The Negative Sentiment Returns

Good day… And a Happy Friday to one and all! A Happy Fabulous Friday! The end of a week where we saw things begin to get back to normal, that is, with the currencies. The return of the negative bias and sentiment for the dollar was the theme of the week, and as we head into the weekend, it probably won’t get a breather, as the latest new housing report is due to print later this morning.

The negative sentiment toward the dollar is really gearing up again. Goldman Sachs issued a new forecast for the currencies, and here you can really see the negative sentiment coming through. Here’s a snippet from the report:

“Markets have been extremely volatile in recent weeks and we have been reluctant to make forecast changes for that reason. But we now think that key aspects of the Dollar outlook are sufficiently clear for us to implement a forecast change. We are incorporating significant Dollar weakness on a 3-6 month horizon versus the Euro and the Yen, reflecting three key forces. First, we expect continued decoupling between activity in the US and the rest of the world, and this trend will continue to drive rate differentials lower from a Dollar perspective. Second, we think weakening credit markets in the US will be an important Dollar negative from a flow perspective. Third, we think mark-to-market losses on mortgage instruments are a bigger problem in the US than elsewhere at the macro level. For these reasons, we now forecast EUR/$ at 1.43 on a 3-6 month horizon, compared with 1.35 previously. For $/JPY we expect a move to 110 on a 3-6 month horizon, compared with 118 previously.”

You may ask yourself why this is happening again so quickly after the consolidation last week. Well… There are a few things that I think are pushing the envelope for a weaker dollar. And of course, I’m going to tell you what I think they are!

1. Housing… Subprime… Losses… Layoffs… And an overall uneasiness with the markets right now.

2. The rumors of a Fed rate cut (Fed funds rate) this fall. (Of course if you were in attendance at the last speech I gave in Panama, before going on leave, you would have heard me say then, that I believed the Fed would cut rates before winter)

3. A return of the ECB rate HIKE talk.

Yes, a couple of weeks ago, the markets and everyone else had finally come around to thinking that the European Central Bank (ECB) was going to hike rates again in September. And why not? At their last meeting, ECB President Trichet uttered the “magic word” that has, in the past, preceded every rate hike – “vigilant”.

But then we had the ECB get the ball rolling with the injecting of liquidity, and all bets were off the table! However, yesterday, the ECB issued a statement about how Trichet’s words were the ECB’s stance. In other words… They were elbowing the markets, and winking to them, while saying… Don’t forget, he used the word “vigilant”!

4. Chuck still thinks there will be a recession in the U.S. from this housing mess.

And you know there have been a few economists that agree with me on this… Yesterday, Countrywide’s CEO, Mozilo was asked if there would be a recession. Mozilo said: “I think so… I know I’ve been proven wrong so far, but I can’t believe that when you’re having a level of delinquencies, foreclosures – equity has disappeared, equity is gone, the tide has gone out – that this doesn’t have a material effect…on the psyches of the American people, and eventually on their wallet.”

Mozilo, went further to say, “the markets are in ‘one of the greatest panics I’ve ever seen in 55 years in financial services.'”

OK… Enough… Let’s go to some upbeat stuff before we head to the Big Finish, eh?

One of my fave currencies for the past two years remains the Norwegian krone (NOK). It has been a big reason the Viking CD, the Petrol CD, and the World Energy CD have been good performers versus the dollar. I keep saying that the Norges Bank (Norway’s Central Bank) is on track to keep hiking interest rates, as they lagged the Bank of England, and the ECB.

Well… Yesterday’s data should keep the Norges Bank on the rate hike tracks. Norwegian GDP rose 1.3% in the second quarter, which was higher than expectations of a 1.2% gain.  In addition, first quarter GDP was revised up to 1.6% from 1.4%.

Yes… That report should do the trick, and keep the Norges Bank on the rate hike tracks.

OH! One more thing. As I suspected, or feared really, the Bank of Japan (BOJ) did leave rates unchanged, which caused a few headaches for yen (JPY) holders. But I’m sticking to my guns on yen. Patience is required… And further weakness may be seen, giving us some more buying opportunities. But if Goldman Sachs’ forecast is correct, which by the way, it’s in line with my own forecast, then today’s levels do equal buying opportunities!

So, as I head to the Big Finish, the euro (EUR) has moved back above 1.36. Just shows to go you that you can’t keep a good currency down, long! Seriously though, this bounce back has been pretty impressive don’t you think? A Super Ball bounce, if you will! Remember Super Balls? As a youngster we used to buy a bag of those, go to the park and hit them with a bat. We would have competitions to see who could hit them the furthest! Wait… What the heck does that have to do with currencies, economies, or the euro? Ahhh, grasshopper, you must allow this one go off on tangents; his writing will be better because of it! HAHAHAHAHAHA!

You know… I’ve been writing this journal since 1992… I’m sure just a “few” tangents have been gone off to in that time!

As I said above, today we’ll see the color of the latest new home sales here in the United States and the fears that it will once again show another lower notch on the limbo poles has the dollar in the woodshed this morning, and if the report is bad, the dollar will remain there as we head into the weekend. You know… When you are at home and not working per se… Weekends just blend into the rest of the week. Hmmm, how about that for an uplifting (NOT!) thought of the day. Yes, Chuck writing in Jack Handy style! Oh No!

Currencies today: A$ .8215, kiwi .7130, C$ .9510, euro 1.3615, sterling 2.005, Swiss .8325, ISK 64.80, rand 7.2660, krone 5.8410, SEK 6.8850, forint 190, zloty 2.8150, koruna 20.3350, yen 115.80, baht 32.40, sing 1.5220, HKD 7.80, INR 41, China 7.5660, pesos 11.05, Silver $11.85, and Gold… $669.30

That’s it for today… I wonder what my latte’ buddy, Michelle is doing on Friday’s since I’ve been away from the office? I haven’t had a “frou-frou” cup of coffee in three months! I think I might just saddle up and go out and get me a nice hot mocha. Nah… Who am I kidding, that’s too much work for me to get in and out of a car these days! I told you I had probably put the kybosh on Albert Pujols’ home run streak yesterday… I’m sure he loves me! (NOT!) Oh well… Time to get my little buddy on his way to school. Talk to you on Monday… Have a Fabulous Friday, and Whirlwind Weekend!

Chuck Butler
August 24, 2007