New Zealand's Trade Deficit Shrinks!

Good day… Well… One step forward, one step back… No, I’m not giving cha-cha instructions! Instead, I’m talking about this back and forth trading in the currencies that’s been going on now for a week… Yesterday, after the euro had staged an overnight rally, the dollar seized the hammer and rallied the rest of the day… Hard to say where the euro’s rally went awry, but most observers are pointing toward the U.S. New Home Sales data that printed yesterday… Here’s the skinny…

April’s New homes Sales posted an unexpected increase in April, rising to 1.198 million units… The forecast was for a rise of 1.15 million units, which would have been a 6% fall from March’s total… Instead the markets were surprised by the strength of the April figure… However, something that no one talked about, except for me on the desk yesterday, and now in the Pfennig is that there was a substantial downward revision to March sales. The March figures were revised to a 1.142 million unit pace from the previously reported 1.213 million rate.

So… What if April’s “surprise” is revised down as much as March’s was? I just don’t get it… I say… Don’t report something until you know for sure what the number is… I recall that last month the also rallied when the March New Home Sales number was reported… Would it have rallied at all, if the “true” number was reported? I don’t think so Tim!

Here’s some more information from the report that should have been reported, but you won’t see it anywhere but here… Since peaking at 1.37 million units in July 2005, New Home Sales have trended lower and the inventory of new homes on the market has been rising. In April, the inventory of unsold homes rose to 565,000 which equals 5.8 months supply at the current sales pace. This indicates to me that Housing is coming under some extreme pressures from the 2 years of rate hikes… I would also add that the report showed that it is taking longer to get a New Home sold…

So… The dollar rallied against just about every currency, save three… The Mexican peso… The Canadian dollar… And the New Zealand dollar… The latter two had some very good news that brought about their moves VS the greenback, and I’ll talk about them…. NOW!

The Bank of Canada (BOC) did raise interest rates 25 BPS just as I had told you they would last week… Recall, that the loonie had gotten sold a bit, because observers and traders thought the BOC would bypass a rate cut at the next meeting… But, Noooooo! I didn’t believe it for a minute… And the BOC did come through for us…

However, at first glance, the Bank of Canada’s Gov. Dodge’s statement following the meeting seemed somewhat dovish, and the loonie headed south… But that soon turned around as the report was investigated a little further. While the BOC did suggest that they were done with rate hikes… They went on to say that they would continue to remain on close data watch to determine if any changes in policy will be required. And that brought everyone back to square one… Because the belief is that oil and natural gas prices haven’t seen their highs, and the pressures added to inflation will cause the BOC to come back to the rate table…

The New Zealand dollar / kiwi rallied very hard yesterday, all day and all night after it was reported that their Trade Deficit has shrunk in April, and looks now as if it has turned the corner… Recall, I had issued warnings on kiwi because their Current Account Deficit (a broader measure of Trade and investment) had risen to an unsustainable 8% of GDP! So… OK… Do I lift the warning? I don’t think so… This is one month’s data, and like I always say about one month’s data… One Swallow doesn’t make a summer!

However, this is very good news for kiwi, and we should just accept it for what it is!

There’s a story out this morning that has the currency markets moving around a bit… Reuters reported that Russia is telling everyone that they have increase their euro and Gold holdings as a part of their reserves… Russia seems to have bone to pick with the dollar, and takes a shot whenever they get the opportunity… I wonder if there’s more to the story there…

The dollar was briefly sold on that report, but remained in a range. Most of today’s focus is on the U.S. preliminary 1st QTR GDP report, which is expected to show an impressive 5.8% gain… But, again, as I told you yesterday, the key here should be, how much of that 5.8% is made up of Government spending? Subtract that from the total…

I have a contact, well actually I have two contacts at the Wall Street Journal, but one, brought a story that appeared in the WSJ a week ago to my attention yesterday, when I was ranting about the media not covering the John Snow talking down the dollar story…

The story appeared in the May 13th edition of the WSJ… And I’ll just give you a couple of snippets, as they tell it all… “The Bush administration is quietly acquiescing in the dollar’s recent slide, a potentially risky approach but one it hopes may gently narrow the yawning U.S. trade gap by realigning world currencies.

But backing currency depreciation can be tricky. The dollar’s slow slide could become a steep plunge if markets turn against it — particularly if investors fear that U.S. officials are trying to engineer a drop. That’s why the administration isn’t calling attention to its stance, except for attempts to press China and its neighbors to strengthen their currencies.”

There you go… Now I KNOW that someone else beside me thinks the U.S. is doing its best to talk down the dollar slowly… I find it strange that traders don’t take them up on their request! During my 15 years as a currency / foreign bond trader, I’ve always seen the markets oblige a country that sends out the message that they want their currency weaker!

So… If the GDP report is strong as forecast, then look for some additional dollar strength… But if the “experts” have been looking through their rose colored glasses too long, and have gone overboard with their forecast… I suspect traders will take the approach that the dollar’s gain has been “overdone” and a currency rally will break out!

Did you see what the kind people at the Daily Reckoning said yesterday when they were talking about their Vancouver Wealth Symposium? Check this out!

“You won’t want to miss the speeches from not only your favorite Agora Financial columnists, but also EverBank’s Chuck Butler, Steve Forbes…and many more.”


Currencies today: A$ .7570, kiwi .6395, C$ .8980, euro 1.2780, sterling 1.8730, Swiss .8220, ISK 72.80, rand 6.60, krone 6.12, forint 205.42, zloty 3.09, koruna 22.10 yen 112.20, baht 38.35, sing 1.5820, INR 45.87, China 8.0243, pesos 11.23, dollar index 84.96, Silver $12.70, and Gold… $647.50

That’s it for today… A had a visit from my little friend, Allison Road last night, what a cutie! Drawing close to the Memorial Day weekend… Let’s not forget why this is a national holiday… Because of the holiday weekend, tomorrow will be a light day, with little volume and no liquidation after noon time… So, we’ve got that going for us! Have a great Thursday!

Chuck Butler
May 25, 2006