Home resales to drag down the US economy...

Good day…The dollar continued to gain back some of its losses in what turned out to be a rather slow trading day to start the week. With no data to impact the markets, traders continued to take some profits off the table after last weeks rapid rise by the Euro, Pound Sterling, Aussie and New Zealand dollars. This morning we will see two measures of Consumer Confidence which are expected to show slight decreases in April and existing home sales which is expected to show a rather large 4.3% drop.

The National Association of Realtors will report home resales for March which probably fell to the lowest point in three months. As always, some will say the fall was simply weather related, but with subprime mortgage defaults rising the housing market is no where near bottom. Buyers continue to sit on the sidelines, and sellers have been reluctant to reduce prices. But with all of the mortgage resets which are expected over the next few months, sellers will likely be forced into reducing prices. The question now is just how low home prices will need to go before the bargain hunters start buying back into the market. Again, I don’t think this months expected 4.3% drop is the bottom and the falling housing market will have a major drag on the US economy.

None of the data due out this morning will be dollar positive, so we will likely see the two day rally by the US$ come to a screeching halt. I think this morning’s prices will look like good bargains next week.

As Chuck touched on yesterday, S&P raised Japan’s debt rating one level to AA, after the government cut borrowing and helped to generate a recovery in corporate earnings. In its report, S&P said the banking system has been restored to “good health” and the world’s second largest economy will grow at about 2 percent, twice the current rate. This increase in growth will probably cause inflation to accelerate, giving the central bank room to raise the lowest interest rates among major economies. The Bank of Japan will publish its nine board member’s projections for prices and economic growth in a semiannual outlook report this Friday, the same day it is set to announce the latest rate decision. Predictions of faster inflation and sustainable growth may bolster Governor Fukui’s case for raising interest rates, which he says are “very low” and need to reflect the economy’s strength. But with recent drops in core prices, we expect the BOJ to just leave rates unchanged later this week. With no change in rates expected, the markets will key on the wording of the semiannual outlook. The recent S&P upgrade simply confirms what we have been seeing over the past few months; the Japanese economy has recovered and will continue on a positive path. Interest rates will need to be increased sometime this summer.

The good news for the Japanese yen was bad news for the New Zealand and Australian dollars as both fell the most in three weeks against the yen on speculation funds will sell assets in those countries to buy Japanese investments. While the upgrade in ratings could potentially increase capital inflows back into Japan, interest rate differentials continue to favor the Aussie $ and kiwi. I still believe the carry trade will persist until the BOJ finally starts to raise interest rates, a decision which I believe is still a few months away. We continue to be cautiously optimistic for the kiwi and slightly more confident in the Aussie $.

Australia’s producer prices were expected to rise in the first quarter, but the strong AUD$ kept price of imports down and producer prices were unchanged. Yesterday the Aussie dollar fell after the report signaled inflation may be slowing even as the economy’s 16 year expansion gathers pace. The important Consumer Price index report was released overnight, and showed prices rose less than expected in the first quarter. This report will likely keep the Reserve Bank of Australia from raising borrowing costs at their meeting next week. Many currency traders had been pricing in expectations of the first increase in interest rates since November of last year, so we saw a rather quick pull back in the value of AUD$ back below .83 cents.

The Canadian dollar continued to rise yesterday trading near a five-month high on expectations the Bank of Canada will shift their bias toward a tighter monetary policy due to inflationary pressures. The rate announcement will occur today, and as Chuck stated yesterday, we believe rates will remain unchanged. Canada is still very dependent on the US and the slowdown which is occurring in this country has got to weigh on any decision by the BOC to raise rates. Commodity prices should continue to give the loonie some support, but don’t look for a dramatic move up from these levels. In fact, we may see the Canadian dollar give back the gains of last week if the BOC stance on interest rates remains neutral, which I believe will be the case.

India’s central bank left its benchmark overnight lending rate unchanged last night. The Reserve Bank of India said the five interest rate increases in the past year are enough to tame inflation. The rupee rose the most in more than a week as the central bank said the right things in the press release announcing the unchanged rate. Reserve Bank of India Governor Yaga Venugopal Reddy, who has raised the overnight lending rate nine times since October 2004, said his policies will aim for inflation of “close to 5 percent” in the fiscal year ending March 31. With a growing economy and inflation under control, the Indian rupee has been the world’s third best performer up 7.5% this year.

Currencies today: A$.8278, kiwi .7426, C$ .8926, euro 1.3582, sterling 1.9991, Swiss .8288, ISK 64.45, rand 7.0752, krone 5.9671, SEK 6.7690, forint 180.98, zloty 2.7893, koruna 20.65, yen 118.85, baht 32.45, sing 1.5148, HKD 7.8159, INR 41.16, China 7.7345, pesos 10.967, dollar index 81.71, Silver $14.045, and Gold $691.35

That’s it for today… Chuck is off to Las Vegas today and took Kristin along with him, so we will probably have a busy day on the desk. The calls keep coming in for the MarketSafe CDs; due to popular demand we are offering the Japanese REIT and Gold series again in May. Got to get to work now, hope everyone has a great Tuesday!

Chuck Butler — April 24, 2007

The Daily Reckoning