Dollar Rally Fizzles

“Happy Friday to one and all!

“This is a Jobs Jamboree Friday to boot! I’ve talked a lot about the jobs report this week and I’ll stop talking about it on Monday next week! Yesterday, I told you about how the ADP jobs report gives us a gauge for the national jobs report. This morning I’ll talk about the BLS… Yes, the Bureau of Labor Statistics, those guys that create jobs out of thin air. Well… After all their creation… There are times that they come back and make an adjustment, which really ticks me off, considering the currency market traded accordingly on the day the report printed.

“Anyway… I’ve read some reports that say the adjustment could be 200-400K! WOW! However, they don’t throw that adjustment all into one month’s report… No, they spread it out. So, would could see a negative adjustment of up to negative 80K this month… Which, given the thought that jobs would come in at a positive 80K before the adjustment, doesn’t look to good for the Jobs Jamboree!

“OK… Fizzzzzzzzzz, did you hear that? I know I heard it… Fizzzzzzzzzzz, there it is again! Oh! Now I get it! That’s the dollar rally fizzling out! Well… It sure looked that way yesterday as the euro (EUR) gained back ground almost all day to end the day at 1.4135. I’ve said all week that the dollar rally should be short-lived, and if the jobs data doesn’t help the dollar, then the rally will fizzle out!

“So, maybe all the gaps have been filled, and the oversold dollar position has been cleaned out, and we can get back to the business at hand, which is moving the euro to the next step of 1.45! However, if the jobs report does a Bullwinkle impersonation, and pulls a rabbit out of its hat… The dollar rally will continue, at least through today. But at this point, it sure looks fizzled out to me!

“The European Central Bank (ECB) left rates unchanged as I expected they would, yesterday… ECB President Trichet, said that they (the ECB) needs more data before moving rates lower. To me… That means next spring.

“You know how I always talk about how the ECB loves the strong euro because it does a great job of fighting inflation… But a long time customer/reader brought another reason the ECB loves the euro to my attention yesterday… As oil is denominated in dollars, they aren’t paying $80/ barrel. Compared to last year, oil is costing them more like $55-60/ barrel.

“See how the strong euro fights inflation? It’s all right there!

“I read a report last night that traders are beginning to believe all the rhetoric coming from the Fed Heads that there isn’t a need for additional rate cuts. That’s one of the reasons the dollar had hung onto its gains before yesterday. I can’t believe traders are that gullible! First they believed the Fed’s rhetoric that the housing problem would become big… Then they believed the Fed’s rhetoric about wanting to fight inflation… How many times will these traders get fooled by the Fed before they starting singing The Who’s, ‘We Won’t Get Fooled Again'”?

“And welcome to the world of Central Banking to the Bank of Canada’s new Governor Mark Carney. Mr. Carney used to work for Goldman Sachs! I would like to give a hand to the out going Governor David Dodge, who I believed did a pretty fair job! The Canadian economy is strong… Job growth is strong… The loonie (CAD) has hit parity with the U.S. dollar… And most important of all… Inflation is in check!

“At least Mr. Dodge didn’t leave a complete mess to his successor, like Big Al Greenspan did to Big Ben Bernanke!

“My Pfennig just got picked up again by the Sovereign Society’s newsletter, “My Two Cents.” I just love when they choose some of my words, and then the editor there, Kat Van Rohr, has a great knack for taking what I say and making it all flow and look great! So… Thanks again, Kat!

“Well… Not that I’m looking for any sympathy here, just stating a fact… And that fact is… That with my deep vein thrombosis, I will NOT be able to go to Columbia to see my beloved Missouri Tigers this week. UGH! My beautiful bride and little buddy are going though! So, I’ll be home watching it on national TV on ESPN, along with you!”

As Chuck mentioned above, the dollar rally looks like it has fizzled out and most of the other currencies continued to rally overnight. But the dollar still headed for the first weekly gain versus the euro since August, as traders continue to speculate that a stronger jobs number will weaken the case for further interest rate cuts by the FOMC.

In the on again off again world of the carry trade, it looks like the carry trade was being put back on over the last few days as the yen (JPY) has weakened and the higher yielding currencies have rallied again. As we have explained several times in the past – in a carry trade, investors get funds in a country with low interest rates (Japan, Singapore, Switzerland) and invest in one with higher interest rates (Iceland, New Zealand, South Africa, Brazil). These investors then pocket the difference in interest rates, the “carry”. But the risk for these investors is that the currency they have borrowed rises or the currency they are invested in falls, erasing the profits from the carry. Increasing the risk of these trades, most carry trade investors have used leverage to make the interest rate differentials even more profitable.

So now it looks as if the carry trade is being put back on, but it can and will reverse at some time. And when the carry trade reverses, those investors who are in the high yielding currencies can and will get burned. Unfortunately we can’t predict when this will happen, but I can tell you that eventually it will. A move by the Bank of Japan to increase interest rates or another credit crisis would be two events that could cause an unwinding of this trade. For those of you invested in these high-yielders, enjoy the ride while you can, but keep an eye out for any signs of reversal.

We have been talking a lot about the Norwegian krone (NOK) over the past year, and with good reason. Norway’s krone is set to gain for a seventh week against the euro and is second only to the Canadian dollar versus the U.S. dollar so far this year. Recently Norway’s finance ministry raised its economic growth forecast to 5% this year from 3.7%. Norway continues to benefit from high oil prices, and is using these oil revenues to pay down their debts. This has enabled Norway to continue to strengthen their standing as one of the most fiscally solid countries in Europe. Look for their currency to continue to perform.

Currencies today: A$.8921, kiwi .7582, C$ 1.015, euro 1.4120, sterling 2.0391, Swiss .8492, ISK 61.01, rand 6.895, krone 5.4159, SEK 6.5045, forint 178.13, zloty 2.6653, koruna 19.4891, yen 116.50, baht 31.55, sing 1.4742, HKD 7.7566, INR 39.49, China 7.5061, pesos 10.8776, BRL 1.8240, dollar index .7846, Silver $13.445, and Gold… $736.60

That’s it for today…Had a wild time on the desk yesterday as our computers didn’t want to cooperate with us. Hopefully today will be much calmer. It is a real shame the mighty Yankees got beat up yesterday, and the Cubs have dropped two in a row. If the Cardinals can’t be in the playoffs, at least we can take some enjoyment from the defeat of NY and Chicago! My Blues didn’t start off on the right foot last night as they lost to the Coyotes. Boy I hope MIZZOU can pull one out this weekend!! Have a Fantastic Friday and a wonderful weekend!!!

Chuck Butler
October 5, 2007

The Daily Reckoning