German Investor Confidence Drops...

Good day… Well… No exciting / scary stories about flying into Las Vegas this time around… YAHOO! This time difference going west always gets to me though… I normally wake up at 4 am each day… Which means that here I was awake at 2 am! So, then I go back to sleep, and I’m all messed up! Oh well… I carry on despite the time differences!

OK… As I look across the board this morning to see where yesterday’s sell off left the currencies, I can see that the selling, for the most part, has ended… Commodities really took one to the chin yesterday, creating dollar strength that carried over to the currencies… And while I kept talking about how we should be surprised if a correction happened, I was not thinking that the correction would be as strong and swift as it was to the Commodities.

However, as I said, it appears that the selling of the currencies has ended for now…

The German Investment Confidence as measured by the think tank ZEW, didn’t help the euro’s cause this morning, as the May report dropped the most in more than a year. The euro’s gain and higher oil prices has made investors aware that prospects for economic growth has taken a shot across the bow. I wouldn’t let this get me down, it’s only castles burning… No wait, I don’t need Neil Young interjected into this right now… What I’m trying to say is that this report will fade into the background as we eventually get back to focusing on the U.S. fundamental stresses…

Lessons learned are like bridges burned, you only need to cross them but once! And we crossed that dollar strength bridge last year, when it enjoyed the HIA repatriation (which no longer exists), and the Fed rate hikes, which look as though they are about to at least pause, maybe as soon as June!

The emerging markets are once again on the chopping blocks of traders and investors (mostly speculators!) Again, we saw this at the end of February, when the Fitch report knocked Iceland to its knees, which then spilled over to rands, Turkish lira, Brazilian real, Indian rupees, and Indonesian rupiah, among others… I would think that the speculators were finished with Iceland, but once emerging markets begin to get sold, they all are thrown into the same barrel, and rolled down the hill!

This was true with the Commodity currencies yesterday, during the Commodity bashing… Australia, Canada, New Zealand, and even South Africa, were guilty by association, and sold… However, everything I read about this Commodity sell off is saying that it is merely a correction… And I agree with that… There has been no change in the demand for Commodities by China. I see it as merely a tempest in a teacup! So… To that end, I would fully expect the forming of a new base now, and a return to the rally once the dust settles on this whole sh-bang!

China continues to say all the right things regarding their willingness to reform their currency policy, and make the renminbi more flexible… As I said yesterday, the renminbi did briefly trade below 8, and it did the same last night… So… This reminds us that the move to 7.50 is going to be slow… Two steps forward, and one step back… All the way to 7.50!

In other news from the Asian region… There’s a story going around that Japanese Finance Minister told Parliament that in theory, it is possible that he would sell U.S. Treasuries to fund future currency intervention if needed… That’s the first time anyone in Asia has even whispered aloud, that they were even thinking about selling U.S. Treasuries… There’s got to be some repercussions from that statement, but I’m not seeing them right now.

Speaking of U.S. Treasuries… The Net Foreign Security Purchases (NFSP) did fall greater than expected in March, but remained in the ballpark regarding its ability to cover the Current Account Deficit… I did see something in the report though that made me look twice… Foreign demand for U.S. Treasuries seemed to be very weak… Is this a signal that worse times are ahead for the selling of Treasuries to fund the deficit? Or was it merely a one month blip? I guess we’ll have to wait until next month to find out, eh?

OK… I’ve got to get to the Big Finish, as it takes me 4 times longer to save everything and get it out, when I’m on the road! So… Here we go!

Currencies today: A$ .7620, kiwi .6220, C$ .8990, euro 1.2820, sterling 1.8820, Swiss .8260, ISK 71, rand 6.38, krone 6.10, forint 204.92, zloty, 3.05, koruna 22.10, yen 110.10, baht 38.15, sing 1.5750, INR 45.40, China 8, pesos 11.08, Silver $13.19, and Gold… $684.30

That’s it for today… Chris got really ill yesterday, I’m hoping he’s back to normal today… I’m speaking this morning… So I’ve got to get my throat all cleared! We’re hoping this web cast is of better quality than the last one, so we can get it on our web site for everyone to view that couldn’t make it here. Have a great Tuesday!

Chuck Butler
May 16, 2006

The Daily Reckoning