U.S. Dollar Benefits from the Swine Flu

Good day… And welcome to another week. Chuck headed off to Bermuda on Saturday, so you are all stuck with me for the whole week. Both he and Frank will be giving presentations at the Sovereign Society’s Total Wealth Symposium – Frank representing EverBank and Chuck representing his paid newsletter, Currency Capitalist. Frank and Chuck probably log more miles than anyone else in the company, and while it may sound like fun to travel to all of the exotic locals… Travel is tough. And with the big news over the weekend, airplanes and airports are the last places I would want to be right now.

The story that is dominating the trading screens this morning is the outbreak of swine flu in Mexico, and the fear of it spreading into a pandemic. The flu has jumped off of the North American Continent and is now a global concern, with cases being reported as far away as New Zealand. President Obama’s administration has declared a public health emergency, with cases now being reported in several U.S. states. Hopefully health officials will be able to keep the virus somewhat contained, and this won’t become as predominant as the SARS outbreak.

As most would predict, the Mexican peso (MXN) has dropped significantly, moving down almost 3% versus the U.S. dollar overnight. Fears of a global pandemic have driven investors out of the high yielding currencies of New Zealand (NZD), Australia (AUD), and Brazil (BRL). Risk aversion seems to be back in vogue, with investors moving funds back into U.S. Treasuries and the Japanese yen (JPY).

I read a story over the weekend that suggested the U.S. dollar would continue to strengthen no matter what happens in the global economy. The story said that the U.S. dollar would increase if the administration’s efforts to stimulate our economy worked, and that we would lead the rest of the globe into the recovery phase. On the other hand, it said that the U.S. dollar would also strengthen if the global economy continued to weaken, as investors would purchase U.S. Treasuries as a safe haven.

While that is what has been happening lately, I don’t agree that the U.S. dollar will win no matter what happens. China and Europe both seem to be on the path toward recovery, with China leading the way. Countries, such as the U.K. and U.S., which have participated in ‘quantitative easing,’ have thrown an incredible amount of money supply into the markets in an attempt to stimulate their economies. Eventually, this flood of money will be inflationary, as these administrations will not be able to pull all of this new money back out of the markets. As inflation increases, the values of the U.S. dollar, Japanese yen, and U.K. pound (GBP) will fall. On the other hand, those countries that are able to pull through the global slowdown with limited generation of money supply will be able to return to growth without an inflationary spike.

The euro (EUR) has been able to hold onto the $1.31 level over the weekend, as German consumer confidence held steady. The reports out of Germany gave us the first indications that the European economy was beginning to pull out of the recession. ECB ministers are split over the need to follow the U.K., U.S., and Japan down the ‘quantitative easing’ path, and the leveling-off of consumer confidence may keep the ECB from doing so. I think the ECB will probably cut interest rates one more time in May, but hopefully they will be able to avoid monetizing their debt as we have seen the U.S. and U.K. do recently. If they can avoid ‘quantitative easing,’ the euro should be able to hold above $1.30 and perhaps start a move back up toward $1.40.

I had been prepared to talk about the tremendous amount of U.S. Treasury issuance this week, and what impact it would have on the dollar. It was going to be interesting to see if all of the new supply would finally outstrip demand. But the outbreak of the swine flu has probably saved the U.S. Treasury for now. Investor demand for the U.S. dollar has increased with the pandemic fears, and the timing of this increase couldn’t be better for the United States. It will still be interesting to see what the new supply does to interest rates, but the U.S. has probably dodged a bullet for now.

It will be a light day of data here in the United States today, with only the Dallas Fed Manufacturing activity scheduled for release. Tomorrow we will see a couple measures of consumer confidence, along with the S&P/CaseShiller Home price index. Wednesday will be the big day with the release of first quarter GDP and personal consumption along with the FOMC rate decision. Thursday will be another big day of reports with personal income and spending for March along with the weekly jobless claims and the Chicago Purchasing Manager report. Finally, we will close out the week on Friday with data which will give us a better picture of the state of U.S. manufacturing, with the release of March Factory orders, ISM manufacturing index, and the vehicle sales numbers.

None of the data scheduled for release this week is expected to show much improvement for the United States. Wednesday will be the interesting one, as GDP will probably show a 4.7% drop for the first quarter of 2009. This is bit of an improvement from the 6.3% drop in the fourth quarter of 2008, but still equates to a dramatic slowdown in the U.S. economy. Following the release of the GDP figure, the FOMC will make their rate announcement. They obviously can’t cut rates, so the markets will concentrate on the accompanying statement, looking for information on additional ‘quantitative easing,’ which is being planned.

The Chinese renminbi (CNY) moved back up to trade near its 2009 high amid signs of a recovery in the Chinese economy. Vice Premier Wang Qishan said the Chinese economy is performing ‘better-than-expected.’ The news came as China is readying to release a second wave of stimulus funds aimed at infrastructure improvements. This news should bolster the price of raw materials, and help offset some of the recent selling of the commodity currencies.

Currencies today 4/27/09: A$ .7143, kiwi .5655, C$ .8223, euro 1.3140, sterling 1.4558, Swiss .8721, rand 8.8275, krone 6.6758, SEK 8.167, forint 225.29, zloty 3.4781, koruna 20.285, yen 96.58, sing 1.4966, HKD 7.75, INR 50.24, China 6.8272, pesos 13.74, BRL 2.1838, dollar index 85.206, Oil $48.86, Silver $13.02, and Gold… $912.90

That’s it for today… Had an absolutely beautiful weekend here in St. Louis, albeit a bit warmer than some would like. It seemed we skipped right through spring and moved on to summer, with temperatures reaching near 90 degrees. The Cards took two out of three from the Cubbys this weekend, with Albert Pujols hitting a monster grand slam on Saturday that nearly left the ballpark. I wasn’t able to make it down to any of the Cards games, as Brendan’s hockey team had two games and a practice this weekend. Having some computer/phone problems this morning, with a few of the folks on the desk not able to log into the phones (not a good way to start the week). I had better get this out so I can log in and help out! Hope everyone has a Marvelous Monday!!

The Daily Reckoning