German Investor Confidence Takes A Hit

Good day. Well, the euro did flirt with the 1.29 level yesterday, briefly going over it, but ended the day below the level I reported in the currency roundup yesterday on profit taking… This morning the single unit has lost more ground, albeit small moves, when the first piece of the data I warned you about yesterday printed.

Yes, German investor confidence really took a hit this month as measured and reported by the German think-tank ZEW. Investors are beginning to show concern about the higher interest rates and the upcoming higher taxes that begin in 2007. I had the feeling going into this week that the ZEW and the upcoming IFO reports would weigh heavily on the euro, and by the looks of this morning’s action, the weighing is heavy, but not too heavy, he’s my brother – no wait! Oh, never mind. You get what I’m saying…

On Thursday, this week, we’ll see the German think-tank IFO print their version of business sentiment. I’m expecting some additional weight for the euro to carry, because here, businesses will point to the stronger euro as their reason for not feeling too excited about the future. Once we get through these two reports, we will see consumer inflation on Friday. This, along with liquidity in the Eurozone still running too high, will lead the ECB back to the rate-hike table, and that scenario will boost the euro higher.

Speaking of interest rate hikes, it sure seemed as though we went through a flurry of them in July and the early part of this month. However, I think we’re going to find slim pickin’s with regard to additional rate hikes around the world until October. We may see a rate hike from Sweden and Norway between now and October, but for the most part, the rate hike stories will be null and void.

Now, that won’t stop the ECB from letting everyone know its intentions. And, that fact alone will help the euro to build on this year’s 8.36% rise versus the dollar until the ECB does raise rates at their October meeting.

Don’t forget the Bank of England’s Monetary Policy Committee (MPC) and their quest to rid the country of inflation that on a headline basis (which is really the only basis I care about), is running at 2.4%. Again, this is higher than their ceiling target rate of 2%, though look for October to see another rate hike here.

Just when it looks like it was safe to get back into the emerging-markets waters, Iran throws a cat among the pigeons with their announcement of non-compliance with regard to their nuclear program. The emerging markets got taken to the woodshed yesterday. South African rands, Icelandic krona, Mexican pesos, and others on the list were all pushed down, as once again a flight to risk aversion was the play of the day. We’ll have to keep our eyes on this risk aversion play to see how long it lasts. Recall the last one lasted about three months. Ugh!

But, what’s not good for the emerging markets is good for gold. The Iran announcement really lit a fire under the shiny metal. Now, investors are waiting to see how serious this situation with Iran becomes. If it escalates to the strong rhetoric that was going back and forth two months ago, I think we’ll see gold really take off.

The commodities market, as measured by the CRB, had a nice bounce to it yesterday. According to my “chart friend,” it was a good thing. He had sent me a note yesterday that said if the CRB had fallen below the 329 level, it would have made a deep penetration through the 200-day moving average, which would not be a good thing. On the upside though, he pointed out that if the CRB could regain the 336.48 level this week, it would have avoided all the “bad stuff.” Well, the CRB stood at 336.75 as of the close yesterday. “Bad Stuff” avoided!

Speaking of “Bad Stuff,” Bill Bonner reported this yesterday in his Daily Reckoning newsletter: “In order to head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, has begun sending out letters to thousands of borrowers who have been making only the minimum payments on the company’s popular PayOption adjustable-rate mortgages.

“The letters explain that ‘this is an early message to alert you that, based on your current payment trends and potential future interest rate changes, the monthly payment you will be required to pay may increase significantly.'”

Ouch! That’s serious stuff, folks. The house payment for ARM loan holders could double! This stuff scares the bejeebers out of me.

Currencies today: A$ .7635, kiwi .6380, C$ .8950, euro 1.2850, sterling 1.8925, Swiss .8145, ISK 70.25, rand 7.11, krone 6.2575, SEK 7.1620, forint 215.50, zloty 3.0340, koruna 21.92, yen 116, baht 37.55, sing 1.5720, INR 46.50, China 7.9664, pesos 10.80, dollar index 84.97, silver $12.30, and gold $628.

That’s it for today. It was a pretty crazy day on the desk yesterday. It’s a good thing Christine was kind enough to go out and get me a big cup of Diet Coke in the afternoon! It’s time to let everyone know about the San Francisco Money Show. Chris, Frank and I will all be there, and I’ll be speaking twice! The best thing about the Money Show is that admission is FREE! So, go to and find the San Francisco Show, October 16-18 at the San Francisco Marriott. See you there! Have a great Tuesday!

Chuck Butler
August 22, 2006