More Hawkish ECB Talk!

Good day… And a Terrific Tuesday to you! Front and Center this morning, we have the euro (EUR) attempting to reach 1.60 again. I know I gave the euro the Chuck Kiss of Death last week when I sang the praises of it reaching 1.60, so I’ll just let it fly under the radar this morning.

Yesterday when I signed off, the euro was pushing the envelope of 1.59. Later in the morning, ECB member Weber sounded off on inflation. Let’s listen in…


Now, that’s two consecutive days of ECB members talking hawkish… First Liebscher and now Weber, with Weber’s comments sounding more and more like there’s another rate hike up the ECB’s sleeve. At best, the ECB doesn’t sound like they are ready to CUT rates any time soon… So, the euro gets to hold on to its positive interest rate differential to the dollar… And so… The single unit heads higher.

You know… I really didn’t like the Fed bailout of Bear Stearns; I’ve chronicled that position here in the Pfennig… But the markets took the bait, hook, line and sinker… And for now, at least, there’s more calm in the markets and probably more since last August. I’ll tell you why I think that…

The stock market, seems to believe better times are ahead, and that risk aversion is no longer needed… (Yes, I’m aware that it sold off yesterday)… And then there was this story that flashed across the screen this morning… Interest in placing puts on Aussie dollars has dropped to the lowest level since last August. For those of you new to class… When someone places a put on an asset, they believe it will fall in price… They get to sell it at the price they placed the put on, and everyone’s happy, the peasants dance in the streets, and Marie Antoinette gets to eat cake.

Back to reality… So… With investors/traders no longer thinking that the Aussie dollar (AUD) had reached its high… Guess what? The Aussie dollar is going higher! Amazing! Truly amazing how that works! HAHAHAHAHA! And remember it was months ago, that I said that the Aussie dollar looked like it would reach parity, along with Swiss francs? Well, the Swiss franc (CHF) did it, and so can Aussie dollars!

However, the road to parity is full of potholes, much like the St. Louis roads after an awful winter! And the biggest pothole is the one that contains risk events. You know, risk events, like Bear Stearns… I’m still a believer of the thought that there will be more risk events this year. Look at these earnings that the Big Boys have been posting in the last week… Yesterday, Bank of America posted a gain in the last quarter, but it was down 77% from the previous quarter! I sure wouldn’t want to be the one responsible for explainin’ that to the shareholders!

The Wall Street Journal is reporting this morning that loan losses pose a potentially larger threat to more banks than the losses taken so far.

Today, we’ll see the color of the latest Existing Home Sales report here in the United States. The experts tell us that we should expect to see more rot on the vine here, with sales forecast to drop 2.3% to the $4.92 million annual rate, the lowest level since 1999. This is a pothole, and it could become an even bigger pothole, should the drop exceed the forecast. This housing meltdown has been something to behold… Most of the younger crowd has never seen this before; they were always told that their house would keep going up in value.

The Bank of Canada (BOC) meets today, and I’m expecting a large cut from them to keep pace with the U.S. Federal Reserve – 50 BPS, which should put some deep tissue pressure on the Canadian dollar/loonie (CAD). This is what I’ve been talking about with regard to the loonie… Downward pressure applied from the BOC and their rate cuts, and upward pressure applied from commodity prices… Today, it looks like the rate cuts will have the upper hand, eh?

About a month or so ago, Goldman Sachs forecast a rate cut in Japan, which really hurt the yen (JPY) when it was trading around 100. Goldman Sachs has abandoned that call now… Hmmm… This sounds fishy to me. You don’t think that the Bank of Japan (BOJ) talked to Goldman… Nah… That’s too far fetched for even my conspiracy-laden mind! But maybe a screenwriter would like to make a movie from my thoughts? HA!

It will be interesting to see if Japanese yen can get back on the rally horse now… Of course we need for the carry trades to stop to see real gains here. And, as I said above, I still believe that we’ll see more risk events this year, which should put a real damper on the carry traders.

Two of my fave currencies keep pushin’, keep pushin’, keep pushin’ onnnnnn… There you go, a little REO Speed wagon to get your blood going this morning! OK, now back to the currencies of Norway (NOK) and Sweden (SEK)… Have you seen these two lately? WOW! The moves this year have been something to behold.

I have an acquaintance that’s an oil man. Every time I see him, he’s smiling like a Cheshire Cat… Well, I’m sure the oil people in Norway are smiling the same way! With oil hitting $117 and change yesterday, oil revenues are pouring into Norway, thus padding their positive balance of payments and removing their need for foreign capital. Notice, that we’ve not discussed any Norwegian Banks or Swedish Banks involved in the subprime write-downs?

Norway’s Norges Bank meets tomorrow, and I’m expecting the Norges Bank to hike rates 25 BPS tomorrow. This should help propel the krone even higher.

As I’ve told people for many years… When evaluating a currency, first look at its position in the world… Then think of the currency as the stock of that country, and evaluate it like you do a stock. What’s the yield? What’s the flow of investments? What’s the balance sheet look like? What’s the leadership like? Etc. etc. When doing so, you’ll find that it makes it an easier decision for you… And when you do this for Norway, or Sweden, you’ll find stocks that you would probably want in your investment portfolio.

Wouldn’t you know it? I come in, see the euro pushing the envelope of 1.60, and by the time I’m ready to go the Big Finish, it sells off, making what I wrote earlier look like I’m delirious! Oh well… I carry on, despite my challenges!

I’ll finish with the thought that what I explained about two years ago, regarding the Asian currencies is really taking hold these days. Japan, China, Singapore… All are seeing their currencies strengthen versus the dollar, and that’s good, and about time too!

You see… Inflation is really getting to these economies, and at least they understand that a stronger currency can help fight inflation. Ahhh… They Got The Inflation Memo!

Currencies today 4/22/08: A$ .9440, kiwi .7965, C$ .9930, euro 1.5940, sterling 1.9880, Swiss .9920, ISK 74.20, rand 7.6810, krone 4.9730, SEK 5.87, forint 158, zloty 2.14, koruna 15.72, yen 103.20, baht 31.48, sing 1.3510, HKD 7.7955, INR 39.95, China 6.9880, pesos 10.51, BRL 1.6640, Oil $116, Silver $17.61, and Gold… $921.45

That’s it for today… Hey! Did you see the nice story in the St. Petersburg Times this past weekend? The writer, Helen Huntley, came to see me when I was in St. Pete, and wrote a great piece! Now… The photo is a little old… I haven’t worn that tie in two years! Anyway… Great stuff! In case you missed it… Here’s the link…

The rain is back today. I’m guessing the water table here in the Mid-West is doing quite nicely! Time to eat my apple! I sure hope you have a Terrific Tuesday!

Chuck Butler
April 22, 2008

The Daily Reckoning