IFO Pushes the Euro Lower

Good day… And a Tremendous Thursday to you! Well… Euro 1.60 (EUR) didn’t last long. More on that in a minute… But first we need to address the question of whether or not the euro hitting 1.60 was a flash in the pan. I certainly don’t think so, but it sure looks as though that could be the case given how the single unit has tumbled since reaching that level on Tuesday.

So… There were lots of reasons for the euro’s decline yesterday… But the infamous straw for the euro seemed to be the German Business Confidence report as measured by the think tank, IFO, this morning. German Business Confidence – which had surprised on the upside the past three months – came out softer than expected in April, falling from 104.8 in March to 102.4. That was quite a tumble in business confidence, and apparently wipes out the previous three months of stronger confidence. It’s a “what have you done for me lately” world out there folks.

So, is this the mini-sell off I’ve been talking about since January? Could be… I had a sneaky feeling yesterday, so I asked my chartist friend what he was seeing. Here’s what he had to say…

“As far as the euro, I’m not seeing anything too exciting. There are some signs that it may be overbought in the short term. The weekly chart is absolutely beautiful (movement from lower left to upper right), but it is also showing that we may be due for a slight pullback (buying opportunity.)”

Risk appetite is really taking flight again in the markets, but I just can’t get my arms around this willingness to take on risk. There are just too many “risk events” out there (like Bear Stearns) but, that’s just me, apparently, the markets don’t think this way. And with the risk appetite on the rise, the fortunes of Japanese yen (JPY) and Swiss francs (CHF) are on the opposite side of that rise.

Here we go again… Investors taking on risk like there’s no tomorrow. I sure hope, for them, it doesn’t end up in smoke… But I have to think that it will. My chartist friend also had this to say about risk right now…

“What I am more excited to share with you is what is going on in the whole Risk vs. Risk Aversion Arena. As you have pointed out many times, the stock market and the high yielding currencies represent Risk. The Yen and Franc represent Risk Aversion. So, what does that mean?

“If you look at the stock market (S&P 500), there is major overhead resistance in the 1380-1400 area. We are currently in our fourth retest of this 1380-1400 area and we appear to be failing yet again. Each failure drains the confidence levels of investors, so we could be setting up for some dramatic downside movement. If this happens, then Risk will be on the run, which will mean Risk Aversion (Yen and Francs) could see some much needed love. Both of these low yielders look to be primed for strong moves upward.”

Theswoop.net had this to say about what’s going on with the Fed, their collateral for loans, and everything else that I’ve yelled at the walls about recently…

“The issue here is uncertainty. Despite some signs that the worst of the banking crisis may be past, officials from the Treasury and Federal Reserve concede in private that, with regard to certain complex financial products and relationships, their knowledge is imperfect. ‘The truth is,’ one Treasury official told us, ‘we don’t have a clue.'”

Oh my gosh! Did shivers just go down your spine when you read that? “We don’t have a clue”? The old saying about the inmates have taken over the jailhouse, comes to mind right now.

Are you keeping on top of the news of the rationing of rice? Brazil suspended their rice exports to protect their supply for domestic demand. I saw on the TV yesterday, a news story flash across that Wal-Mart and Sam’s Club are rationing rice. Yesterday, Chicago rice futures hit a record price above $25 (per hundredweight). And in Thailand, the world’s top exporter of rice, the price surged to $1000 a ton.

Right here, right now, in the U.S. of A. we’re rationing rice. Can you believe that? There are underlying stories woven into this that I won’t get into, but for now… We have this to think about… We have rationing in the United States.

So… The dollar is on the rise… The only good thing about that right now is the fact that when the dollar rebounds, the price of oil goes down. This all looks as though it’s a house of cards to me… But, give the dollar it’s due… I’ll bet a fiddle of gold, against your soul, ’cause I think I’m better than you! I have no idea where that came from, but Charlie Daniels in the morning ain’t too shabby!

You know all this talk lately by G-7 ministers claiming that the markets didn’t understand their Forex message? Well… The Bank of Canada’s (BOC) Flaherty said yesterday that G-7 did NOT have discussions about currency intervention.

See! I told you so! I told you that the markets wouldn’t take G-7’s message seriously, unless there was a threat of coordinated intervention… And that, I just didn’t see coordinated intervention in the cards, not as long as the United States is still banging on China to let their currency gain versus the dollar. And now, we know! There was no discussion of intervention!

That’s an “all clear” horn for currency participants… I guess they are now waiting for the bargains to appear.

The Reserve Bank of New Zealand (RBNZ) left rates unchanged last night. I didn’t expect any movement, and quite frankly had forgotten all about the meeting. Good thing they didn’t spring any surprises on me/us, eh? Here’s RBNZ Governor Bollard…

“Economic activity has weakened more markedly than expected in the Bank’s March Monetary Policy Statement. There have been sharp falls in consumer and business sentiment, exacerbated by tighter credit conditions, a further decline in the housing market and weaker prospects for world growth. Financial market turbulence around the world continues to add to an uncertain economic environment. Further, the very dry summer is also weakening short-term growth prospects.

“However, the labor market is still strong and New Zealand’s key international commodity prices remain high. Government spending plans and the possibility of personal tax cuts can also be expected to limit the economic slowdown.”

That’s central bank parlance for “rates will remain unchanged at these high levels for some time to come so we can get inflation back to the 1-3% range it is required to be”.

So… Kiwi (NZD) will remain a high yielder. And as long as risk appetite is strong, the high yielders like kiwi, Iceland (ISK), and South Africa (ZAR) all get to bask in the warm glow of risk takers… But… As I’ve explained above, I don’t think this is anything to hang your strong currency hat on.

Norway’s Norges Bank did indeed hike rates 25 BPS, as I expected them to do, yesterday. But, this move didn’t help the krone (NOK) hold off the dollar’s move. But, when the dollar’s move gets turned around (that’s my opinion, and I certainly could be wrong), the higher interest rates, and wider interest rate differential in favor of the krone, will help propel it higher.

Today’s level in Norwegian krone certainly represents a much cheaper buying price than just two days ago… Wink and a nod.

Currencies today 4/24/08: A$ .9460, kiwi .7930, C$ .9850, euro 1.5755, sterling 1.9760, Swiss .9755, ISK 74.20, rand 7.7820, krone 5.0425, SEK 5.9025, forint 160.20, zloty 2.17, koruna 15.98, yen 103.50, baht 31.60, sing 1.3575, HKD 7.7925, INR 40.18, China 6.9875, pesos 10.48, BRL 1.6580, dollar index 72.25, Oil $116.04, Silver $17.01, and Gold… $898.48

That’s it for today… Almost didn’t make to work today, as I had a bad episode with my “bionic” leg and ankle yesterday. They swelled so much they looked like the Michelin Man’s leg… But I kept it up all night and stayed off it, and this morning it’s much better. No need to be alarmed, the doctors told me that swelling would be a problem for some time. Today is our Linda Lou’s birthday… Linda helped me while our little Christine was out last year on maternity leave. I don’t always know these birthdays, I just happened to hear “talk” yesterday! Time to go… Hope your Thursday is tremendous!

Chuck Butler
April 24, 2008

The Daily Reckoning