A V-8 Moment!

Good day… And A Happy Friday to one and all! The last weekend of January, which is just fine and dandy with me! Pitchers and catchers report to spring training in February; and with January under our belts, there’s one more month of winter in our rear view mirrors! Winter… YECH!

OK… Another day of tight ranges in the currencies, but again, with a bias to buy dollars. In fact, as I hit the “send” button yesterday morning, the currencies were mounting a rally, but that was short-lived, even with the initial weekly jobless claims soaring by 25K, back above 300K. And who’d a thunk it, but the dollar continued to rally after December existing home sales fell, leaving those that were waving the flag for an end to the housing problem with frowns on their faces.

So… On Tuesday of this week, just three days ago, we were staring straight down the barrel of pound sterling hitting “two”… And now? Well, let’s just say we’re not staring straight down that barrel any longer. What’s happened in three days to change all that? Well… I told you on Wednesday that Bank of England (BOE) Governor King mentioned that he believed inflation would fall quickly in the second half of this year, and that led the markets to think the rate hike environment was over in the United Kingdom.

Upon further review though… I looked over the whole King report, and by all means, he did not say those words to telegraph anything to the markets. In fact, his speech was quite hawkish! And the comment about inflation falling was really taken out of context. Unfortunately, that’s not how the markets saw it or heard it. So, here we are… But wait, is this a crying opportunity? No… In my opinion, this is a buying opportunity!

The euro has come under some pressure too, this week… I find this to be just another dolt mentality move by those selling euros and buying dollars. Can’t they see the writing on the wall? Or do they get some kind of sick pleasure out of taking future losses? The European Central Bank (ECB) is on the rate hike warpath. The rate hike drums are beating, and there’s a ring of smoke rising from the ECB headquarters. And you know me… Where there’s smoke… There’s fire! And that’s exactly what we have with the ECB and their desire to get rates to 4% in the first half of this year. That’s an additional 50 BPS, and they get back on the rate hike tracks at their meeting in March… Either March 8th or 22nd.

Ahhh… March 22nd, I’ll be in Jupiter Florida watching my beloved St. Louis Cardinals! I haven’t figured out how the Pfennig will get to you that week and the following week, as both Chris and I will be on Spring break with our families… But I’ll figure something out.

I looked at the trading screens late yesterday afternoon, and was taken back by the move in Treasuries. Ten-year yields have crept up to levels not seen since the Fed started raising rates two years ago… And I had a V-8 moment! This is what has the dollar bulls all lathered up! Rising Treasury yields! Uh-oh… Rising Treasury yields might be good on the outside for the dollar, but imagine the mess it will cause in housing…and in the economy, which then brings the Fed into the scene, and after seeing what’s happening to the economy, they cut rates. So… Here’s a memo to the dollar bulls basking in the sun right now because of higher Treasury yields… Enjoy it while you can! Because the storm clouds are forming on the horizon…

This just came across the screens… Eurozone money supply accelerated in December to the fastest pace in 17 years! M3 money supply for the Eurozone rose 9.7% from a year earlier. This should have been good news for the euro… Yes, I know, money supply growth like that is not good for a currency… But what I’m talking about is simply the fact that the ECB uses money supply growth and inflation as their tools to determine interest rate direction. This report is the final piece of the interest rate hike puzzle the ECB has been working on. Get those rates higher, squash that money supply, and all will be right on the night!

There’s been a lot of talk swirling around that the G-7 ministers will discuss the yen’s weakness at their next meeting February 9-10. I was telling Ashish the other day that about three or four years ago (not sure, as time sure does pass by very quickly) that G-7 first used the term “flexible currencies” to describe their wish that the Asian currencies get in the game. The game was simply that the European and South Pacific currencies were taking liberties with the dollar, without the Asian currencies participating.

Anyway… What happened after that statement was interesting. Japanese yen rallied strongly… Very strongly… For almost two years, all the way down to 101.68. Long time readers might recall how I chronicled the trillions of yen the Bank of Japan was spending every day to intervene in their attempt to bring the yen weaker. Well… Finally the markets quit fighting the Bank of Japan, and we all know what happened since then, eh?

So… If G-7 can pull a rabbit out of their hat, with nothing up their sleeve, this could be the case again. HOWEVER! I think the G-7 is out of rabbits. So… We can only hope the rumors swirling around right now are correct… But I doubt it.

I told you yesterday that the Japanese yen had mounted a rally, but I wasn’t going to get lathered up about it… And for good reason! And… Yen didn’t disappoint me either! It gave back all its overnight gains throughout the day… UGH!

Today, in the United States we’ll see December reports on new home sales and durable goods orders. Both should give additional strength to the dollar if the forecasts are correct. So, the currencies will end the week on a sour note… Not much I can about that… UGH!

Currencies today: A$ .7737, kiwi .6955, C$ .8450, euro 1.2905, sterling 1.9615, Swiss .7970, ISK 69.05, rand 7.31, krone 6.35, SEK 7.04, forint 198.90, zloty 3.05, koruna 21.86, yen 121.50, baht 35.85, sing 1.5380, HKD 7.8080, INR 44.31, China 7.7760, pesos 11, dollar index 85.31, Silver $13.22, and Gold… $642.90

That’s it for today… This weekend we’ll have three EverBankers celebrating birthdays… Chris Gaffney, Jude Naes, and our little Christine Peplow… Happy birthday to one and all! We were very excited yesterday when it was announced that the winning $254 million Power Ball ticket had been sold in Missouri. But a thorough check of our tickets brought us back to earth, as all we had won was $3… Close… But no cigar! Have a great Friday and weekend, and try to stay warm!

Chuck Butler — Jaunary 28, 2007

The Daily Reckoning