Aussie Trade Deficit Narrows

Good day… And a Terrific Tuesday to you! We received some sad news at the Butler House yesterday. My younger sister’s husband lost his battle with cancer. When I heard the news I had to stop and thank my lucky stars that I was one of the lucky ones to survive that nasty disease.

OK… There was some healing in the currencies yesterday – not much, but some. As I signed off yesterday the euro (EUR) had already seen some healing and stood at 1.5480. It range traded around that figure most of the day, but as we began to shut down, the single unit pushed 1.55 and has added to that figure overnight to 1.5535. But as London opened, (coming back from their May Day holiday yesterday), the euro lost ground back to 1.5450… But, some stronger domestic data printed firmer than expected and the single unit has rebounded to back above 1.55.

So, that’s not a huge move, but a move in the right direction for euro holders. The storyline that I explained yesterday is still getting airplay. That is, simply that the positive interest rate differential for the euro versus the dollar, is getting some recognition, along with the fact that the differential will probably remain after the European Central Bank (ECB) meets this week. Whew! That was long winded! I’ve got to give my fingers a breather here… Be right back.

Alright, I know that’s silly, but hey! If I don’t keep this moving, it could become very boring right away, eh?

I was chastised yesterday for calling the negative 20K result for the Jobs Jamboree as “negative job growth”. I agree, and can’t believe that’s what I wrote! An “oxymoron”… Like Jumbo Shrimp, or Airline food, or Rap-Music… Here’s something that I did leave out yesterday regarding the 20K loss in jobs… The old Birth/Death model or “ghost jobs” from the Bureau of Labor Statistics was at it again. So far this year, the model has added 166K jobs… Which means that our job losses are even greater than reported by the media… But don’t let that get in the way of a “feel good story”.

I also received a note from one of my fave economists regarding the Jobs number… Here’s what she had to say, “Inflation can mitigate job losses by allowing employers to pay workers less in real terms. In other words, firms may not have to be quite so heavy handed in firing because they can let inflation reduce their real wage bill. This won’t work over the long run but it can work in the short run. This might help explain 20,000 jobs lost last month as opposed to the forecasted 80,000.”

OK… Enough on the jobs losses… That’s depressing enough.

Another of my fave economists, Nouriel Roubini, recently said, “The Fed’s seven rate cuts since September – which lowered the benchmark lending rate to 2 percent from 5.25 percent – aren’t enough to stave off a contraction and that earnings expectations are unrealistic.”

This led money manager Jean-Marie Eveillard, who runs the $22 billion First Eagle Global Fund, to be skeptical that the gains can last, because the worst housing slump since the Great Depression will reduce earnings. S&P 500 companies were valued at 22.7 times profit last week, the most in four years. Options traders are paying 63% more to protect against a drop in the S&P 500 than to bet on a gain, the widest difference since at least 2005.

“It may be a suckers’ rally,” said Eveillard, who is based in New York. “Investors want to believe. But if I’m right, then there’s truth to the argument that this is the worst financial crisis since the end of World War II. The same kind of reflex is the wrong reflex.”

OK… I know, you’re saying, “Whoa there partner! Since when did Chuck get all caught up in the stock market’s net?” Well… Just to make a point… You see, yesterday, I spent a lot of time talking about the carry trade and how I believed that it would unwind to cause losses in stocks. (Or rather, stock losses would cause the carry trade to unwind… Just wanted to put some “meat” behind that statement.)

So, the Eurozone Service Industries posted a stronger than expected figure in April, printed at 52 from 51.6 in March. Just another sign that Europe’s economy is showing resilience in the face of higher inflation, a strong euro, and the U.S. recession. This is just more data for the ECB to use to keep rates steady at the wheel… Thus maintaining the euro’s rate differential to the dollar.

Speaking of rate differentials… The Aussie dollar (AUD) is the gate keeper of a larger rate differential to the U.S. dollar, and traders are using that as a springboard to higher levels for the Aussie dollar. The Reserve Bank of Australia (RBA) met last night and left rates unchanged, which was good… But they tried to throw cold water on the Aussie dollar’s rise to the highest level since 1984, by saying they thought that “demand growth will remain moderate this year”. That’s central bank parlance for… “If growth slows more we’ll have to revisit these rate levels”.

So, the Aussie dollar took a bit of a hit, but I expect that to last about as long as the book on “What Men Know About Women”… I really don’t expect the RBA to throw a spanner in the works here by messing with interest rates, and therefore, I expect rates to remain at current levels for a long time. OH! And Australia’s trade deficit narrowed in March, as exports to China of coal, iron ore, and other materials, shrank the deficit by A$ 2.74 billion ($2.59 billion in dollar terms). This what I LOVE to see… Shrinking trade deficits!

This is not a “one and done” deal for Australia either. Three of the last four months have seen the trade deficit narrow. I fully expect this to continue… And as long as China continues to growth at +10% clips, it will certainly help!

Another huge positive rate differential belongs to New Zealand, which has been rallying after a large sell off last week. Of the two, I prefer Aussie, for a number of reasons. For instance: it’s the larger economy, it has the raw materials China needs, its trade deficit is narrowing… But, kiwi (NZD) continues to amaze me with its resilience.

Oil touched a record of $120 overnight as violence in Niger continues to mount. Talk about a major pain in the neck! But don’t worry folks; I’m sure the government will tell us that inflation is still “no problem”.

Speaking of the government… Well, not really the government, but close… Fed Chairman, Big Ben Bernanke was speaking yesterday to a crowd regarding mortgage delinquencies and foreclosures when he decided to warn us about the potential for substantial spillover effects on the housing market, the financial markets, and the broader economy.

Hey Big Ben! Shouldn’t that speech have been made last year at this time? Talk about “too late to close the barn door when the cows are already out of the barn”… Geez Louise… Serenity NOW!

OK, I’ve got to go on to something else here before my blood pressure gets out of control!

Japanese yen (JPY) is stronger this morning. After spending the day above 105 yesterday, it is back below that figure. I’m a huge yen fan (some people might say that I’m just HUGE) and feel like a heavyweight fighter absorbing body blows when it weakens like it did last week… Stupid carry trade!

Japan is on holiday until Wednesday this week, so the overnight activity was limited… But liquidity in the markets will return tonight and tomorrow…

Time to head to the Big Finish, as I spend a good amount of time this morning, looking for my “link” to the BLS numbers… Eventually I found it… Whew!

But first, I need to talk about Iceland… Yesterday, when we tried to deal our Iceland krona (ISK) position, we were told there was “no liquidity” in the markets… Which means you get stuck with whatever price the dealer wants to hang on you. That’s just not my cup-o-tea folks… Speculators have pushed this currency to this point… And that’s a sad thing.

Currencies today 5/6/08: A$ .9445, kiwi .7865, C$ .9870, euro 1.5510, sterling 1.9690, Swiss .9525, ISK 77.10, rand 7.5325, krone 5.0825, SEK 6.0225, forint 162.40, zloty 2.21, koruna 16.25, yen 104.70, baht 31.71, sing 1.3580, HKD 7.7950, INR 40.94, China 6.9870, pesos 10.47, BRL 1.6540, dollar index 73.13, Oil $119.70, Silver $16.70, and Gold… $875.90

That’s it for today… I’m draggin’ the line today. This medicine I take just makes me so tired all the time… But that’s OK… It gives me an excuse to take a nap each day! We’re almost to full strength on the desk again. Our colleague Don Ries is still recovering from the surgery he had last week… So, we’re just one person down… That’s good for us! But it won’t last long, as our little Christine is out the door later this week, and then Chris and I head out the door on Monday. I’m heading to the Las Vegas Money Show. Chris will accompany me for two days, and then he heads to Panama. I did that Panama trip twice and decided that was enough! And now this is the second trip for Chris. I’m sure he’ll have the same thought! I hope your Tuesday is Terrific!

Chuck Butler
May 6, 2008

The Daily Reckoning