A New Record!

Good day… And a Wonderful Wednesday to you! The euro (EUR) inched even closer to its all time high yesterday, as neither Bernanke nor data gave any support to the greenback. I’ll start with the data because I have a bone to pick with it… As usual, I guess!

Recall last month when the media jumped all over the printing of the trade deficit, and how it had “narrowed” from $60 billion to $58.1 billion in June? “WOW!” they all cried. “The deficit is narrowing!” The dollar bulls all jumped around and sang praises of the dollar… But hold the phone! A month later, when the government thinks we’ve all “forgotten” about the June printing, they try to slide a revision of the number through. Yes… The “actual” June trade deficit was $59.4 billion, which would represent a “slight” narrowing… Not the stuff they sang praises about a month ago!

So… July’s printing of $59.2 billion didn’t give the dollar any backing… Because, in my mind, traders are looking at it and saying, “Hmmm, I wonder how much the revision next month will add to this number?”

OK… Enough… Now onto Big Ben Bernanke… Big Ben kept to his script on global imbalances before the Bundesbank yesterday giving no hints about the direction of interest rates. He did comment though on the U.S. current account deficit, and said that it was “unsustainable”. But then tried to put some lipstick on it by saying, “it hasn’t put a burden on the economy.” Yeah… Like I always say… You can put lipstick on a pig… But you’ve still got a pig!

Big Ben did mention something that plays well with my thoughts I shared with you yesterday regarding the strong global growth… Big Ben acknowledged that there was “stronger growth abroad”.

It was like “old times” yesterday, when the phone rang, and it was a reporter for the Wall Street Journal Online. I shared some thoughts with him, and lo and behold, there it was in print later in the day! There was a time in 2003, and 2004, when this was a daily occurrence, and I loved it! There are so many people that have joined the ranks of currency analysts that the quotes get spread out amongst many these days. But it’s always fun, when a media outlet does call me!

There’s a headline story on the screen this morning that says, “Stocks in U.S. rise on speculation that Consumer Demand will help buoy the economy”. I hope the stock guys aren’t putting too many eggs in that “consumer demand” basket. Take oil prices… With them rising, that takes away from discretionary spending, and cuts back on the amount of oil we use/buy! The ATM’s are dry… And, oh, wait, I’ve been through all this before… In fact I did it yesterday. So, I’ll just leave it right here… You know what I’m talking about!

How about that loonie (CAD)! Just yesterday I was shining the light on the Canadian economy and thus the Canadian dollar/loonie. And right before I went home to rest, Ashish yelled over to me… “Hey Chuck, the loonie is about to hit 96-cents!” WOW! Good news to go home with, eh?

I was looking at the price of oil on the screen yesterday, and happened to see the CRB (Commodities) Index up strong on the day. So, that led me to looking around at the base metals, because I already knew gold and silver were up… And there it was, “as plain as the nose on my face,” as the guard at the door of the Wizard of Oz said… Copper! Yes, copper was up 4% on the day, after it was reported that China’s imports surged… And since China is the world’s largest consumer of copper, you can see why it was up so strongly on the day.

You know me… I love those commodities! And the rise in commodities led to a brief rally in the Aussie dollar (AUD), pushing it to 83-cents… Briefly.

I’m seeing lots of talk about the Fed not cutting rates next week… Hmmm… Doesn’t make sense to me! Now, don’t get me wrong here… I still believe inflation is eating us alive, and cutting rates will only make that worse. But, the markets are crying for a rate cut, and after last week’s awful jobs number, we’re heading straight for a recession… So, in the Fed’s eyes, rates will need to be cut.

So… Cutting interest rates, thus reducing deposit rates, is going to add further damage to the dollar. But… And this is a BIG BUT… If the Fed leaves them unchanged, the recession will only be longer and harder, and the damage to the dollar would be even greater… So, it all comes down to choosing one’s poison!

Well… Look at that! The euro has just crossed its all time level of 1.3853! A NEW RECORD LEVEL! How does that sound? Well, it sounds pretty darn good to me! Especially since I saw a technical report yesterday that said if the euro closed above 1.3853, then it was on its way to 1.45! Now… That rings pretty loud and clear with me, since I said that 1.45 was the level I was looking for in the next year! Of course, the euro needs to reach my first call for it this year of 1.40 before we begin talking about other levels, eh?

I just can’t get over this move… But hold on, because we’re due to see some profit taking here, as I can’t imagine there aren’t a ton of sell orders just waiting for this to happen! But I’m not going to let some profit taking rain on my parade today!

Speaking of raining on someone’s parade… Japan’s Prime Minister Abe, has resigned. This news has left the yen (JPY) on shaky ground. But what else can go wrong for the Japanese yen? This currency is much like my beloved Cardinals team, which has been beset with injuries, the death of a player, and so on. They tried to rally, but the bad stuff has just been stacked against them… And so too, the Japanese yen… But hey, 114 is still better than the plus 120 levels we were looking at not so long ago! So… There’s a ray of sunshine on that rainy parade!

Another parade that has been wiped out by rain is the housing boom. I’ve been talking about this for a couple of years now… In fact, there’s a gentleman I know that would make fun of me every time he saw me, with comments like, “Hey Chuck, how’s that housing boom crash working for you?” Well… He’s not crowing so loud these days now is he! The National Association of REALTORS hammered another nail in housing’s coffin yesterday when they reported that U.S. existing home sales would fall 8.6% this year, and that on a year-to-year basis, the drop is like 24%… Uh-Oh!

Recall about 10 days ago when I explained LIBOR to you? Well… The liquidity/credit crunch hasn’t abated in Europe, and LIBOR is now trading around 6.80%! This higher rate illustrates the problems corporations are having with borrowing these days. Oh, they can get the cash; unfortunately it costs them an arm and a leg! Now, here’s the real problem… There is a ton, and I mean a truckload, of even more commercial paper deals coming due in the next week. Those all have to be “rolled”. I wonder what the interest rate cost will be at the time of the roll.

OK… One more thing before I head to the Big Finish… I read yesterday that the Fed may have already cut the Fed Funds rate, and just hasn’t told the world. You can laugh… I did at first… But then the conspiracy theory bug in me took over, and the next thing I knew I was thinking, yeah, the Fed could do something like that because they think they’re so darned smarter than the rest of us! Well… Either way, they have to announce it next week when they meet on the 18th… I wonder if they can keep it under their hat until then!

Currencies today: A$ .8365, kiwi .7070, C$ .9595, euro 1.3866, sterling 2.0340, Swiss .8445, ISK 64.40, rand 7.1830, krone 5.6470, SEK 6.7070, forint 183.47, zloty 2.7250, koruna 19.89, yen 113.90, baht 32.10, sing 1.5150, HKD 7.7880, INR 40.45, China 7.5220, pesos 11.08, dollar index 79.52 (the all time low here is 78.19), Silver $12.80, and Gold… $719.10

That’s it for today… Except to give a big WELCOME HOME to our own Jessica Witt’s husband, Billy, who just returned from a tour of duty in Iraq! Glad your home! I made it to 1:00 PM yesterday… A little longer every day at the office, pretty soon I’ll be back to my half-days of 5 AM to 5 PM… (That’s a “half-day”!) Nah… I’ve pretty much decided to back off that work schedule. They made it three months without me, I think they can do without me for a few less hours a day! Besides, being told you have cancer gives you a different outlook on things… And this is one of those things! Alrighty then… This used to be called “wired Wednesday” but then Chris Gaffney gave up drinking coffee, so now I’ll just say… Have a Wonderful Wednesday!

Chuck Butler — September 12, 2007

The Daily Reckoning