The Loonie Hits Parity!

Good day… And a Marvelous Monday to you! It’s a Marvelous Monday for us at EverBank World Markets, because our long time colleague, Jennifer Mclean, returns from maternity leave today. I’m sure it will be a difficult day for Jen, after spending eight weeks at home with her newborn son, Drew… So… I’ll try to make certain things are as normal as possible for my good friend Jen.

Friday was a strange day, in that, for most of the day, we saw profit taking in euros (EUR)… But the last hour of the day saw the euro mount a rally… And close near the 1.41 level once more. There was no data on Friday, so we saw the currency markets just drift around for most of the day… Except for the Canadian loonie (CAD), which hit parity with the dollar – and for most of the day on Friday, traded above the greenback! WOW! Who’d a thunk it – back about five years ago, when the loonie was trading at 65-cents, that it would hit parity with the greenback? Or, last year when the government changed the taxation on the Royal Energy Trusts, which threw the loonie for a loop?

I got a huge kick out of the loonie hitting parity. For loonie lovers/holders, I’m sure they got one too! The Canadian Finance Minister held a press conference on Thursday night to discuss the loonie’s looming parity. I was half expecting some jawboning down of the currency to keep it from reaching parity… But I was wrong. Canadian Finance Minister Flaherty said late yesterday that he sees parity as a sign of Canada’s domestic economic strength, and largely U.S. dollar weakness, but added that he is growing increasingly worried about U.S. economic weakness.

Yes… Mr. Flaherty… I’m also very worried about U.S. economic weakness! We’ll get to see some data this week that will feed us information about the weak economy. Existing and new home sales print this week, along with the final picture of GDP, and the oh-so important personal income and outlays.

Of all these, the personal income and outlays data will pique my interest, as this will hopefully give us some information regarding spending habits, since, in August, the mortgage meltdown really set in. But that data doesn’t print until Friday… And the data cupboard is empty today.

Let’s not blow off the housing data… After a 50 BPS rate cut last week, and the dollar’s fall versus the euro, I think the housing data will be very important. We’ll want to see just how this all works its way into an already melting down housing sector. Oh, and I almost forgot, because I almost always disagree with this data… Consumer confidence will print this week too. If we don’t see a fall in consumer confidence this time, I’m going to throw the data in the same ‘stupid data’ bucket that CPI, now takes up residence in!

The euro did trade above 1.41 Thursday night, setting a new record, and as I said in my taped interview on Friday, I still expect the euro to trade to 1.45. But with the Fed Rate cut last Tuesday that thought may well prove to be a very conservative one! Last night, the euro set another new record of 1.4130!

My friend, Bill Bonner, had this to say about the euro/dollar in his Daily Reckoning on Friday…

“Yes, dear reader, the dollar seemed to go into freefall yesterday. Ben Bernanke did nothing to slow it down; it was he who had kicked it out of the airplane! And with the falling dollar went down Americans’ real wealth. Today, they can buy fewer things with their money; they are poorer. Just how poor are they? From the time the dollar traded for 88 cents against the euro until today, an American has lost nearly 60% of his purchasing power in Europe. In the gold market, he has lost even more; his dollars from ’99 will buy only one-third as much of the metal. Even his house didn’t keep up – it is only up about 100%. At the gas station…his purchasing power is similarly reduced. And now, the foreigners are buying up his assets at cut-rate prices.”

And on Friday… European Central Bank President, Trichet, had this to say about the euro… “The euro is an inspiring currency that helps build confidence.” Isn’t it nice to see the Head of the Central Bank saying nice things about his currency? And personally, I would have to agree with Trichet. Back when the euro was around 88-cents, and I changed my call on the euro (yes, I wasn’t always a fan of the euro!) I never imagined the euro would be trading at 1.41. Yes, it truly is “an inspiring currency!”

The dollar index, which is so heavily weighted with euros, fell 20 points short of its all time low of 78.19 on Friday.

On Friday, Fed Head Kohn spoke to a crowd about the recent rate cut. Let’s listen in to hear what he had to say… “The Fed cut was intended to ‘forestall’ negative fallout from the financial turmoil.” Isn’t it interesting that just two weeks earlier they were still pounding the drum about inflation, and strong job growth? These guys, and girls should be taken out back and told to find their own switch before they head to the woodshed! They are awful! And their leading our Central Bank? Geez Louise…

OK… I’ve got to go on to something else here or the blood pressure will begin to rise.

After reaching 28-year highs on Friday, gold backed off along with silver. One would expect this to take place given the size of the upward move and the speed at which it took to get to the 28-year highs. With the dollar continuing to get thrown to the wolves, gold should, by nature of its historical relationship with the dollar, get back to heading higher soon.

I read last night that there are some that believe the dollar has become oversold and a near term correction could be in the cards. Hmmmm… I’m torn between two lovers here. On one hand, a short-term correction would provide some better buying levels… But on the other hand, I’m greedy, and want to see more profits being made in currencies! I guess the short-term correction would be better in the long run, and since I harp, and harp about long term investments with currencies… I’ll take the correction… As long as it is as billed… Short-term!

Of course that doesn’t mean we’ll see one… Just pointing out, that it could take place!

As I talked about last week… The Fed cut rates 50 BPS and told the markets that it was OK to take on risk, because, shoot… If you get into to trouble… We’ll be here to bail you out! One form of risk taking is putting on carry trades… And brother has that taken place since last Wednesday! Japanese yen (JPY) is getting sold like funnel cakes at a state fair, and it all has to do with the carry trade.

Of course this means that the high yielding currencies get another round of buying, thus boosting their prices to levels that probably are fundamentally sound… But you don’t want to throw yourself under this bus. You don’t tug on Superman’s cape, you don’t spit into the wind, you don’t pull the mask off the old Lone Ranger and you don’t take the other side of the carry trade! Not now at least…

This on again, off again stuff with the carry trade reminds me of Wayne and Garth playing street hockey… “Game on!”

While I’m in Asia, I might as well take a jump over to China to see what’s happening there. Well… That was a wasted trip, because there’s nothing, absolutely nothing say it again, going on there… Except… Trumpets are blaring here… Duh, duh, duh duh! The renminbi (CNY) set a new record level versus the dollar since the peg was dropped in July of 2005. I told you all last year that the renminbi would trade to 7.50 within the year… And were there ever times when that didn’t look like it would ever happen! But… Here we are, a year later, and renminbi is trading 7.50 and change.

Getting there was a tough row to hoe… Or as Ty Keough said on Friday when I pointed out that renminbi had finally hit 7.50… Ty said getting there was like… Chinese water torture!

With inflation in China moving higher and higher each month, and the government finding that interest rate hikes alone are not slowing things down, they would be well served to allow the renminbi to appreciate faster… A strong currency can go a long way toward fighting inflation!

Currencies today: A$ .8690, kiwi .7460, C$ .9995, euro 1.4110, sterling 2.2060, Swiss .8540, ISK 62.25, rand 6.9925, krone 5.5110, SEK 6.5075, forint 177.25, zloty 2.6650, koruna 19.5410, yen 115, baht 31.80, sing 1.4990, HKD 7.7750, INR 49.77, China 7.51, pesos 10.95, dollar index 78.47, Silver $13.70, and Gold… $741

That’s it for today… Calls to the desk on Friday were by the truck load, yours truly actually had to log in and take some calls to relieve the pressure! The reaction of long time customers when they hear me on the phone is funny… “Is this really Chuck?” HAHAHAHA! Well, it looks like we’re going to have to suffer through a losing Rams football season too! UGH! At least my beloved Missouri Tigers continue to win! As I said at the top, Jen’s back today… YAHOO! Jen has worked with me since she got out of college… I won’t say how long ago that was! So, WELCOME BACK JEN! Let’s have a Marvelous Monday, eh? And how about a Wonderful Week!

Chuck Butler
September 24, 2007

The Daily Reckoning