The Boy Who Cried Wolf

Good day…We saw the euro trade over 1.32 yesterday afternoon – the first time it has traded over 1.32 since April of 2005. At that time though, it was headed down. This time, it’s headed up! There has been some profit taking in the overnight session, but I can’t help but think that the euro’s probe over 1.32 will not be its last. In fact, you normally see this with currencies…probe a new figure, fall back, and form a strong base before heading higher once again.

So…I know you are wondering, “Just what caused the euro to move so strongly yesterday?” Ahhh grasshopper, I knew you would ask. I’m loaded for bear! First of all, we saw existing home sales jump higher, but at a cost. The median price on these home sales fell 3.5% on a year-over-year basis and with months supply remaining quite high, which tells me that further price declines are in order going forward. Last night on the network news, the reporter said that home prices had NEVER fallen by 3.5% over a year!

Oh, but don’t let that worry you. Remember Big Al Greenspan told us that the housing slump is over! HAHAHAHAHAHAHAHA! When will he learn to keep his trap shut? The old football coach used to say that it was far better to keep one’s mouth shut and allow people to believe you are a fool, than to open it and remove all doubt!

Next on the docket yesterday was durable goods. Recall last month when this number jumped through the roof and I told you it was due to some large airplane orders? Well this month’s durable goods fell on its face, falling 8.3%, and thus wiping out last month’s gain. However, the real meat and potatoes of this dish comes in the “Ex-Transportation,” and here we saw further rot on the vine, as orders fell 1.7 percent. And if you want to dig even deeper…those orders that exclude defense declined 6.4 percent.

Then the icing on the cake came from a consumer confidence number that weakened for the second consecutive month. Don’t know what’s going on there, unless the survey board is only surveying Pfennig Readers! Consumer confidence is finally heading in the right direction given all the rain clouds around us.

After all that, the euro began to rise…slowly and not out of line…but then along came a spider and sat down beside her. Big Ben Bernanke spoke…and once again he talked about inflation fears. But guess what? This talk only got traders lathered up, and at that time they took the euro over 1.32. All the other currencies followed, with pound sterling going above 1.95, and Swiss going over 83-cents.

Normally, this type of talk by Bernanke would have stirred the dollar bulls…but not this time. You don’t think?…Nah, that’s not happening already. Is it? OK, I’ll tell you what I’m thinking here. I think that Big Ben has cried wolf (with inflation fears) one too many times, and his credibility foundation is cracking. I know this seems like it could be too soon – he hasn’t even held the job for 12 months – but why else would the currencies soar, when Big Ben was talking about inflation fears?

The bigger question would be, why would traders and investors pay any attention to Fed Head inflation talk when they have left interest rates unchanged for the past three meetings?

Anyway…the Asians took the opportunity overnight to take profits. And so…the euro is back to 1.3160 this morning.

You know what I like about the trading in currencies since last week? There’s a ton of two-way trading. There are just as many people on the other side of the weak dollar fence as there are on the other side. That means, that we’ve still got a long way to go. The euro is not overbought in any sense of the imagination at this point, and there are still those that believe this is just a blip on the dollar’s radar screen. That’s fine with me. Just keep thinking that way.

Hey! Did you hear about the latest report from the IMF? Well…sit back, grab that cup of coffee and take this one in. The IMF staff has proposed a way to cover the IMF’s losses…sell their gold reserves. Now…with the IMF sitting on a huge pile of gold – as they are the third largest holder of gold behind the Fed Reserve and the Bundesbank (Germany’s Central Bank), they could easily afford to sell some of their holdings to use as deficit funding. However, they will receive stiff opposition from gold producing members and reformists, including the United States.

And…the IMF is required to hold substantial gold reserves at hand. So I doubt the IMF staff’s proposal will go too far…but it’s something you should be aware of.

Today, the data cupboard gives us the inflation data that the Fed really looks at – not that cooked, massaged, and trumped up CPI data! Personal Consumption is the Fed’s preferred inflation data, and its 3rd QTR results print today. The “experts” have forecast that Personal Consumption will have fallen to 2.8% from 3.1% in the previous quarter, and that Core PC will remain unchanged.

If the experts are bang on with these forecasts…the boy who cried wolf will look pretty silly once again, eh? Of course, should PC come in stronger than forecast, then his statements will be justified, and the dollar should rebound a bit more. So…this is a market-moving piece of data!

We’ll also see a preliminary on 3rd QTR GDP, the Fed’s Beige Book, and finally New Home Sales for October. I would venture to say that New Home Sales will probably not look too healthy.

This dollar weakness and the cold front that has brought winter to the west (and heading to St. Louis tonight) has oil perking again. A higher priced oil, will help underpin the Canadian dollar/loonie. However, it is my opinion that oil will have to get back to those loft levels of the summer before the loonie sees any real push.

Before I head to the Big Finish, I want to point out that Marshall Law has been lifted in Thailand, as things continue to get back to normal there. And with the lifting of Marshall Law, the Thai baht has really rallied…Good show!

Currencies today: A$ .7838, kiwi .6783, C$ .8795, euro 1.3160, sterling 1.95, Swiss .8280, ISK 68.90, rand 7.1350, krone 6.2725, SEK 6.91, forint 196, zloty 2.91, koruna 21.29, yen 116.25, baht 36.04, sing 1.5450, HKD 7.7750, INR 44.69, China 7.8313, pesos 11, dollar index 83.43, Silver $13.62, and Gold… $635.57

That’s it for today…Winter weather moves into our area tonight. I have to say that I have enjoyed this warm weather we’ve had the past week. A freak of nature, I know…but still quite enjoyable! Too bad I’m not heading to Phoenix today instead of next Monday! Time to hit the send button. Have a great Wired Wednesday!

Chuck Butler
November 29, 2006

The Daily Reckoning