Currencies Rally!

Good day… And a Tremendous Thursday to you! I really got a kick out of an email I received yesterday. Recall, in yesterday’s Pfennig I said, “the Big Dog rebounds”? Well, at first glance, the reader and sender of the email, thought I was talking about myself! Which makes sense! But, in this case I was talking about the euro (EUR)…

The FOMC minutes did what the markets couldn’t do for over a week – turn the dollar’s mini-rally around. As I told you yesterday, the minutes have really opened the market’s eyes once again toward additional rate cuts… And toward taking on more risk and getting the dollar back on the slippery slope versus the currencies. The currencies posted a very nice rally yesterday, which carried on in the overnight session.

I really got a kick out the way the guys over at The 5-Minute Forecast (Ian Mathias and Addison Wiggin) explained the FOMC minutes… “The market interpretation of the Fed minutes goes something like this: The Fed is both concerned that the credit crisis will slow the economy down and unanimously in favor of using rate cuts to ease the pain. Using a combination of quantitative analysis, tea leaves, bar charts and cocaine, traders came to believe an October rate cut could be in the cards, and started to buy.”

OK! The currencies, as I said they would, traded in a very tight range on Wednesday for most of the day, and then the switch was turned on and dollars got sold… The next thing we saw was the euro blasting through the 1.41 handle on its way to 1.42!  There was no data to deal with, so the dollar was on its own. Today, we’ll see the August trade deficit, which should remain around the $59 billion level, and maybe even inch up to $60 billion. Do the simple math and we’re running a plus $700 billion trade deficit per year. And the thing that really stands out here is the fact that U.S. exports continue to show monthly increases.

I’ll point out here that the weak dollar is the push behind the increased exports, but we’ll keep that as our little secret, eh? Heh, heh, heh….

The Eurozone ministers have decided to throw in the towel with regards to hatching a plan to strengthen the dollar. They have not cast their ire at renminbi (CNY), and to a lesser extent, yen (JPY)… Now, they have the United States with them in this fight! And the Eurozone ministers, not being of unsound mind, know that it is far better to have the U.S. with them than against them!

I’m sure the Eurozone ministers, like their U.S. colleagues before them, are not going to find a pot of gold at the end of this rainbow! The Chinese will give the Eurozone ministers the same smile, and talk about increasing the flexibility of the renminbi. Then laugh at the ministers as their plane takes off! This has all been done on my previous occasions with the U.S. representatives.

And while the Eurozone ministers have shifted their attention to renminbi, the hawkish statements about the Eurozone have returned. They need to be careful here, as the more hawkish they sound, the markets will think the ECB is back on the rate hike cycle… And I don’t think they want to go there!

Poor old British pound sterling (GBP), which has been sent to the corner to think about what it had done, read Northern Rock, has finally put the past behind it, and moved on. Bank of England Governor King, may have rekindled the sterling fire when he stated that he wouldn’t cut interest rates to bail out lenders. Well… This news has the pound trading close to 2.04 again. But before we get too excited and lathered up, we need to think clearly about what Mr. King said… He said he wouldn’t cut rates to bail out lenders… He DIDN’T say he wouldn’t cut rates… Which I believe he will before the end of the year.

Unless… Inflation really flares higher than the Bank’s ceiling target of 2%… Then he’ll have to think twice about cutting rates.

It’s nice to see a BIG Bank agree with me… I told you yesterday that Swiss National Bank Governor Roth had given the green light to risk takers and therefore the Swiss franc (CHF) would once again be used as a financing currency for carry trade investors, thus keeping the franc from rising.

The Union Bank of Switzerland put out a report last night saying that the Swiss franc will extend its drop as risk appetite rises.

The Bank of Japan began their two-day policy meeting last night… But don’t expect any rate hikes. This group of central bankers has really disappointed me. Interest rates should be higher in Japan, and only one Bank of Japan minister knows this. Mr. Mizuno has been the only dissenting vote to keeping rates unchanged at the last three meetings, and I expect this pattern to remain at this meeting.

By keeping rates unchanged, the Bank of Japan has also given the green light to carry trade investors to keep on keepin’ on! Don’t you just love it?

I’m told that there is strong resistance at 0.9033 for the Aussie dollar (AUD)… OK… Let’s make that WAS strong resistance, because overnight, the Aussie dollar has blasted through that level, to infinity and beyond! Well… At least to the 0.9055 level this morning! What a move! WOW! The Aussie dollar had been dancing this two-step – one step forward, and one step back – for about a week… But now we can see that it was merely forming a nice strong base to launch its next move!

Of course a rebound in commodities this week has certainly helped the Aussie dollar. I have more on that in a minute.

Former Fed Chairman, Big Al Greenspan is at it again, this time in London… What am I talking about I hear you asking? Well… Big Al just can’t seem to keep his opinions to himself… He had 18 years to share his knowledge, but that just isn’t good enough for him, he has a need to tell us more, and tell us more he is doing!

Big Al, told an audience in London, that the credit crunch that has troubled financial markets in recent months will eventually take its toll on the U.S. economy. “When you get house prices flattening out, you begin to get pressures on consumption.” He went on to say that home prices would almost certainly fall and the slump will eventually prompt consumers to cut back spending. Hmmm… Sounds a bit like he’s been reading the Pfennig, don’t you think? I mean, come on! That sounds every bit like the things I’ve been telling you for some time now!

Oh well… I carry on…

And carry on I will… Right to the Big Finish… But first I want to mention that commodity prices have really rebounded nicely this week, due to the renewed dollar weakness. Oil is back over $81 and gold is up to $746… This is exactly how I explained how it would play out to you in Monday’s Pfennig… “And with the dollar mini-rally fizzling out… We should begin to see the price of gold start to pick up the pace again.” Ahhh… I love it when a plan comes together!

And if you need any evidence that the carry trade is kicking tail and asking names later, just look at the currency levels of kiwi (NZD), Icelandic krone (ISK), rand (ZAR), and even A$… Hot, Hot, Hot…

Currencies today: A$ .9055, kiwi .7715, C$ 1.0240, euro 1.4220, sterling 2.04, Swiss .8495, ISK 59.90, rand 6.8450, krone 5.4015, SEK 6.4040, forint 175.44, zloty 2.6320, koruna 19.3450, yen 117.20, baht 31.38, sing 1.4610, HKD 7.7540, INR 39.30, China 7.5040, pesos 10.82, BRL 1.8020, dollar index 78.06, Oil $81.69, Silver $13.75, and Gold… $746

That’s it for today… A very nice move indeed yesterday for the currencies! I received the word from my doctor yesterday that I can go to New Orleans in two weeks! YAHOO! I thought he was going to nix that trip for me, but decided that I’m strong enough to go. My beautiful bride will be going with me, as it would be very difficult for me to travel alone… Then the following month, the family is going to Amelia Island to relax for a few days. I know I’ve been home a lot over the last four months, but I haven’t gotten “away”. This will be good for me! So… Time to go… Have a Tremendous Thursday!

Chuck Butler
October 11, 2007

The Daily Reckoning