Swiss franc (CHF) has gotten past being used as a financing currency for the carry trade… It gets pushed back into the whole mess! It all started with a comment from the Swiss National Bank (SNB) Governor Roth, who had recently been on the interest rate hike cycle. Governor Roth said that he sees downward risks to the Swiss economy… Well, that was like turning on the fire hydrant on a hot summer day! You know, when the kids would flock to cool off in the water from the fire hydrant…

Well… Governor Roth telling the markets that he sees risks to the economy, was basically telling the markets that there would be no more rate hikes, which would increase the borrowing costs of Swiss francs. With no more rate hikes to worry about, carry trade investors flocked to the sell francs once again! UGH! I bet Governor Roth wishes he had kept his mouth shut, and allowed people to think of him as a fool, rather than to have opened it and removed all doubt!

HEY! On Monday I wrote about the Aussie dollar (AUD) and how some people think it may reach parity to the greenback like the Canadian loonie (CAD) did, and lo and behold, what did I see yesterday? A story in the prestigious Financial Times talking about the same thing! WOW! You don’t think? Nah, they wouldn’t, nah… Oh, maybe… The writer is a Pfennig reader!

Oil prices bounced back higher on Tuesday, and with a falling dollar most of the day, gold and silver saw better levels. There was also a report on Tuesday calling for higher heating costs this winter… Hmmmm, rising energy costs. That should be huge for Canada, the United Kingdom, Norway, and Australia. Someone at EverBank should create a CD combining each of those energy-laden countries’ currencies! Yeah… And they could call it the…. World Energy CD! Yeah, that’s the ticket! Oh wait…we already did that!

Anyway… Higher energy prices should also be good for higher gold prices, and investors look to hedge inflation from the rising energy prices.

The base metals are moving up again led by lead, HAHAHAHAHAHA! I just couldn’t pass that one up! But seriously, lead, copper, and other metals are moving up again as China keeps putting up demands, and the supply line is strained. This is all good news for Aussie and Canadian dollars, as these two countries have that pipeline of raw materials to China!

Speaking of China… The IMF decided to downgrade China’s forecast for GDP growth in 2008… Are you ready for this? Yes, China’s 2008 forecast for GDP was moved down from 10.5% to…. 10%! WOW… Are you sure? I mean, once it’s above 10% it’s in the stratosphere! Any way… Even if China’s GDP drops more, it will still be flaming hot, and their demand for raw materials won’t stop!

And while I’m in that part of the world, I’ll tell you that New Zealand printed a real nice report last night… The kiwis printed a larger-than-expected budget surplus for their fiscal year ending June 30th. A very strong NZD 8.7 billion surplus to the Treasury’s coffers is great for New Zealand! In case you are looking for your calculator, the NZD 8.7 billion is equal to approximately $6.6 billion greenbacks.

Now, don’t get confused here though… New Zealand may have a great budget surplus, but their trade deficit is atrocious! Anyway, the thing to take from this, in my opinion, is simply that the New Zealand economy is still cooking with gas, which fuels inflation pressures. And that will keep the Reserve Bank from cutting interest rates any time soon! So, the high yielding kiwi (NZD) will continue to be one of the fave currencies along with Icelandic krona (ISK) as the investment currencies of the carry trade.

If I’ve said it once, I’ve said it a thousand times… Watch out for that carry trade. Yes, the Fed Heads have once again given the risk takers the green light, but this is getting too far out of hand once again.

OK… I think I know how this will all sound, and I want to say right here, right now, that I’m simply telling you something I heard through the grapevine. I’m not saying this to spool up buying of Brazilian real (BRL)… So, here goes… There’s a rumor going around that Warren Buffet recently told an audience that he was investing in currencies, and that the dollar should continue to be weak for some time to come. When asked about which currencies, he mentioned that he liked the Brazilian real. Hmmm… OK… I didn’t hear that, and didn’t see it in print… I’m merely telling you something going around the grapevine… I have NO IDEA whether or not he’s actually buying anything!

So please! Do your own research to confirm this before purchasing anything based on a rumor!

And one more thing as I head to the Big Finish… European Central Bank President Trichet did announce this morning that currencies would be on the agenda of the next G-7 meeting. Again though, you will not hear Mr. Trichet say that he has problems with the strong euro. Instead, he will most likely point out the weakness of yen (JPY), renminbi (CNY), and maybe the dollar, but mostly yen and renminbi.

Currencies today: A$ .90, kiwi .7650, C$ 1.0200, euro 1.4150, sterling 2.0470, Swiss .8460, ISK 60.30, rand 6.8330, krone 5.4390, SEK 6.4730, forint 176.41, zloty 2.6480, koruna 19.4450, yen 117.30, baht 31.40, sing 1.4650, HKD 7.7570, INR 39.32, China 7.51, pesos 10.83, BRL 1.7910, dollar index 78.30, Oil $80.10, Silver $13.65, and Gold… $746

That’s it for today… The data cupboard is bare today, so look for a small trading range to take place all day. I’m still sleeping a ton! Nodding off here and there. I’m not complaining… I love to sleep! I continue to receive tons of lovely notes and letters from readers with kind words of encouragement. Great stuff! I said I would beat this when I first told you I had cancer, and I’m not backing off that statement! Mind over matter, eh? Well, I’ve babbled on enough, time to go to work! Have a Wonderful Wednesday!

Chuck Butler
October 10, 2007

The Daily Reckoning