Bewitching the Dollar?

Good day… And a Marvelous Monday to you! Did you miss me Friday? I missed writing to you! My beautiful bride said on the way to the airport at the crack of dawn Friday… “You didn’t write today!” I said… No… But I did tell everyone on Thursday that I wouldn’t… I wonder how many people called the office to ask where their Pfennig was?

How about that currency run on Friday? WOW! The euro traded near 1.44 on Friday… And in the overnight market in Asia, it ran past 1.44. I can tell you that last week in New Orleans there were a lot of people calling for Gold to go to the moon, and the dollar to collapse… I was the voice of reason, and explained that currency trends caused by fundamentals determine these moves, and once the fundamental reason the dollar is in the weak trend is corrected or at least well down the road to correction, the dollar will continue to be in a weak trend.

I also explained how a trend was not a one-way street, and there would be volatility in the trend… This is all old news to you dear long time reader, but I have to make sure all new readers. That brings me to the euro 1.44… There sure seem to be a lot of people now jumping on the euro’s bandwagon, which is normally the recipe for a technical correction… So, I wouldn’t be surprised to see one here shortly… However…

The Fed’s FOMC meeting takes place on Wednesday… That’s right Halloween. Will it be the bewitching day for the dollar with another Fed rate cut? Well… The markets sure have come around to my way of thinking on this, and are now pricing in a rate cut of 25 BPS… But what happens if the Fed is in the panic mode and cuts 50 BPS again? Whoa Nellie! I would not like to be in a dollar bull’s shoes should that happen!

Besides the FOMC meeting this week, we’ll also see the advance printing of 3rd QTR GDP, which should begin to show us the slowdown in the U.S. economy that the housing meltdown has pushed the envelope on…

And before I go on… The main thing I focused on in New Orleans was the lack of foreign financing to cover the Current Account Deficit… I’ve explained this Corporate Credit Derivatives, which includes Commercial Paper… And without the $50 Billion this sector normally generated before the credit crunch in August… The euro’s climb could really accelerate folks…

And that announcement that I told you about where 3 BIG BANKS were going to shore up the commercial paper market? Well… I’m very suspect of this… One of the BIG BANKS… Citibank, is one of the culprits in the whole mess… So they will cast a shadow of doubt on the validity of pricing from them… It’s all set up to fail!

Speaking of the housing meltdown… Moody’s (the credit agency) cut ratings of CDO’s tied to $33 Billion of sub prime mortgage securities. These cuts will probably lead to the next round of CDO selling, and build more dark clouds to the housing storm… CDO’s are Collateralized Debt Obligations…

Did you see the size of the loss that Countrywide, the country’s largest home lender, posted on Friday? $1.2 Billion! OUCH! Now… That’s going to leave a mark! I’m not being silly here… I’m serious! That’s HUGE! The housing meltdown continues to spread and this loss will be felt by more than just Countrywide!

The fundamentals for the U.S economy are weighing heavily on the dollar… And so it goes.. On and on, and on, and on… Thanks to Christopher Cross for those words!

There will be some data and Central Bank meetings this week in Europe, but they most likely will be overshadowed by U.S. GDP, and the FOMC… But, I’ll tell you about them anyway!

German inflation data is due out today… And Eurozone inflation on Wednesday… Sweden’s Riksbank will meet on Tuesday, and I expect a rate hike from them, thus pushing Swedish krona even higher VS the dollar… On Wednesday, Norway’s Norges Bank meets, and they are not expected to move rates… But, I’m going to go out on the big fat limb, and say I think they will hike rates, thus giving krones a nice boost VS the dollar!

Down under… Aussie dollars have hit 92-cents overnight… Looks like the blue light special on Aussie dollars was last week and has ended… What a recovery! Why? I hear you asking… Ahhh grasshopper that’s an easy one… Recall last week I told you that Australia’s annual inflation rate hit 1.9%, just a hair below the Reserve Bank’s ceiling target rate of 2%… Well… The Reserve Bank was quick to point out that their measure of core inflation is running at 3%… How hawkish is that? The Central Bank clarifies the data they use, which just happens to be greater than the CPI figure.

This all tells me that the Reserve Bank has considerably more work to do in order to bring inflation under control… And that means more rate hikes are on the way! Here’s how I see it happening… A rate hike in November… And then one in the 1st QTR of 2008, and one in the 2nd QTR of 2008… All the while the A$ will continue to mount its charge to parity with the green/ peachback…

And good news this weekend from the Chinese Central Bank, which announced that they would tolerate a faster appreciation of the renminbi, to narrow their trade surplus with the U.S. and help fight inflation… Recall that this has been my point with the Chinese all this time, in that, if they allow their currency to strengthen it would help them fight the inflation that has to exist in a country where the average GDP has been running at 10% for over 5 years now!

The markets took this news and pushed the renminbi to the highest level it has been VS the dollar since the drop of the peg over 2 years ago.

Of course with this announcement we’ll probably hear from U.S. Treasury Sec. Paulson as he pounds his chest with belief that he alone brought the Chinese to this decision… I laugh out loud at Paulson… Anyway… Given last week’s announcement from investment guru Jim Rogers regarding China, and now this… I would expect a very strong move from renminbi as we head into the end of the year…

The price of a barrel of oil traded over $93 last night… OUCH! Is this just amazing or what? The latest move came as a result of Mexico shutting a 5th of its production, which totals up to about 600,000 barrels a day… Storms are to blame… Now the $100 oil scenarios don’t look as foolish as they did a few months ago do they? Over the weekend, I read a piece by a trader that believes we could see $120 just based on Chinese demand… Double OUCH!

Talk about inflation problems… But don’t let that get in the way of a Fed rate cut!

And these inflation problems are really boosting the price of Gold! Of course as I always tell you, dollar weakness is a key to Gold… But they both play off of inflation… And don’t look now but Gold is about ready to take out $800! WOW!

Our newest currency to the roster of currencies we offer, the Brazilian real, has recently caught some wind in its sails… Friday’s move was +1.5%! Investment flows to Brazil have recently increased allowing them to believe this will continue… Which would be good for the real…

Investment flows here are not restricted to the U.S.! And here’s where the dollar gets to look shaky again… Foreign investors are looking for yield… Risk Aversion is nowhere to be seen in the rear view mirror… Where are you going to find it? Right here… And as long as the investment flows continue, much like the scenario in India, the currency will continue to benefit… Cut off the investment flows… And the reverse comes into play.

Currencies today: A$ .9260, kiwi .7720, C$ 1.0425, euro 1.4415, sterling 2.0575, Swiss .8605, ISK 60.20, rand 6.50, krone 5.3430, SEK 6.3690, forint 174.17, zloty 2.5120, koruna 18.6710, yen 114.20, baht 31.80, sing 1.45, HKD 7.75, INR 39.45, China 7.4740, pesos 10.73, BRL 1.7690, dollar index 76.86, Oil $92.70, Silver $14.50, and Gold… $795.90

That’s it for today… Congrats to the Red Sox  who swept the World Series. I start a two week sabbatical away from my cancer medicine today… YAHOO! The New Orleans Investment Conference was good last week, not as heavily attended as in past years, which was strange for a Gold Bug crowd, given the price of Gold… I was great being hugged and kissed by friends that hadn’t seen me since I got sick… “it’s great to see you Chuck”… I would reply… “It’s great to be seen!” Well… I see by the clock that I need to get this in gear… I hope you have a Marvelous Monday and Wonderful Week!

Chuck Butler
October 29, 2007

The Daily Reckoning