The Euro Hits 1.60!

Good day… And a Wonderful Wednesday to you! Well… I saw it; my colleagues on the trading desk saw it; I wonder if you saw it? Saw what, you ask? The euro (EUR) traded at 1.60 yesterday. Yes, indeedly do, it did! It has since backed off, and I’ll give you the skinny on that in a minute… But first, let’s just soak in the thought that the euro reached 1.60 yesterday.

OK… Well, after signing off yesterday morning, the euro began to move higher again, and when the Existing Home Sales data printed and showed more rot on the housing vine, the euro moved like it was shot out of a cannon! 1.60 and change… But then, seeing this move, an ECB member (Noyer) decided he had better do something before this move got out of control. So, he decided to try to explain his earlier comments that had led the markets to believe a rate hike from the European Central Bank (ECB) was in the cards.

In a Wall Street Journal interview later Tuesday, Mr. Noyer said markets had over interpreted his remarks as a hint about the direction in which rates might move. “Movements can go both ways,” he said. “I would never engage in a discussion about the future path of interest rates, simply because nobody knows. It would be dangerous to make predictions in either direction.”

And just as quickly as the euro shot over 1.60, it fell back… Sort of like the old saying, “fire and fall back!” But let’s not get off the euro train just yet… The single unit is still well into the 1.59 handle!

The Aussie dollar (AUD) reached a 24-year high overnight! The Aussie dollar is trading well into the 95-cent handle now, and looking quite perky. Inflation in Australia is still on the rise, leading traders to believe interest rates in Australia aren’t going lower, and maybe going higher! Here’s the skinny… Australian consumer inflation posted the highest level it had seen in seven years.

Someone sent me a note about the Aussie dollar yesterday, after I mentioned that I thought it had the makings of a parity level with the green/peachback (U.S. dollar). Being an astute Pfennig reader…he brought up the Aussie trade deficit. Here are my thoughts on that…

The Australian trade deficit HAD been narrowing in recent months, until the last report showed it widening again.

I’m not a fan of trade deficits…but the key to the Aussie, in my opinion, is China. As long as China continues to grow at a fast pace (+10% the past five years), the Aussie dollar will remain well bid, due to the exports to China.

I had one other thing to add… Don’t forget those commodity prices!

Well… The Bank of Canada (BOC) did cut rates, like I thought they would, 50 BPS yesterday. I think the BOC is so scared of what’s going on in the United States that they are just greasing the tracks for the Canadian economy response. In the statement following the rate cut, the BOC cited the slowdown in the United States… But… While the statement still points to further easing from the BOC, the language is less definitive than in the March statement suggesting that the Bank is shifting to a less aggressive stance. After a modest downgrade to the inflation forecasts, the Bank now views the risks as being balanced.

I just don’t think the BOC likes to see the loonie (CAD) trading around parity… But I doubt they cut rates just to deal the loonie a blow. The markets don’t seem to care either, as the loonie remains well bid above 99-cents. As I’ve said before, the push and pull of BOC rate cuts and commodity prices will keep the loonie range bound.

And I’m waiting for the Norges Bank announcement that should come through any time now… You may recall that yesterday I told you that Norway’s Central Bank, The Norges Bank, would hike rates 25 BPS today in an attempt to stop rising inflation.

So… The U.S. existing home sales came in about as expected, at -2%, bringing the annual rate of sales to 4.93 million. This was the March data. In February, annual sales were 5.03 million. When you look at this on a year on year basis, it looks even uglier – with annual sales down 19% from the previous year. In a strange sequence of events, the median house price rose in March to $200,700 from $195,600 in February.

There’s just no end in sight for the housing meltdown folks… No end in sight.

A reader sent me a story that appeared in the Washington Post, and written by George F. Will. In the article, George Will takes the Fed to the woodshed for coming to the aid of Bear Stearns. He had lots to say, but I had to cut it down to a couple of snippets that apply to us. Here’s George Will from the Washington Post…

“The Fed’s mission is to preserve the currency as a store of value by preventing inflation. Its duty is not to avoid a recession at all costs. The Fed should not try to produce this or that rate of economic growth or unemployment.”

And this: “A surge of inflation might mean the end of the world as we have known it. Twenty-six percent of the $9.4 trillion of U.S. debt is held by foreigners. Suppose they construe Fed policy as serving an unspoken (and unspeakable) U.S. interest in increasing inflation, which would amount to the slow devaluation – partial repudiation – of the nation’s debts. If foreign holders of U.S. Treasury notes start to sell them, interest rates will have to spike to attract the foreign money that enables Americans to consume more than they produce.

“Having maxed out many of their 1.4 billion credit cards, between 2001 and 2006 Americans tapped $1.2 trillion of their housing equity. Business Week reports that the middle-class debt-to-income ratio is now 141 percent, double that of 1983.”

Great stuff! You know, I can sit here and yell at the walls, and pound away on the keyboard and tell you this stuff over and over again, but when a guy as famous as George Will says it… People start to think… “Hey that Chuck guy, has been saying this all along, and he couldn’t get but the small number of people that read him to listen… Maybe we should do so!”

Yeah, maybe you should! (You should have seen the emphasis I put on that exclamation point as a pounded it on the keyboard!)

There’s no data to speak of today (mortgage applications). Tomorrow we’ll see the data cupboard emptied, with durable goods orders, new home sales, and weekly initial job claims… So, come back tomorrow, same Bat Time, Same Bat Channel!

Oh… And oil hit $119 yesterday… UGH! But… It has fallen back to $117.

Currencies today 4/23/08: A$ .9530, kiwi .8025, C$ .9935, euro 1.5965, sterling 1.9920, Swiss .9930, ISK 73.65, rand 7.65, krone 4.9550, SEK 5.8275, forint 157.60, zloty 2.1380, koruna 15.73, yen 103.10, baht 31.49, sing 1.3490, HKD 7.7950, INR 40.03, China 6.9825, pesos 10.47, BRL 1.6560, dollar index 71.40, Oil $117.70, Silver $17.56, and Gold… $915.64

That’s it for today… Did you like the St. Petersburg article I highlighted yesterday? Still no word from the Norges Bank, so I’ll tell you about that tomorrow… Well… More rain is on the way here… UGH! Pretty soon the farmers will be complaining that they couldn’t get their crops in; it’s that bad! Oh well… My little buddy, Alex, is supposed to have his first baseball game Friday night (they haven’t even had a practice!), I don’t have a warm and fuzzy about that game getting played. Time to go… I hope you have a Wonderful Wednesday!

Chuck Butler
April 23, 2008