Turning Dovish

Good day… Welcome to October, and a Marvelous Monday! And… Welcome to euro (EUR) 1.42! That’s right! Friday, we saw the euro trade through the 1.42 level for the first time ever, of course, and didn’t stop at the 1.42 handle! WOW! A LARGE trading move for such a widely traded currency. The reason I say that is with it being so widely traded, you would normally see trading on both sides of the ledger, thus keeping the move higher or lower within in a range for a day… But not Friday… The euro “gapped” up.

OK… So now I bet your wondering, “Hey Chuck, what made the euro ‘gap up’?” Well… The data on Friday morning came in bad… But not really “that” bad. So… The bad data might have stirred the pot of dollar selling… But what got it all boiling? Well… It could have been a speech by the Fed Head from St. Louis, Poole. In the speech, Poole, who had previously been a “hawk”, turned dovish… He made a big point of noting that inflation is “moving in the right direction”… And that the job report last month made the Fed’s decision of a 50 BPS rate cut… Easy! Hmmm…

Wasn’t it the Fed in their previous meeting’s minutes that stated that job growth was strong? Were they blind to the problems that were quite evident, as I said at the time, or were they just not smart enough to see it? Hmmmm… That reminds me of a great line… About a guy that has a photographic memory… But just doesn’t have any film!

Anyway… The horse was out of the barn. The data was mildly bad, Poole was dovish, and the negative dollar sentiment toward the dollar was out in force! I won’t spend all day talking about the data on Friday… I’ll give it the Reader’s Digest treatment… Things got back to normal as personal spending was double personal income… And personal consumption showed that inflation is falling. Which should give the Fed more “wriggle room” toward more rate cuts.

And to complete the set on Friday… The U. of Michigan consumer confidence remained low in September.

So, there you have it! And it wasn’t just the euro taking liberties with the dollar… The Canadian dollar/loonie (CAD) jumped up over parity with the greenback, and remained there all day! And the other BIG commodity currency, Aussie dollars (AUD), pushed very close to 89-cents! WOW! And just when pound sterling (GBP) was getting so many bad reports written about it every day, it rallied to over 2.04!

Speaking of Canada… Their economy grew at a moderate pace in July – not slowing, but not heating up either. My friend, John Mauldin, used to write about how the U.S. economy was in the middle of what he called “muddle through”… And that was about the best description you could use to describe the U.S. economy. Well… The Canadian economy may be getting ready to experience the same.

However, I doubt that it will be a detriment to the loonie, as gold and oil prices continue to go higher. And the higher they go… The higher the loonie goes!

I had someone ask me a very good question the other day, “If the dollar keeps sinking, and the Asian countries with floating currencies, start to intervene… Why doesn’t G-7 do something about the weak dollar?”

Ahhh grasshopper… Because… The U.S. doesn’t want G-7 to “do something about it”. You see… The people in power totally understand that to save whatever manufacturing that still exists they need a weak dollar – period. So… G-7 may call and offer their help… But the U.S. will politely decline. And I believe this mentality will remain in place even if the euro goes to 1.50 versus the dollar!

One of my fave economists, Stephen Roach, recently wrote a great article about currencies, and namely the dollar… Here’s a snippet from the article that appeared in the NY Times last week…

“Why worry about a weaker dollar? The United States imported $2.2 trillion of goods and services in 2006. A sharp drop in the dollar makes those items considerably more expensive – the functional equivalent of a tax hike on consumers. It could also stoke fears of inflation – driving up long-term interest rates and putting more pressure on financial markets and the economy, exacerbating recession risks. Optimists may draw comfort from the vision of an export-led renewal arising from a more competitive dollar. Yet history is clear: no nation has ever devalued its way into prosperity.

“So far, the dollar’s weakness has not been a big deal. That may now be about to change. Relative to the rest of the world, the United States looks painfully subprime. So does its currency.”

Ooooh… That’s going to hurt! The dollar is subprime? OUCH!  But… The truth hurts, eh?

OK… The euro not only pushed past 1.42 on Friday, it got within spittin’ distance of 1.43… But don’t you feel like this has all gone to far, too fast? It sure does to me! And I’ll betcha the charts show the dollar oversold too! But, as I’ve said before, I’m not a chartist, nor do I play one on TV… And… I didn’t stay in a Holiday Inn Express last night!

Speaking of last night… I was sitting here in mucho pain. I have no idea what happened… I was simply sitting in the bleachers watching my little buddy’s football game on Saturday morning and when I got up… My leg didn’t come with me… The pain was incredible! I must have pinched a nerve in my leg or something. The swelling came next… So, I’m staying at home today… Too much pain and swelling to push it, and go to the office.

But getting back to the euro… The overnight market has taken some profits and pushed the euro from 1.4270 on Friday to just above 1.42 this morning… So maybe some of that bloom is being taken off the rose.

We get some data this week starting with today’s printing of the September ISM (manufacturing) Index, and ending with the Jobs Jamboree on Friday. In between we’ll see some stuff, but as the week moves along all focus will be on the Jobs Jamboree, due to last month’s printing of negative (-4K) jobs.

I’m told that there’s some real risk to the dollar with the Jobs Jamboree printing this Friday, in that this would be a scheduled “revision” of the data… Which, if I’m correct, would mean a negative revision… You know… Sooner or later, love is gonna get ya, no wait, sooner or later you’ve got to pay the piper, right? And when it comes down to actually counting those “ghost jobs” we just might see some bad numbers…

But that’s Friday… And today is Marvelous Monday! And on this Marvelous Monday, we’ve seen that the Japanese Tankan report, which measures the pulse of the economy, surprised the markets and held near a two-year high. The forward-looking outlook dropped though… However, Japanese yen (JPY) has rallied a bit on the data.

But, that’s about it… Things are really crazy in the currency markets these days… Those hazy, crazy, lazy days of summer are gone. Oh… One more thing… The dollar index has fallen below its all-time low of 78.19… I’m sure the boys and girls that watch this index closely are charting their next moves!

Currencies today; A$.8870, kiwi .7615, C$ 1.0050, euro 1.4220, sterling 2.0395, Swiss .8565, ISK 61.90, rand 6.8850, krone 5.4020, SEK 6.4610, forint 176.89, zloty 2.6510, koruna 18.3620, yen 115.50, baht 31.84, sing 1.48, HKD 7.7690, INR 39.84, China 7.5150, pesos 10.95, BRL 1.8330, dollar index .7790, Silver $13.80, and Gold… $750

That’s it for today… Bad day at red rock for the high ranked college football teams last Saturday, I’m sure glad my Missouri Tigers weren’t playing, not that they are high ranked! The baseball season ended Sunday for my beloved Cardinals who finished the season with only two regular players that started on opening day! The rest were injured! Oh well… Let the playoffs begin! My little buddy is sick today, so the two of us can console each other all day! I hope you have a Marvelous Monday and a Wonderful Week!

Chris Gaffney
October 1, 2007

The Daily Reckoning