Currencies Rally

Good day… And a Marvelous Monday to you! Man… Talk about hitting the wall! I got home on Friday afternoon, sat down in my recliner, and fell asleep for hours! The last few days on my four weeks of cancer meds, this last week has been awful for me… But… I carried on, and I doubt anyone at the Money Show noticed me being uncomfortable and in pain.

The Las Vegas Money Show was quite good I believe, one of the better ones with regards to people having interest in what we do. It’s still nice to receive the “good to see you” and well wishes from readers that stop by the booth.

OK… Well… Friday saw some chinks in the dollar’s armor, and the euro (EUR) was marked up as the day went on. The U. of Michigan consumer sentiment index dropped to 59.5 in early May, its lowest level since 1980, from 62.6 in April. The decline was below the experts’ expectations calling for a dip to 62.0.

There was also news that U.S. housing starts posted an unexpected increase… But, really folks, is that a good thing? Empty homes a.k.a “inventory” is the major problem in this housing glut, so should we really get excited about “more homes” being built? I don’t think so… And apparently neither did the currency players, as this news was largely ignored.

In the overnight market, the Asians have really taken the dollar to the woodshed, pushing the euro to 1.56. Wasn’t it just last Monday that the euro dropped to 1.5365? This overnight move is being pushed by the thought that home sales, the more important part of the housing data, will show another decline, thus dropping for the second consecutive month.

Then there was a subtle little statement by the U.S. Treasury Undersecretary that I believe helped usher the dollar on its way to the woodshed. U.S. Treasury Undersecretary, David McCormick urged China to quicken their currency reforms. Now, I know, you’re saying what’s new about that, Chuck? Ahhh grasshopper… The dollar had rallied lately and the calls for Chinese currency reforms were nowhere to be seen. This statement reminded the markets that in the end… The U.S. Government wants a weak dollar… And if that’s what they want, currency traders and participants are happy to oblige them!

I don’t know at this point if this is a true reversal of the dollar rally or a false dawn… But either way… Just to see some chinks in the dollar right about this time is probably a good thing to currency holders!

The key focus for the United States this week will likely be the release of April’s FOMC minutes on Wednesday, which should provide some indication as to who is winning at Battleship. No wait, we’re looking for indication on who is winning the battle for rate hikes or rate cuts. The rate hike hawks have dominated of late on speculation that the Fed has ended its easing cycle, and the next U.S. rate move will be a hike later this year.

Of course you know me… I’m still keeping the light on for another rate cut by the Fed this year, which should really throw a spanner in the rate hawks’ works.

And getting back to last month’s -20K job loss posting… I’ve already highlighted the BLS ghost jobs that totaled 260K… But now this… The sum of state payrolls just came out for April showing -151K jobs, versus the actual preliminary release earlier this month of -20K. This hints at a potentially large downward revision to April payrolls when the May data is released.

I’m currently reading a new book called, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve written by William Fleckenstein. You know that name as the guy who writes financial columns on MSNBC. I met Bill Fleckenstein a few years ago… He told me I was bang on with my banging on the Fed. Well, his new book is awesome at pointing to the mistakes that Big Al Greenspan and the Fed Heads made over and over again… More on this in the future…

Today, we’ll see the color of the latest printing of leading indicators here in the United States. I suspect they will show no gains, thus leaving the people like me that believe the recession is already in place, with reinforced thoughts.

We won’t see the above-mentioned existing home sales report until Friday… So, we’ll probably drift around all week… But at least we’re drifting in the right direction!

I was writing our monthly newsletter to clients, The Review & Focus, last night (yes, on a Sunday night!) and highlighted the Aussie dollar (AUD)… Through all the dollar strength the past couple of weeks, there were a couple of currencies that remained resilient… Aussie dollars, Brazilian reals (BRL), and Canadian loonies (CAD)… That’s no coincidence either! As I kept telling people last week… Look at positive balance of payments currencies and currencies from countries that provide the world with something they need! Voila! Aussie, Brazil and Canada!

The Aussie dollar has pushed the door of 95-cents wide-open overnight, and Canadian loonies have passed the parity level to the green/peachback. Aussie is looking quite perky, which is good for my thought that Aussie too would reach parity to the green/peachback.

Aussie dollars have a central bank that will either keep rates unchanged or move them higher, while the loonie has to fight with a central bank that wants to keep in step with the Fed’s rate cuts… So… Look for Aussie to outperform loonies, kiwi (NZD), and reals going forward based on this rate outlook.

Now that was some great news that Chris brought to you regarding Iceland on Friday, eh? The poor krona (ISK) was in need of some good news, and when the Nordic Banks pledged to provide liquidity to the Icelandic Central Bank, it was just what the doctor ordered! But… Please do not take this as an endorsement to buy Iceland again. Instead, I believe that this news gives us better levels to sell when our CDs come due.

Someone asked me at the Money Show last week, what I would buy with the Icelandic krona proceeds… Well… I would either cross to Norway (NOK) or Aussie… There are two great economic stories right there, with little chance of going the way of Iceland.

And how about bold? The shiny metal enjoyed its best week in about two months it seems, and has come back to the $900 level and beyond. I have to admit that the $900 handle looks much better hanging on gold than the lower number it wore for too long!

And that, my friends, is a good note on which to head to the Big Finish.

Currencies today 5/19/08: A$ .9535, kiwi .7745, C$ 1.0060, euro 1.5585, sterling 1.9575, Swiss .9570, ISK 73, rand 7.50, krone 5.0150, SEK 5.97, forint 158.60, zloty 2.1715, koruna 16.09, yen 104, baht 32.25, sing 1.3680, HKD 7.80, INR 42.54, China 6.9725, pesos 10.39, BRL 1.64, dollar index 72.76, Oil $126.16, Silver $17.16, and Gold… $910.60

That’s it for today… We finally had some decent weather here in St. Louis over the weekend. Hopefully we’ve turned the corner in that regard. My beloved Cardinals won 2 of 3 from the Rays this weekend in dramatic style, helping to make the weekend grand! We’re hosting a big shindig at the Butler House this weekend to say goodbye to my two fave lefthanders… Neighbors Kevin and Lisa and their two lovely children. We’ve been neighbors for 18 years… Where did the time go? WOW! 18 years… OK… Time to get to the pile of stuff on my desk! I hope you have a Marvelous Monday, and Wonderful week!

Chuck Butler
May 19, 2008

The Daily Reckoning