Employment Data Sends the Dollar Down

Good day… I want to start off by apologizing (again) about the delay in getting the Pfennig to everyone on Friday. We continue to have problems with the server that sends it out. As always, you can read the Pfennig as soon as it is written by going to our website.

The bad employment numbers in the United States sent the dollar spiraling down early Friday morning, but it suddenly rebounded and ended Friday a bit stronger versus most of the currencies. I scrambled to figure out what had turned the dollar, and found it was nothing but a technical correction. A trader friend told me that as the euro (EUR) ran up toward 1.55 but then stalled, option traders started covering their positions, forcing the single currency back down to 1.532. Apparently $1.55 on the euro is a big options level, so the euro will have to work to get past it. I don’t really mind though, as the run from 1.50 was a bit too quick, and it is a healthy sign for the euro to range trade a while and ‘fill in the gaps’ left by the rapid appreciation it has had over the past 1 1/2 weeks.

Chuck went from one of his favorite spots in Florida out to the cold weather in Colorado and sent me the following from the road last night:

“Rocky Mountain high… Colorado… Here I am in Edwards, Colorado, just down the road from Beaver Creek and Vail, where I’ve been shuttling my beautiful bride and little buddy to and from their ski and snowboard schools. It was an absolutely beautiful day here today, but… It’s wasted on me. I’ve said it over and over again, this dance is gonna be a drag… No, wait! I’ve said over an over again that I’ve gotta go where it’s warm!

“As Chris was signing off on Friday, he left you with the news that the Jobs Jamboree had posted a negative 63K jobs in February. I read something, I don’t remember what, that ballyhooed the fact that the jobless rate fell… COME ON! We all know that the jobless rate is bogus as it no longer counts people as unemployed after their unemployment benefits run out! Anyway… In my humble opinion… This report does nothing but put the stamp of approval on my call that we’re already in a recession!

“Don’t forget… On March 18th, the Bureau of Labor Statistics (BLS) will issue their annual ‘adjustment’ to all the ‘ghost jobs’ they’ve created in the past year. I would say, that after the BLS comes clean, the recession will officially begin!

“So… I’m looking at reports in my in box, and a couple of them are telling me that traders are now pricing in a 100 BPS rate cut by the Fed next week to 2%! WOW! Now… I told you a long time ago that I thought the Fed would cut rates to 2%… BUT I didn’t think it would be achieved by cutting 100 BPS to get there! But I’m not taking this thought hook, line, and sinker like the markets are. I still think we’ll see 50 BPS next week, followed by another 50 BPS at the next meeting.

“To cut 100 BPS, the Fed would be saying ‘uncle’… All that bogus talk about a strong economy, and how housing wasn’t going to hurt the economy, and the other lies and videotape they threw at us, were just that… Lies… And I don’t think they want that on their resumes!

“Anyway… Just the thought of 100 BPS has the dollar running for cover again!”

I can always count on Chuck to send me some great stuff for the Pfennig no matter where his travels take him. As he stated, the markets will spend this week trying to predict what the FOMC will do with U.S. rates at their meeting next week. Data due out this week will include wholesale inventories today, trade balance and ABC consumer confidence tomorrow, and MBA mortgage applications and the monthly budget statement on Wednesday. The big data will be out on Thursday when we will get retail sales and import prices along with the weekly jobs data. We will end the week with another big series of data as the monthly inflation numbers will be reported on Friday.

All of this data will likely point toward the fact that the U.S. economy is already in a recession, and the Fed will have no choice but to keep cutting rates even with inflation heating up. But Friday’s monthly inflation numbers are predicted to show no increase in prices for the month of February, and the monthly numbers are actually predicted to show a drop of 0.1% over last month. Are you kidding me? Economists actually believe prices have fallen recently?!? These guys must not be shopping in the same grocery stores or gas stations that I am. Even the bogus ex-food and energy number has got to show an increase. But if these ‘experts’ are correct, and inflation doesn’t show a gain, the dollar is in for an even more dramatic drop, as Ben Bernanke and his ‘boys’ will have the green light to get more aggressive with their rate cuts.

While the data in the United States was negative, data released in Europe illustrates the differences in the direction of the two economies. German exports rose more than three times faster than economists forecast in January, as the stronger euro didn’t have the negative impact some had predicted. French industrial production also rose in January, spurred by record exports. Another report showed that German industrial production growth unexpectedly accelerated in January as mild temperatures fueled the biggest gain in construction output in almost two years. From a year earlier, industrial production rose 6.9%. Apparently German manufactures stepped up production as sales to Asia and Europe offset a drop in exports to the United States.

This is what we have been talking about for some time; just because the U.S. is in a recession doesn’t mean the rest of the world has to stop growing also! Asia is going to continue to grow, and the demand created by just a small up-tick in disposable income in the world’s largest population will help offset the slowdown in the United States. Now I don’t think these new Chinese consumers will be spending as quickly as our U.S. consumers, but the sheer size of the Chinese middle class will make up for their lack of experience in consumption.

Speaking of professional spenders, it was reported that U.S. consumer debt expanded $6.9 billion in January on credit card charges, as Americans spent twice as much as they did a month earlier. Chuck wrote in this month’s Review and Focus about this ‘other shoe to drop’ for the U.S. economy. People once dependent on home-equity financing are turning to other forms of short-term financing after the collapse in subprime mortgages made it harder to qualify for loans. Personal income in January rose at a slower pace than inflation, and credit card usage in January rose for a second straight month. This is not good for the U.S. economy, as these credit cards will soon be maxed out, leaving U.S. consumers with no where to turn for additional spending. Without the resilient U.S. consumer supporting our economy, growth will fall even faster. This is not good folks!

Just when the “experts” are writing off the Japanese economy… They get this thrown in their collective faces. Japanese machinery orders rose at the fastest pace in seven years in January. Orders jumped 19.6% from December… Yen (JPY) keeps trying to push the 100 envelope, and data like this will grease the tracks! And the yen isn’t the only Asian currency doing well versus the U.S. dollar lately. China continues to let the renminbi (CNY) appreciate to try and offset inflation, which probably surged to another 11-year high in February. The Chinese central bank has moved interest rates up, and is now letting the currency appreciation help to offset these inflation pressures. China’s producer prices rose 6.6% from a year earlier after gaining 6.1% in January.

I read a story over the weekend that suggested China will try to let the renminbi appreciate versus the euro. Instead, U.S. dollars as exports to Europe will likely be growing at a greater clip than those to the failing U.S. economy. The Chinese currency actually dropped 3.3% versus the euro last year and is now expected to rise 9.5% versus the euro in 2008. China’s trade surplus soared to a record $262 billion in 2007, prompting calls from European officials to reduce trade imbalances. Letting the renminbi appreciate versus the euro will stem some of these protectionist calls. So what will this mean for U.S. investors? It should mean the euro will continue to advance versus the U.S. dollar, which will continue to take a back seat to what is starting to be seen as the world’s new reserve currency.

Several readers have asked me to write about the Icelandic krona (ISK) and recent drops in its value. The Icelandic economy is actually fairly strong, as their diversification into aluminum processing has helped reduce dependence on fishing. The reason the Icelandic krona has been dropping is mainly due to another reversal of the ‘carry trade’. Most of the high yielders have been selling off, and the Icelandic krona was one of the largest losers during the past three months, selling off almost 10.5% versus the U.S. dollar. The only currency that has done worse than the krona is the South African rand (ZAR), which has sold off more than 16% versus the U.S. dollar over the past three months. Risk and volatility in the markets have made the carry trade less attractive for investors, and these high yielding currencies will continue to come under selling pressure.

This latest reversal was also blamed for Friday’s sell off of the Aussie (AUD) and New Zealand dollars (NZD) currencies. Both traded off their recent highs as investors moved out of them. Much of this selling was due to equity market deterioration after the bad U.S. data. But as all of our readers know, the carry trade seems to never die, so don’t expect to see these high yielders stay down for too long. Aussie and kiwi rates will remain high when compared to the United States and Europe, and their commodity driven economies should remain strong. The recent sell off in both of these currencies should be viewed as another buying opportunity.

Currencies today: A$ .9250, kiwi .7940, C$ 1.0124, euro 1.5351, sterling 2.0202, Swiss .9769, ISK 68.35, rand 7.9700, krone 5.1344, SEK 6.1165, forint 171.88, zloty 2.3221, koruna 16.3145, yen 102.23, baht 31.52, sing 1.3891, HKD 7.7876, INR 40.495, China 7.1062, pesos 10.8205, BRL 1.6832, dollar index 73.027, Oil $104.56, Silver $19.83, and Gold… $989.35

That’s it for today… Mike beat me in this morning, and Tim and John also flew in last night, so we will only be down one today. What a relief that will be! Christine’s husband’s basketball team made it to the state finals, but ended up taking second. I forgot to remind everyone to move their clocks up an hour this weekend. I love daylight savings, as it is still light outside when I get home from work. Hope everyone has a Marvelous Monday!!

by Chris Gaffney
March 10, 2008