The Dollar Bounces on Bad Jobs Data

Good day… And a Marvelous Monday to you! What a Super Bowl, eh? The beginning was good… The middle was boring… But the end was great! I’m sure Giants fans are excited. And knowing New Yorkers, they will be boasting for some time to come! Good for them!

Well… What a wild day of trading on Friday after the Jobs Jamboree printed. The euro (EUR) was flying like a bird in the sky, and closing in on its all time high of 1.4965, when something happened. A lot of people will say that the plunge protection team stepped in to protect the dollar from this free fall… I think it was probably, a technical level indicating profit taking… But then, the turn-around came so quick, and so hard, that you can see how the thought of “under the table stuff” could have happened.

If you are a “believer” of “under the table stuff” you could easily point to how quickly the euro fell, after awful U.S. data. And you could say, “The Fed doesn’t mind seeing the dollar weaken… They just don’t want to see it fall so quickly.” You wouldn’t get any argument out of me on that statement.

For the record, January’s Job creation was a negative 17K. That’s right, we lost jobs in January. Now, December’s awful number was revised up a bit, but the rot is on the vine here, and it’s being exposed.

The ISM manufacturing index came in a bit stronger than expected, right at 50. But before we close the books on this, I’ll bet a dollar to a Krispy Kreme that this number gets revised downward next month.

It will take more than some bad U.S. data to get the euro past 1.50. For instance, we’ll see the European Central Bank (ECB), and Bank of England (BOE) meet this week. Once again, I expect the BOE to cut rates, while I expect the ECB to keep rates unchanged. The ECB press conference following the meeting will be very important to the euro’s direction this week.

Aussie (AUD) and New Zealand (NZD) dollars ended the week on a high note, and harmonizes with their high yield. Even with commodity prices falling at the end of last week, these two put in good performances. High yield is what it’s all about here folks.

And… Guess who’s coming to dinner? The Reserve Bank of Australia (RBA) meets this week to discuss rates. I previously said that I expected the RBA to hike rates at their next meeting, and this is it! The expectations of a rate hike have dimmed a bit here but I still think the RBA will do what’s right to fight inflation in their country. We’ll see, eh?

Speaking of commodities, gold was down over $20 on Friday. That’s a smack in the face, eh? Well… Again… You’ve got to realize how fast gold moved last week through one record after another. There had to be some profit taking, etc. But now, a nice base has been made for gold’s next move up. At least that’s how I see it!

I heard an interview this weekend with a guy that believes the United States has averted a recession because of the Fed’s rate cuts and strong money supply. Hmmm, I wonder if this guy ever did any research on Japan’s situation in the ’90s?

Jimmy Rogers was back on the tube this weekend, saying, “The guy (Bernanke) doesn’t know what he’s doing.” Of course Jim Rogers has not been a fan of Big Ben’s and then when he turns his back on inflation to help out financial institutions… Well, he leaves himself open for attack… Which is what I’ve done… And of course, Jim Rogers too!

How about those Asian currencies? Yes, they got caught up in the dollar’s bounce on Friday, and weakened from Thursday’s figures, but all in all they put in a nice performance week. They have two days of trading this week, before they close for a week… Lunar New Year holidays stretch out for over a week… Must be nice!

OK, out of the starter blocks this morning we see that European Producer Price Inflation (pipeline inflation, PPI) jumped in December to the fastest pace in a year, increasing 4.3%. Of course, most of that jump was tied to oil prices… You may recall that over the years I’ve told you time and time again that Europe is very dependent on oil (like the United States) and their inflation numbers are very sensitive to rising oil prices. What have we had for the past couple of years? Rising oil prices, ding, ding, ding, we have a winner! Johnny, show them what they’ve won!

Seriously though, this is the main reason the ECB can’t entertain thoughts of cutting interest rates right now. When the money supply spigot gets turned down… When oil prices stop being a “shock” to the economy in Europe… We’ll see inflation fall, and interest rates cut… Not a minute before. I will serve no rate cut before its time. (That’s ECB President, Trichet sounding like Julio Gallo!)

And while traipsing around Europe… European investor confidence took another hit, marking eight straight months of falling investor confidence. Most of the latest fall in confidence came as a result of the prospects of a U.S. recession. This data has pushed the euro down a bit from overnight levels.

The data cupboard yields a piece of data each day… But none have the home run power that last week’s data had… Singles hitters each day. The event risk switches over to Europe for the ECB and BOE rate meeting this week.

Long ago, in a distant galaxy, I used to trade foreign bonds along with currency at Mark Twain Bank. We held a very large customer position in New Zealand government bonds (high yield, great currency). At the invitation of one of our bond partners in New Zealand, I flew to Los Angeles to meet the then Governor of the Reserve Bank of New Zealand, Don Brash. I had my picture taken with him, and still keep it in my desk drawer. Don Brash, gave me his business card, and told me to call him whenever I had a question regarding policy (remember, we held a very large bond position)… And believe it or not, when I called him, he took my call!

He was a “real” central banker… Kept inflation between 1-2%, maintained price stability, and kept the economic boat out to sea for the New Zealand economy. The reason I bring this all up, is that I re-established contact with Mr. Brash last Friday!

Wow! And he remembered me! This is going to be fun, picking his brain on stuff, as we go along.

Currencies today 2/4/09: A$ .9070, kiwi .7950, C$ 1.0027, euro 1.4820, sterling 1.9770, Swiss .9175, ISK 64.75, rand 7.4010, krone 5.4250, SEK 6.35, forint 173.23, zloty 2.4080, koruna 17.43, yen 106.70, baht 31.12, sing 1.4145, HKD 7.80, INR 39.23, China 7.1910, pesos 10.80, BRL 1.7475, dollar index 75.45, Oil $88.64, Silver $16.64, and Gold…. $902.80

That’s it for today… Friday’s snow was quite an event here. But by drive home time, the roads were cleared, and everyone’s focus shifted to the St. Louis version of Mardi Gras. I used to go and celebrate, but that’s a “young man’s game”. Eight years ago, I wrote about how the St. Louis Rams were Super Bowl Champions. Never thought I would see that day, but I did! I know the feeling that New Yorkers are feeling this morning. It’s a great feeling! I’m on the road again tomorrow, as Chris Gaffney, Frank Trotter, and I head down to the Orlando Money Show… Hope to see you there! And… I hope you have a Marvelous Monday, and Wonderful Week!

Chuck Butler
February 4, 2008

The Daily Reckoning