Much-Needed Rest

Good day… Chuck’s hip didn’t get any better yesterday, and the doctor’s finally convinced him to take a break, so I will be writing the Pfennig again for a while to give Chuck some much-needed rest. We all kept telling him to slow down, and that he was overdoing it, but it’s not in Chuck’s nature to ‘take it easy’. The currency markets also look like they are taking a much-needed breather after ‘overdoing it’ the past week.

The U.S. dollar ticked up throughout most of the day yesterday, and continued its bounce back overnight. The European currencies gave back the most versus the dollar, but the greenback was strong across the board; but the numbers released yesterday did not cause the dollar’s strength, as the ISM manufacturing data declined more than expected and, the ISM prices paid number also came in below expectations. These numbers show a U.S. economy that is slowing, and justify calls for additional interest rate cuts by the FOMC. No, the currencies, like Chuck, are taking a much-needed breather. As Chuck explained yesterday, the euro (EUR) ‘gapped up’ over the weekend, and this pullback is simply the markets way of filling in the gaps the currencies missed on the way up.

Today we get sales figures for pending homes and vehicles. Both are expected to show additional weakness, with pending home sales expected to be down 2.1% over last month, while the total vehicle sales will also be down from last month. The pending home sales number illustrates our thoughts that the housing recession has further to run. The National Association of REALTORS’ index of signed purchase agreements will likely drop to the lowest level since record keeping began in 2001. This housing slump is far from over, and will extend well into 2008. As Chuck predicted last month, the FOMC will have to lower interest rates one or maybe two times before the end of the year to prevent housing from dragging the economy down further.

But even with the expectation of poor data here in the United States, I would expect the dollar to continue to gain in the short term. The drop by the dollar over the past few weeks has been too rapid, and a pullback is actually healthy for the currency markets. But don’t confuse this short-term pullback with the longer-term trend. The U.S. dollar is still in a slow downward spiral, and a few more rate cuts by the FOMC will keep the greenback falling.

One of our favorites, the Norwegian krone (NOK), fell more than any other major European currency, as investors increased bets that the central bank will have to shelve interest rate increases. The Norges Bank lifted its benchmark rate on September 26th and warned at that time that credit markets may cause it to hold off on additional rate increases. Earlier in the year, it forecast further increases by year-end and into mid 2008. Looking at their economy, and the continued strength of the energy markets, I would expect at least one more increase in rates before year-end. The Norwegian krone will continue to perform well over the next 6 to 12 months, so investors should take advantage of this pull back.

ECB President Jean-Claude Trichet joined European leaders in expressing concern that an appreciating euro will curb Europe’s exports and hinder economic growth. This jawboning is a common way for central bankers to ease the appreciation of their respective currencies; but the talk is no match for economic data. Trichet seemed to use excellent timing yesterday, as his words were backed up by a report which showed European producer price inflation eased in August to the lowest rate in three years. The Bank of England and ECB are both expected to leave interest rates unchanged on Thursday of this week so don’t look for the interest rate differentials to give currencies any major boost.

The Reserve Bank of Australia is also expected to leave rates unchanged at their meeting tomorrow. The Aussie dollar (AUD) fell from an 18-year high as currency traders felt the 8% gains of the past month were excessive. But as I said earlier, this pull back is just a short-term correction in what many now believe will be a steady run up to parity with the U.S. dollar. Yes, the Canadian dollar (CAD) has set the standard for commodity based currencies, and there are now many who believe the Aussie dollar will be the next currency to reach parity with the U.S dollar.

Fundamentals suggest the Aussie dollar will continue to rise in 2008. The economy is expected to expand by more than 4% next year and inflation will accelerate. Overseas shipments of raw materials, which contribute about 14% to Australia’s economy, helped drive 4.3% growth in the second quarter from a year earlier, the biggest increase in three years. According to a technical analyst at Goldman Sachs Group, a close above so-called resistance at 89.25 would target parity. But even at parity we wouldn’t be in uncharted territory, as it traded all the way up to almost $1.20 back in 1981. So another 12% move to parity doesn’t seem like such a long shot.

Currencies today: A$.8845, kiwi .7588, C$ 1.0014, euro 1.4146, sterling 2.0390, Swiss .8494, ISK 61.75, rand 6.9208, krone 5.4428, SEK 6.5194, forint 177.78, zloty 2.6644, koruna 19.4150, yen 115.82, baht 31.74, sing 1.4837, HKD 7.7642, INR 39.94, China 7.5073, pesos 10.9083, BRL 1.8094, dollar index .78224, Silver $13.29, and Gold… $731.78

That’s it for today… Any of you who were mad at themselves for missing out on this latest move will see some good buying opportunities over the next few days. Take advantage of this sell off to increase your positions or make that investment you have been putting off. Congratulations to the Rockies, who just squeaked into the playoffs last night after a somewhat questionable call at the plate. I hope everyone has a restful (that’s directed at you Chuck) and terrific Tuesday!!

Chris Gaffney
October 2, 2007