German Business Confidence Beats Forecast!

Good day. Well, an interesting day, indeed, in the currencies yesterday. It was a roller-coaster trading day, albeit a little kid’s style roller coaster! I guess range trading would be the proper way to describe the day’s activities. Here’s the skinny.

First of all, the euro was soaring, after it was reported that the U.S. existing home sales dropped 4.1% in July. I’ll talk about that more in a minute. The euro then turned on a dime when some large names took profits, and a report printed showing U.S. inventories of gas were larger than expected.

Now, I don’t quite know what that has to do with the price of tea in China. Nor do I know why the dollar would rally on that report, but that’s what was being reported. I think the turn around had more to do with the large names taking profits. I have more to say about that particular thing, too…later.

The euro has rallied back to the same level it traded at yesterday morning when I signed off, on news that the German business confidence, as measured by the think-tank IFO, did decline, but not as much as the experts had forecast. So, it beat the forecasts; the euro rallied. And we all know that when the euro rallies, so do the other currencies – well, at least the European and South Pacific currencies. The Asian currencies are off on their own scene, man.

OK. Now, back to the U.S. existing home sales dropping 4.1% in July. July’s total represents the lowest level of sales since January 2004. You know, the last time existing home sales had a positive month, was in February. Since then, we’ve seen nothing but negative numbers each month. And if you go back one year, February is still the only positive month of sales.

In addition, the months of supply at current selling rates hit 7.3 months and the median price was 0.9% higher than the same month a year ago, a slight increase from June’s flat year-over-year rate. Despite the slight increase in July, the pace of house price appreciation has slowed dramatically, falling to 0.9% from a 13.4% year-over-year pace in July 2005. These are not a good things, folks.

Today, we’ll see the color of new home sales in July. This data is expected to show negative numbers, too. On top of all that, we’ll also see durable goods for July, which is expected to come in at -0.5%. None of this data is good for the dollar. And now that the euro has made it through the gauntlet of the ZEW and IFO reports, it should bask in the sun, waiting for tomorrow’s consumer inflation report for the Eurozone, which should show us that the ECB has more rate-hike work to do!

OK. Now to the large names taking profits. I don’t know this to be a fact, but judging by the reports of “large names,” I take it to mean hedge funds. Personally, I’m really tired of these hedge funds gumming up the fundamentals, but I doubt the normal investor knows about these hedge funds.

Yesterday, it was announced that Paramount Pictures had severed their ties with Tom Cruise. OK, I can hear you saying, “Chuck! Have you lost it? What does Tom Cruise have to do with economies, currencies, etc.?” Well, our Corporate FX guru Ashish Advani, tells me that Cruise didn’t need Paramount, as he had secured funding from two hedge funds. Hedge funds investing in actors? What in jalapenos is going on here?

So, I asked Ashish to give me his thoughts on hedge funds. I know what mine are, and so I thought it would be a nice twist to see what his thoughts are. But Ashish’s thoughts were harsher than mine toward hedge funds. So, I’ll keep them on the sidelines. But if you want to see them, I’ll be glad to send them to you. Just let me know!

OK. Back to currencies.

Yesterday, I told you that Canada’s consumer inflation had printed higher than expected and that the Bank of Canada would be returning to the rate-hike table. Well, following up that report yesterday was Canada’s leading indicators, which also came in stronger than expected. The Belle of the Ball has decided to stay and dance longer.

Ashish also gave me some of his thoughts on the Canadian dollar/loonie, and these I can print! HAHAHA! I’ve already mentioned the inflation, and leading indicators. So, I’ll go right to the area I haven’t covered. Here’s Ashish:

“The effect of sustained (and slow, but definite upward movement) in gold and other commodities will keep the pressure on a strong dollar. Natural gas and oil prices remaining high with geo-political pressure slackening but not disappearing will hold the CAD strength up. We are one crisis (hurricane, North Korea, Iran talks failing, major U.S. terrorist attack) away from spikes in oil or gold – or both. And this will push the CAD up.”

OK. After new home sales and durable goods are printed today, the data cupboard is empty until next week. And with the only real piece of data tomorrow being the Eurozone inflation report, I see a nice end to the week for the currencies!

Well, after several months of a narrowing trade deficit, New Zealand posted an unexpected widening trade deficit last night for July. Ugh! Imports increased 23% in July versus the previous month, and that indicates the economy still isn’t slowing down. On one hand, that’s good for the kiwi, as the Reserve Bank of New Zealand won’t be lowering interest rates any time soon. But on the other hand, the increase in the trade deficit means there will be no correction in the current account deficit, which is running at an unsustainable 9% of GDP. Ouch!

So, I’m hoping that July’s trade deficit increase is a rogue report and New Zealand can get back to the previous trend of a narrowing trade deficit. The kiwi remains one of the better performing currencies this month. So, not all’s bad.

Currencies today: A$ .7645, kiwi .6380, C$ .9015, euro 1.2835, sterling 1.8955, Swiss .8125, ISK 70.08, rand 7.13, krone 6.29, SEK 7.16, forint 217.84, zloty 3.06, koruna 21.96, yen 116.25, baht 37.65, sing 1.5750, INR 46.53, China 7.9725, pesos 10.9110, dollar index 84.91, silver $12.62, and gold $626.

That’s it for today. Don’t know where my head was yesterday, as I failed to mention that “I Dream of Jeanie” celebrated a birthday yesterday. Yes, Barbara Eden turned 72! I’m sure all of you who grew up during the 60’s will recall Jeanie! Now my beloved Cardinals can’t win in New York either! Ugh! The Big Boss, Frank Trotter, is here! I must be really late getting this out. So, have a great Thursday!

Chuck Butler
August 24, 2006

The Daily Reckoning