Sour Data Sends the Dollar Down

Good day… And a Terrific Tuesday to you! How was your President’s Day three-day holiday weekend? Not much going on here… It’s cold… But in my world… All the stars are in alignment, the karma is flowing, and things are as right as rain. Why? Because baseball’s spring training has begun! YAHOO! It’s so nice to pick up the newspaper and see reports on baseball again! Happy days are here again.

Well… Friday was much of the same as it was all week, with the dollar losing ground, and the data reports confirming our current economic recession. To recap the week, we had Bernanke sending up smoke signals warning those who would listen that we had better batten down the hatches. We had an FGIC downgrade, a Warren Buffet offer to take over $800 billion of Municipal Bond guarantees from MBIA, Ambac, and FGIC.

We had Treasury Secretary Paulson finally coming clean on subprime, and noting that the “worst is just beginning” for subprime borrowers. In addition, we had two consumer confidence indicators both collapse to lows last observed in the 1990’s. So… There you go! The week in a nutshell… And the dollar had its worst performance week of the year.

With Warren Buffett telling the markets “it’s OK to take risk again” the carry trade came back with a vengeance. Aussie (AUD), Kiwi (NZD), Iceland (ISK), and Brazil (BRL) all got a huge gust of wind in their collective sails.

One of the reasons the Aussie dollar took to the skies was the fact that the Reserve Bank of Australia (RBA) admitted that they had come very close to authorizing a 50 BPS rate hike last week before settling for 25 BPS. That news simply told the markets that there would be more rate hikes in the future.

There was news from the United Kingdom this weekend that they plan to nationalize the troubled mortgage lender, Northern Rock… A sign of things to come all over the world… But unfortunately, most of it will probably happen here in the United States. This news has been a bummer for pound sterling (GBP), as it lost the ground it had worked so hard to gain last week.

This dollar/pound cross has spilled over to the other dollar/whatever crosses… Especially the euro (EUR)… But I don’t expect this to be more than a tempest in a teacup for the euro.

The data cupboard here in the United States will only be open for business three days this week. Monday, of course was a holiday, and Friday, there are no data releases scheduled! Today’s data is not even considered “second tier”… Tomorrow’s though, jumps right to the head of the class with the latest on housing starts. We’ll also see the stupid government CPI (inflation) report.

Speaking of data… Did you hear that the government has decided to shut down its popular economic indicators site “due to budgetary constraints?” This news comes to us from John Williams, he of fame… “No data series are being discontinued, but Uncle Sam is making it more difficult for the public to access the data easily, and at the same time that a politically uncomfortable recessionary inflation is starting to surface in official reporting.”

So… Not that this has anything to do with currencies or economies… But the news overnight has Fidel Castro stepping down as the leader of Cuba after 49 years in “the seat”.

OK… There’s a story on the Bloomie this morning regarding The Fed’s lower rates pressuring China to strengthen the renminbi (CNY). So, obviously, I had to stop to read it, because it piqued my interest. The more I read it, the more I liked what I read! Here’s a couple of snippets…

“According to money mangers at Pacific Investment Management, Pictet & Cie, Switzerland’s largest closely held private bank, and Merrill Lynch…” (I guess they forgot that Chuck Butler of EverBank has said this for some time now)… “nine of the 10 best-performing currencies against the dollar in 2008 will come from Asia.”

“To keep their currencies from appreciating too fast and hurting exporters, Asian Central Bank[s] have bought U.S. dollars, accumulating $4 Trillion in foreign exchange reserves. The downside to intervention (to keep Asian currencies from getting stronger), is that it increases the supply of the local currency, which tends to fuel inflation. To prevent this from happening, Asian Central Banks typically sell bonds to remove these funds from the economy.

“That option has become more costly because interest on the debt is paid with income from its reserves, which are invested in U.S. dollar-denominated securities. China pays 1.31% more on its six-month bills than it earns on similar-maturity Treasuries following the Fed Reserves 5 rate cuts since September.”

So… In other words… Chuck’s words to be exact… The Asian Central Banks have no other choice but to allow a quicker strengthening of their currencies. I’m all for that!

Sorry about all the “mumbo-jumbo” explaining it… But these things are better left to be explained by the “professionals”.

And… After all that… China posted an accelerated inflation rate of 7.1% last night! That’s crazy stuff… But… Probably a lot closer to reality than the less than 4% inflation rate the U.S. tries to shove down our throats!

So… As I look out on the currency screen this morning, I see euros trading back above 1.47, they spent most of yesterday around 1.4650… The Aussie dollar has gone back above 92-cents, a level it last saw five months ago! The only currency that’s not rallying this morning is pound sterling, which will have to endure some daily beatings until the Northern Rock thing dissipates.

Gold and silver took a back seat to platinum last week. Platinum soared higher and higher on fears of supply shortages. We don’t deal in platinum, but it sure looks like we should have been, eh?

Have you followed the problems that the Municipal (Muni) Bonds have come across in the past week? My friend, John Mauldin, did a great job explaining the problem in his weekly newsletter from Friday… The problem in broad brush strokes is that Auction Rate Bonds, are long-term bonds on which the interest resets after auctions held every 7, 28, or 35 days. The bonds go to the bidder willing to accept the lowest rate, or remain with the current holders and pay the maximum, or so-called penalty, rate if there are no bidders.

So… With today’s credit crunch going on… The interest rates on these Auction Rate Bonds have soared. The University of Pittsburgh Medical Center saw their interest expenses go up as much as $500,000 a week in recent auctions… OUCH! You see… Banks that normally support this market have stepped away, and now the credit-worthiness (with the bond insurers under siege) is being questioned. And we all know what happens to your interest rate when your credit-worthiness is in question!

So… With the banks stepping away from this arena… It leaves the “loan sharks”. Somebody better do something quick before a lot of good facilities close their doors because they can’t afford the borrowing costs!

Whew! That’s some scary stuff right there folks… Scary stuff!

Currencies today: A$ .9215, kiwi .7995, C$ .9950, euro 1.4715, sterling 1.9460, Swiss .9125, ISK 66.75, rand 7.6380, krone 5.3525, SEK 6.3360, forint 179, zloty 2.4290, koruna 17.20, yen 107.50, baht 31.68, sing 1.4120, HKD 7.80, INR 39.90, China 7.1550, pesos 10.74, BRL 1.7340, dollar index 76, Oil $97.20, Silver $17.28, and Gold… $917.20

That’s it for today… My little buddy Alex, is learning to play the guitar, and quite frankly, he’s gotten pretty darn good! I was showing him how to play the old Santo & Johnny song Sleepwalk yesterday, and he picked it up in a NY minute! WOW! I think back to when I was learning to play the guitar, it would have taken me a week to learn that song!

I spent a long three hours getting my updated scan done yesterday… The actual scan only takes about 15 minutes… The rest of the time is sitting and waiting… And waiting… But! Hopefully this says I’m clean again, and I can move that much closer to getting rid of cancer meds, etc. It’s cold here… I was saying the other day to anyone that would listen to me that our Februarys have been harsher weather than our Januarys in the past five years… Maybe the months need to be adjusted! Time to hit the send button… I hope you have a Terrific Tuesday!

Chuck Butler
February 19, 2008

The Daily Reckoning