Consumer Confidence Data Affects the Euro

Yesterday morning I told you that the euro (EUR) had broken above 1.30, and I would check it to see how long it remained there… Well, this time it was more than 10 minutes, and the euro rose to 1.3040… But then the rug was pulled from under the single unit, and back below 1.30 it went… In fact, it fell to just above 1.29, before turning around once again and heading higher, eventually ending the day at 1.30.

The “rug” that was pulled from under the euro was consumer confidence data here in the US. The Consumer Confidence Index followed June’s sharp drop, with another drop that was larger than expectations. The Index fell to 50.4 from the prior month’s 54.3… The declines in the “present situations” and “expectations” components of the Index represent the lowest levels since March of this year.

I’ve always wondered why consumer confidence was so strong given all that bad stuff around us. I always said, “They sure didn’t survey me”! So, maybe, just maybe, consumer confidence is finally capturing what’s really going on in the economy.

The initial knee jerk reaction to the confidence data was that the world was ending, and dollars and Treasuries would be the only salvation… But, eventually, calmer heads prevailed, when the yield differentials of other countries to the dollar and Treasuries came into light. I’ve talked about this quite a bit in the past, regarding yield differentials holding a lot of weight, and going further out on the horizon, it sure doesn’t look like the US will be able to narrow those differentials.

The Aussie dollar (AUD) got whacked overnight. Here’s the skinny… Aussie CPI (Consumer Inflation) printed at 0.6% in the second quarter… Now… That’s a good thing, right? Well, not if you were counting on another rate hike from the Reserve Bank of Australia (RBA) when they meet next week. Recall on Monday I said if Aussie CPI was 0.8% or above, the rate hike was “on”… So… We had a lot of buyers come into the Aussie dollar the past week, driving the it through 90-cents, because they believed the RBA would be raising rates next week… When they saw the color of the second quarter CPI, they took those trades off the table, and the Aussie dollar fell back below 90-cents, again…

I wonder how long it will take before investors figure out that this, softer, second quarter CPI is just what the RBA was going for, when they were the first country to raise rates, and then continue to raise rates for the next six months? This is “good” for the Aussie dollar, and the Aussie economy.

So, here’s an opportunity for the New Zealand dollar/kiwi (NZD), to play catch-up to the Aussie dollar… The Reserve Bank of New Zealand (RBNZ) meets tonight (their Thursday), and like I’ve said since the last rate hike by the RBNZ, I expect them to raise rates in New Zealand tonight.

But don’t expect a “run-up” of kiwi after the rate announcement… I truly believe the RBNZ will try with all their might to talk down the kiwi, with dovish statements, in hopes of throwing the dogs off the scent of another rate hike…

The RBNZ “used” to be one of my fave central banks, especially when Don Brash was the Governor. These days, the RBNZ is not a “protector” of the currency’s value… And that ticks me off!

I told the general crowd at the Agora Financial Investment Symposium last week that I truly believe we’re going to see home prices drop another 10%… (Yes, I know, the Case-Shiller report yesterday showed that home prices strengthened this spring.) And here’s one of the reasons I believe the price drop is coming… A record 269,962 US homes were seized in the second quarter, according to RealtyTrac Inc. Foreclosures will probably top one million this year!

And… The share of homes empty and for sale, known as the vacancy rate, is the same now as it was a year earlier: 3.7 million homes are sitting empty, and yet, we continue to build new homes… And the Mortgage Bankers Association says that a record 4.6% of US mortgages were in foreclosure in the first three months of this year…

Oh, and getting back to the Case-Shiller report… I wonder where they got their numbers? You see… According to Realtors, the US median home price had fallen 29% in February, to $164,600 – an 8-year low! OK… Wanna know what the high was during the housing bubble? $230,300 in July of 2006…

OK… That’s depressing, eh? But… You’ve got to be armed with facts and figures if you’re going to make a claim like I did last week, in front of 900 people!

Well… The bad print on US consumer confidence socked it to commodities yesterday. The price of oil fell over $2, and gold tumbled more than $20! Now… One would think that a lack of confidence would have boosted gold… But NOOOOOOOOO! In the words of John Lennon, strange days indeed, so peculiar momma!

And, with the price of oil dropping $2, the Canadian dollar/loonie (CAD) backed away from 97-cents, once again… This back and forth stuff really gives me a rash!

OK… You’re going to love this morning’s “Then there was this”… Or… If you’re like me (and I apologize if that’s the case) then it will probably really tick you off!

I saw this on YAHOO Finance…

A US audit has found that the Pentagon cannot account for over 95% of $9.1 billion in Iraq reconstruction money. The $8.7 billion in question was Iraqi money managed by the Pentagon, and not part of the $53 billion that Congress allocated for rebuilding…

The report by the Special Inspector General for Iraq Reconstruction accused the Defense Department of lax oversight and weak controls, though not fraud.

“The breakdown in controls left the funds vulnerable to inappropriate uses and undetected loss,” the audit said.

No fraud? What, did they forget to take their rose-colored glasses off before entering the audit room?

To recap… The currencies range-traded yesterday, with the euro leading the way. The Aussie dollar lost ground overnight when their second quarter CPI was softer than expected. The RBNZ meets tonight, and I expect rates to go higher in New Zealand. And consumer confidence in the US fell again for the second consecutive month, pulling the rug from under commodities, with oil falling $2 and gold falling $20…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning