Taking On Risk Again

Good day… And a Marvelous Monday to you! All my bags are packed, I’m ready to go, the taxi’s waiting, he’s blowing his horn… Yes, I’m off to Vancouver this morning. This becomes a labor of love for me… Especially today, with Chris taking off the same week I’m in Vancouver, I’m writing the Pfennig on my way to the airport! Graham Nash wrote a song about that… But I won’t go there after the intro! Oh, what the heck! Just a song before I go…

This will be short-n-sweet this morning, as I’ve got to get to the airport!

Friday saw the currencies range bound once again, as the data cupboard was empty. And… We didn’t have any major losses print, or we didn’t have any news at all about all the rot on the U.S. economy’s vine. The biggest mover was… Drum roll please… The Mexican peso (MXN)! Yes, the Mexican peso outperformed all other currencies last week, reaching a five-year high versus the dollar after the Mexican Central Bank raised interest rates 1/4% (25 BPS) to 8%, pushing the peso to its highest level versus the dollar since 2003!

I’ve always said that the thing that was wrong with the peso was that it didn’t pay an “insurance premium”. Look back to the turn of the century, and the peso was outperforming most currencies. Why? Because interest rates were greater than 10% and there was an “insurance premium” being paid on the peso! What did it need an insurance premium for? Ahhh, grasshopper, recall in the mid ’90s when the Mexicans just moved the decimal in the peso price? It’s a banana republic folks, and if you are going to invest there, you need a higher interest rate (insurance premium) to help protect you from the volatility… I personally don’t think the interest rate is high enough in pesos, yet… But I see what investors are doing. They are buying at cheaper levels in anticipation of higher rates.

What this also indicates to me is a renewed interest by investors to take risks. That risk taking can also be seen in a stronger Brazilian real (BRL), and a weaker Japanese yen (JPY). You know my position on this risk taking… It’s not warranted, not with all the “risk events” ready to break on the scene at a moment’s notice! Of course, that’s me…

The lack of regard by investors for “risk”, has really helped the South African rand (ZAR), which a couple of weeks ago, looked to be falling into a big black abyss… But, it’s back now… Just like it has done for the past six years… More lives than a cat!

You know, inflation has been a big pain for me, and I write about it all the time… But get this! Inflation in Zimbabwe is so bad… (That’s when you say, “How bad is it?”)… It’s so bad that they are going to introduce a new 100 billion dollar note, that’s only worth $125!

OK… Our inflation is bad, but not that darn bad!

The Reserve Bank of New Zealand (RBNZ) is going to meet this week, and I think they just might go ahead a cut rates at this meeting. Uh-Oh! The underlying fundamentals that have been swept under the rug as long as interest rates were high, my soon come front and center! That won’t be a good thing for kiwi (NZD)… So be careful!

Things have changed (or least the perception that things have changed) in Canada, has really helped the Canadian dollar/loonie (CAD) in the past 10 days. What’s changed, you might ask? Ahhh… It now seems as though the Bank of Canada is talking up the economy! Alrighty then, it’s about time!

Oil really sold off last week… That’s a good thing! It had a lot to do with it’s “overbought’ position… And the fact that President Bush dropped the White House ban on offshore drilling… But that sell-off might be short-lived. Iran has turned down requests to halt its nuclear program. This has ratcheted up the diplomatic tensions… And thus oil rebounds in price.

The Fed Reserve has raised their 2008 economic growth outlook… OK… If you read that and are wondering what they were smoking, then you’re with me! Just where is that growth going to come from? Oh, don’t get me started; I’ll get into trouble again!

One of the first pieces of data to counter the Fed’s revised economic outlook is the leading indicators, which will probably remain weak. I’ve said this before, the markets ignore this data when they shouldn’t! The leading indicators tell us what’s ahead… And months and months ago, if the markets had been paying attention or reading the Pfennig, they would have known that we would be in dire straights right now, because leading indicators told us so!

OK… Did you see the story on Friday regarding the European Central Bank (ECB)? Here’s the story that appeared in Market News International… “The European Central Bank is fiercely focused on fighting inflation despite a slowing Eurozone economy and is not excluding the option of another interest rate hike should price stability remain as elusive as in recent months, well-placed central banking sources have told Market News International.”

So… One would think that would keep the fire lit for another rate hike from the ECB… That could keep the euro (EUR) underpinned. The euro is a little stronger this morning on this type of talk, as it nears 1.59 once again. The euro gets traded on two sides you see… If the Eurozone does well, that’s good for the euro… And with it’s position as the “offset currency to the dollar”, if the dollar gets sold, that’s good for the euro too! Today, it looks as though traders have a bias to sell dollars.

Down Under overnight, the Aussie dollar (AUD) outperformed most currencies as it shrugged off a weaker than expected second quarter PPI. Domestic PPI was up 1.4% for the quarter, 6% for the year. There were thoughts that the Reserve Bank of Australia (RBA) would comment on something like this, to keep the Aussie dollar from gaining… But with little in the way of comments (none actually), I think it highlights the fact that the RBA is of little concern with the Aussie dollar’s strength… That gives traders a green light to push it higher!

And in the U.K. this morning, U.K. house prices had their biggest monthly drop since 2002! While that’s not a good thing for any homeowner wanting to sell, it is a good thing for those wanting to buy! And of course, this is the scenario the Bank of England (BOE) wanted to see all along when they were raising interest rates.

The data cupboard here in the United States is pretty bare this week, with only leading indicators today, existing home sales on Thursday, and durable goods with new home sales on Friday. Slim pickins there folks… Looks like the markets will take their direction from the earnings reports that keep coming in (Bank of America is today). If stocks slide, look for more dollar weakness.

OK… Time to head to the Big Finish… I’ve got a plane to catch!

Currencies today 7/21/08: A$ .9765, kiwi .7626, C$ .9965, euro 1.5890, sterling 1.9970, Swiss .98, ISK 78.60, rand 7.5825, krone 5.0770, SEK 5.95, forint 144.50, zloty 2.0280, koruna 14.5950, yen 106.60, baht 33.33, sing 1.3510, HKD 7.7980, INR 42.72, China 6.83, pesos 10.18, BRL 1.5885, dollar index 72.03, Oil $130.60, Silver $18.43, and Gold… $966.60

That’s it for today… Three talks Wednesday, one Thursday and one Friday before I head back home on Saturday… As I said before, I’m on vacation when I return, until I head to San Francisco for the Money Show. Chris will be back and taking over the Pfennig. Good luck to my little buddy, Alex, today, as he swims in his conference prelims with hopes of making it to the finals. He’ll do well. When it comes down to conference time, he takes it seriously! Went to a wedding reception Saturday night, saw some really old friends… Went to a barbecue yesterday, and saw newer friends! That little granddaughter of mine, Delaney Grace, sure is growing up fast. She’s walking all over the place, and really getting a personality of her own. She’ll turn 1 while I’m on vacation, so I’ll wish her a Happy First Birthday in the Pfennig now! The Dog Days of summer are setting in, the heat is oppressive, as usual, so it will be good to head to Vancouver for the week! Time to go! Hope you have a Marvelous Monday!

Chuck Butler
July 21, 2008