Risk Aversion Disappears...

Good day…Welcome to May! It’s “May Day” in most of Europe today, so liquidity today will be somewhat hit and miss. May Day brings back memories of my youth… The days become more normal weather wise, and you know that you only have 1 more month of school!

Speaking of school, my little buddy Alex, was just awarded the President’s Academic Award… His reaction to this prestigious award? “I really wanted the President’s Physical Fitness Award!” Both his mother (my beautiful bride) and I received the Physical Fitness Award as youngsters… Of course you wouldn’t be able to tell that with me now! HAHAHAHAHAHA!

OK… The currency trading range was pretty limited yesterday, but the bias for a weaker dollar was quite evident, as the euro traded up close to Friday’s new record level VS the dollar. The news yesterday morning regarding China raising their reserve requirement ratio, has been swept under the rug, as calmer heads, came to their senses and realized they were being dolts… Or… Maybe they read the Pfennig, and said… “That Chuck is right, we are dolts!”

Even the Commodity Currencies of Australia, New Zealand, and Canada all recovered lost ground from the overnight “dolt trading”… You know… Last week, I told you that Reserve Bank of New Zealand (RBNZ) Gov. Bollard was the first Central Banker to complain about dollar weakness… I don’t take his words lightly… They were sort of like a line in the sand… But as I said last week, instead of raising interest rates to make your currency more attractive (if you don’t want it to be, like Bollard doesn’t), put the clamps on Money Supply! But nooooooooo! This creation of Money Supply by Central Banks / Treasuries is becoming like their “coke”… They need to go to a rehab center, and withdraw from this awful habit!

OK… Euro & sterling strength has brought the naysayers out of the walls again… It’s my feeling that both the European Central Bank (ECB) and the Bank of England (BOE) are going to be much more open to currency strength this time around, than they were in 2004… Both need all the help they can get from a strong currency to fight inflation, because both are on the Money Supply “coke” too! Therefore, you’ve not heard a peep from either Central Bank regarding currency strength to this point… And it’s my contention that we won’t hear it either….

Case in point is U.K. Manufacturing slowing last month… Yes, the strong sterling is to blame, but do you hear anyone at the BOE crying foul? No sirree…

Therefore, I’m taking the Governor off these two currencies, and have higher levels in my mind for each… Of course I can’t really say a level I think they are going to hit, because the regulators have taken the ruler to my hands! But let me say this, I’m looking for some larger gains VS the dollar…

This is different than a story I saw on the Bloomie this morning, where a fellow named Jeremy Stretch of Rabobank Groep, says, “the euro unlikely to rise beyond 1.37” And Bank of America says, “Euro’s rally to record may stall.”

This what makes a great two-way market folks… And is another reason I believe we’ll see much higher levels from the euro… Everyone isn’t on the same side of the boat yet…

I have to say that I’m surprised that the Risk Aversion campers didn’t come crawling out of the walls after the military coup in Turkey this past weekend. Risk Aversion just isn’t in the vocabulary of traders these days… In the past, news like we had from Turkey, would have sent the emerging markets into a tailspin… But as I turn on the currency screens this morning, I see that South Africa, and Iceland are not tail spinning… No, instead they are rallying… Shoot Rudy, I even see a 63 handle on Icelandic krona!

OK… The Personal Income and Spending data yesterday had some surprised in them… Personal Income was up .07%, which is good… However, Personal Spending was down VS last month, and only accounted for .03%… Has the U.S. Consumer finally seen the light of day? Hmmmm… If they are, it may be too late, as the Personal Saving Rate came in at -.8% in March… As usual, I’ll keep focusing on these reports, as they are quite telling…

For instance, the Personal Income increase could produce wage inflation… But was offset by the slower Personal Spending. For the past couple of years, the U.S. Consumer has been spending more than they make… Nice to see that turn around… That is if it’s not just a rogue month of data!

Canada posted a nice rebound in their GDP yesterday… February’s economy expanded at a stronger-than-expected 0.4% pace in February, double market forecasts for a 0.2% rise and faster than January’s 0.1% gain. That puts the last three months performance at a 3.6% annualized pace, this is a great rebound from the 2.4% rate in January and sub-2% pace in the final six months of 2006. And that… Led to the Canadian dollar / loonie rising to 90-cents for the first time in a month of Sundays!

Rising energy prices have gone a long way toward helping Canada’s economy rebound… Which is just like I told you last year… I filled up my gas tank the other day… Whew! Sometime soon I’m going to need a co-signor to fill up!

Today in the U.S. we’ll see March’s Pending Home Sales, which are expected to show more rot on the Housing Sector vine. We’ll also see the ISM (manufacturing) for April… Recall, that it is hanging around the 50-level, which determines whether Manufacturing is expanding or contracting. I follow this data closely, for it is a strong measure of whether we are in a recession, or if the Fed will raise rates, etc.

OK… So, if energy prices are really on the rise, and our wallets know that to be true… Then the currencies of the countries that produce energy should benefit, don’t you think? Well… you knew it wouldn’t take me long to try to put something together that would attempt to take advantage of rising energy prices…

Therefore… I am proud to announce our newest in the family of EverBank World Markets Currency Index CD’s…. The World Energy CD.

This new index has a $20,000 minimum, just like all our other Index CD’s, and will contain equal weighting of the following:

Pound sterling – for their Oil & Natural Gas from North Sea
Canadian dollars – for their Oil & Natural Gas, uranium, and don’t forget those tar sands!
Aussie dollars – for their coal and uranium…
Norwegian krone – for their Oil & Natural Gas

The simple interest rates will be 4.25% for both 3 and 6 months, or 4.32 and 4.30% APY respectively…

I love announcing new products!

Currencies today: A$ .8310, kiwi .7430, C$ .9020, euro 1.3650, sterling 2.005, Swiss .8280, ISK 63.90, rand 7.0450, krone 5.9420, SEK 6.6875, forint 182.10, zloty 2.7770, koruna 20.65, yen 119.50, baht 32.85, sing 1.52, HKD 7.8220, INR 41.18, China 7.7050, pesos 10.96, dollar index 81.45, Silver $13.45, and Gold… $679.16

That’s it for today… Well… I traveled last week… And guess what? I caught another head cold… I’m all over it with my Airborne, and vitamin C… But that does not give me a warm and fuzzy about 6 hours on planes tomorrow getting to Panama! But I’ll carry on, despite my conditions! Chris will have the conn on the Pfennig the rest of the week… And maybe on Monday… I’m playing that one by ear, given my travel plans… Time to go to work on presentations for this Conference! Nothing like starting last minute, eh? Have a great Tuesday and May Day!

Chuck Butler — May 01, 2007

The Daily Reckoning