A Retail Sales Friday!

Good day… And a Happy Friday to one and all! The end of a long week for yours truly, even though I only worked five hours a day. I went home yesterday and slept till 6:30 last evening! Sleep, Sleep, Sleep… The currencies didn’t sleep yesterday though! What a moon shot move for the euro (EUR) as it gained one full euro at one point during the day!

The U.S. trade deficit came in lower than expected at $57.6 billion, versus July’s $59 billion. Imports dropped 0.4%, and exports rose 0.4% in August. When the report first printed, we saw the dollar rally, albeit briefly… Then as observers looked at this, they realized that the total for 2007 will still be greater than $700 billion, and the dollar rally ended, and currencies rallied for most of the day. You know… It was just two years ago that the U.S. first crossed $600 billion in a year… So… Let the media tell you all about “narrowing”. Just remember the “narrowing” is $100 billion greater than it was two years ago!

For most of the day, the currencies ticked higher versus the dollar… But late in the stock-trading day, something strange happened… Right around 2 PM yesterday afternoon equity markets turned sharply south: The S&P dropped 1.5%, the NASDAQ gave back 2.5%. The sell-off followed disappointing September sales number from J.C. Penney and Nordstrom. Now, I’m not changing horses to an equity analyst here… Just pointing out that the turn-around in equities carried over to the currencies.

So… Just when risk appetites were getting pretty big again, they were cut back by this move in equities. Not that currencies and equities move in the same direction… In fact they have different pricing mechanism, and very low correlation to each other, which makes currencies an excellent asset class to use as diversification… But, having said all that… They did move in the same direction yesterday… Much like in August, when the credit crunch hit the streets. Let me attempt to explain why they moved together under this scenario.

As I’ve explained on many occasions in the past… When the markets move to risk taking, huge positions are taken that exemplify risk… Carry trades… And while currencies like euros, and Norway, etc. aren’t tied up in carry trades, they are tied to the currency crosses. Short one currency and long another, that’s linked to another. These crosses get pretty strange at times, and this looks like one of those times.

So… As I left the office yesterday (at noon), the euro was 1.4250. When I woke up from my afternoon and early evening nap, it was barely hanging onto 1.42! And the overnight session has not been kind to the currencies either. But still… Much stronger than during last week’s dollar correction, eh?

The Aussie dollar (AUD) kept adding to its gains yesterday until the afternoon sell off… The move to 0.9050 yesterday was fueled by the posting of a new three-decade low in unemployment of 4.2%… September’s gains of 13K were not as strong as expected, but the gain in jobs was enough to push the unemployment rate down. This should more than tell the markets that the Reserve Bank of Australia still has work to do with interest rates… They’ll drag their feet, as usual… But I fully expect another rate hike here before the end of the first quarter of 2008.

I yelled out across the desk yesterday that the South African Reserve Bank (SARB) had hiked interest rates – in a surprise move I might add – by 50 BPS. The rand (ZAR) kicked some tail then! WOW! What a moon shot! You should have seen the line on the one-day price chart for rand… It looked like it fell off a cliff! Just when risk appetite had gotten pretty wild again, the SARB goes and adds gas to the fire by raising the positive yield differential fro the rand. Can you say, “Green light to Carry Trades?” I knew you could!

So… Today, we’ll see PPI (pipeline/wholesale inflation), and retail sales. This retail sales report seems to be carrying an awful lot of weight going into the print. I guess the people putting the weight on the retail sales print are figuring that a strong report all but wipes out the chances of any further Fed Rate cuts. But, I have to tell you that the Butler Household Index, says this won’t be a strong report… It will most likely show moderate spending… Around 0.3%… That won’t wipe out anything!

I was reading the text of an interview I did for a magazine about 10 days ago yesterday, and when I got to the part about explaining the housing meltdown it struck me that with all the problems the housing meltdown caused in the United States and Europe, they skipped by Japan. That’s right, Japan hasn’t had to deal with liquidity/credit crunches, failed mortgage companies, failed money market companies, layoffs, shut downs, and more…

But does that add any value to the yen’s (JPY) price? NO! But one day, Alice… To the moon!

Here’s some more ammo for the boys and girls attending the G-7 meeting next week… China reported overnight, that their trade surplus through September had already out-paced last year’s record! WOW! September’s bounty for China rose 23%, and hit its fourth highest monthly figure of $23.9 billion. Add that to the first eight month’s bounty, and China already has a trade surplus this year of $185 billion, which beats last year’s record of $177.5 billion. If you go ahead and forecast what their new record will be, given the average month this year, you’ll see that China could very well book a total for 2007 of $250 billion!

This is good news for the commodity currencies, as China will continue to demand raw materials as long as the pump continues to be primed with billions and billions from the trade surplus.

I see that during the next year we’re really going to hear about the “strong dollar policy” a lot from the candidates. I read a story yesterday that Hillary is going to place a lot of emphasis on having a strong dollar… And did you see the article in the Wall Street Journal yesterday that had an interview with G.W.? Once again, Bush said that Henry Paulson (the U.S. Treasury Secretary) “reflects the view of this administration that the strong dollar policy is the correct policy.” He also went on to say, which has been the pattern for seven years now, “we also believe that the best way for a currency to become valued is through the market.”

That’s absolutely correct! Unfortunately, currency valuation comes from strong fundamentals… And when you need to attract $3 billion in foreign investment a day to finance the current account deficit, and your housing market is melting… “It’s melting…” No, wait… Stay on course here. No reason to take off on a greatest-movie-ever tangent! So, where was I? Oh, the housing market is melting, and interest rates are falling… You really don’t have strong fundamentals to garner currency valuation!

We’ll end this week’s talk with some up-beat talk on the Canadian dollar (CAD)… The loonie, hit a 31-year high versus the green/peachback yesterday. With commodities pushing higher, and with the HOT, HOT, HOT Canadian labor market, the Bank of Canada (BOC) has nowhere to go but up, with interest rates. I’m not saying the BOC will hike rates, but it stands to reason that if the economy is strong enough to raise rates, the BOC surely can’t cut them! Well, I guess they could if they followed the lead of the Fed Reserve… But, no! That shouldn’t happen! And keeping rates unchanged will provide a nice base for the loonie to continue to push the envelope versus the green/peachback.

Currencies today: A$ .9025, kiwi .7720, C$ 1.0225, euro 1.4185, sterling 2.0260, Swiss .8450, ISK 60.15, rand 6.7575, krone 5.3910, SEK 6.4350, forint 176.20, zloty 2.6340, koruna 19.4020, yen 117.35, baht 31.40, sing 1.4650, HKD 7.7520, INR 39.37, China 7.51, pesos 10.84, BRL 1.8050, dollar index 78.28, Oil $82.75, Silver $13.85, and Gold… $753

That’s it for today… I’ve got a treat for you… Well, I think it would be a treat! About three weeks ago I taped a briefing on the markets for a financial website. They finally posted it. The briefing is about four minutes long, and you need to have good bandwidth to view it properly, otherwise it gets hung up and doesn’t sound or look good.

You’ll see me there, bald head and all.

I hope you have fun with that! I wasn’t real smooth in the briefing as I had little time to prepare for it… The Big Boss dropped that one in my lap about 12 hours before I went on! Oh well… It’s not bad! You might want to bookmark this website, as it posts a lot of good stuff on investing and the economy… Not that it would replace your Pfennig!

OK… My beloved Missouri Tigers travel to Norman Oklahoma tomorrow for a HUGE game. We’ve not beaten OU in Norman in like 25 years, UGH! The OU Sooners are ranked #5 in the country… I don’t know if my Tigers are up for this… But after last Saturday… Watch out! I’ve really carried on here enough this morning… Time to go to work… I hope you have a Fabulous Friday and Wonderful Weekend!

Chuck Butler
October 12, 2007

The Daily Reckoning