A Tale of Two Confidences

"The carry traders have come out of the walls… And currencies that have 'risk' written all over them, like Iceland, South Africa, and Brazil have all seen better performances in the past week."

by Chuck Butler

In This Issue…

• Euro gets a boost!
• High yielders are soaring again!
• Existing Home Sales fall again…
• Accepting euros…

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And now…today's Pfennig!

A Tale of Two Confidences

Good day… Thank you, thank you, thank you! Thank you to all who sent along their good wishes, thoughts and prayers yesterday. I am a very lucky individual to receive so many prayers for my good health from people all over the world! Again… Thank you!

I still haven't received any word, but I fully expect to today… But then I fully expected to receive information on Friday too! I guess I just expect too much!

Well… The euro (EUR) popped up to 1.4850 early yesterday, but came back to 1.4825 at the end of the day. That's tight! Like Tupperware! However, in the overnight markets of Asia and Europe, the single unit has pushed higher once again. In Germany this morning, business confidence as measured by the think tank, IFO, unexpectedly strengthened for a second consecutive month… And that news has pushed the euro to 1.4865, as I write.

The high yielders of Aussie (AUD) and kiwi (NZD) kept the heat on the dollar with kiwi trading to 81-cents, and Aussie now heating up the stove for the 93-cent mark! WOW!

I was looking back over some stuff in the Pfennig archives the other day, and noticed that I had taken the Reserve Bank of New Zealand to the woodshed for their intervention in kiwi's rise last summer. Kiwi was 76-cents then… It's 81-cents now! As I said then… central bank intervention is good only in the short term. The markets have deeper pockets than the central banks, and eventually, if the markets want an asset to go up or down, the central bank will have to throw in the towel… Or get other central banks to coordinate intervention… But…

Since the United States isn't going for any of that… I doubt the Reserve Bank of New Zealand will be able to hook up some coordination among central banks to intervene in kiwi… Therefore, after all that… What I'm saying is… I don't expect to see intervention this time around.

It looks to me as though risk aversion has been cast aside these days like a pet rock! The carry traders have come out of the walls… And currencies that have 'risk' written all over them, like Iceland (ISK), South Africa (ZAR), and Brazil (BRL) have all seen better performances in the past week. As long as this lack of concern for risk remains in the markets… These three, along with the participants in the carry trade, like Aussie and kiwi, will be well underpinned with a bias to buy!

I saw a story flash across the Bloomie last night that said… "Jim Rogers says U.S. dollar will rally this year before slumping again". OK, now that caught my attention, and tuned in to listen. Well… He did say that… But he also said he was buying Japanese yen (JPY), Chinese renminbi (CNY), and Swiss francs (CHF)… His idea is similar to mine in that the yen and franc have been beaten down by the carry trade for so long, that they remain undervalued versus the dollar. He also said that he was waiting for a dollar rally to get the rest of his remaining investments out of the dollar!

OK… So, I'm good with that! What I'm not good with is the fact that Standard & Poor's kept the AAA debt ratings on the two largest bond insurers, MBIA and Ambac. What gives with this? These two are down on their knees begging and pleading for a white knight to rescue them… But they keep their triple A ratings? Hmmmm… Sounds like a smoky back room deal with guys wearing shades, took place, eh?

Commodity prices continue to rise, and that really helps a commodity rich country like Canada. The loonie (CAD) was able to post a very nice gain yesterday. Remember, it was little old me that told you the loonie would be tarred with the same brush as the United States, but… Would be underpinned by their commodities… And that's what's happening!

So… Today, we'll see the color of the latest consumer confidence report here in the United States, and it's expected to fall to a multi-year low… Even lower than after Katrina… It's about time too! You know me… All these dark clouds hanging over us like the Sword of Damocles and consumers are still dancing in the streets… I just couldn't figure that one out! But, finally… This looks more like it.

Don't get me wrong here… I don't want it to be this way! I would much rather be dancing in streets… But the facts and fundamentals just didn't give me that feeling that we should be dancing in the streets.

After the report prints, we'll have more of the stuff that I talked about yesterday. Eurozone data that outshines U.S. data… The Tale of Two Confidences.

The Gulf States are whining again about their pegs to the dollar. Yesterday, Saudi Arabia's inflation hit 7% for January, after hitting 6.5% in December. This marks the eighth consecutive month of rising inflation for the Saudis. I know the Saudis recently committed to the dollar peg… But they've got to have an eye on breaking this peg at sometime. Unfortunately, for them, with the Fed cutting rates, and the dollar falling, these guys are stuck! Unless of course they want to do a "one-off" revaluation.

Qatar sent our fresh hints (again) that it is considering a currency change… I believe that all it would take is for one state to move away from the dollar peg, for the others to move too… Kuwait was just too small when it dropped the peg last year… But, the other states see how well it has worked for Kuwait to date, and dream about their own currencies.

None of this means anything for the dollar right now… Or even the near future… But it's something that's out there… And you know me… I'm usually months if not light years ahead of these market moves! HAHAHAHAHAHA!

OK… Existing home sales here in the United States fell for the sixth month in a row during January. The median price of a home fell 4.6% year to year… From $210,900 in Jan of 2006, to $201,100 in Jan of 2007…

Consumers are getting pinched folks. Like I said last week… I don't know where the next pile of cash for consumers to spend will come from… I sure hope they don't resort to selling organs for flat screen TV's or BMW's!

Yesterday, I told you about how precious metals were moving higher in reaction to rising inflation in the United States. Well… My friend, the Mogambo Guru is always preaching about inflation, and rightly so, I must say! He was quoting Mervyn King, governor of the Bank of England… Let's see what the Mogambo had to say…

"[Mrvyn King] ends with the sorrowful news that, 'the U.S. money supply - if the Fed still reported M3 - is now guesstimated to be showing 15% annual expansion.

"Then I think back to Mr. King saying that, 'Few empirical regularities in economics are so well documented as the co-movement of money and inflation', which turns out to be an almost perfect correlation, and I break out into a sweat as I realize that with money in the USA expanding at 15% a year, we're freaking doomed!"

I hope to catch up with my friend, the Mogambo in April when I will be in St. Petersburg… I'm sure he'll have more thoughts on how "we're all freaking doomed!"

A couple of weeks ago I told you about the Hungarian forint and their quest to remain in the ERM (exchange rate mechanism), precursor to the converting to the euro. It seems speculators have driven the currency out of the ERM trading band… At least that's the news I caught on the fly last night.

I saw a story come across the screens this morning… PIMCO's Bond King, Bill Gross is eyeing Australian bonds these days, as he feels the Fed is failing to control inflation here in the United States. You know… I used to be the foreign bond and currency trader at the bank that started all this opportunity for individual investors to diversify into foreign currency assets in a U.S. Bank… Mark Twain Bank.

Anyway… I used to show bonds to the salespeople and tell them all about the features so they could get sold… Aussie bonds were always one of my faves, along with New Zealand bonds. The thing to think about here is do you think interest rates have peaked in Aussie & New Zealand? If you're looking to lock in yield for a number of years, and don't want to pay attention to currency movements during that time, then a bond is right up your alley!

So… I love bonds! Always have… I've told you about in 1981, when I was selling short term Treasuries and Commercial Paper… Great Stuff! So… You go Bill Gross!

Hmmm… Not really sure what I was just writing about… I went off on a tangent for sure! Sorry!

Remember a couple of weeks ago when I told you about the signs sprouting up in New York City stating, "euros accepted"? Well… The mighty Washington Post ran a story on this yesterday… Here's what they had to say in a nutshell…

"With the dollar near its lowest rate ever against the euro and the numbers of international tourists in New York at all-time highs, some store owners figure accepting the euro offers a convenience to customers and sometimes generates a stockpile of a strong currency for themselves."

So, there's more to the initial story than a lot of people believed there would be. I know, because I got the emails telling how wrong I was! I have to say that I absolutely love this! The more people are accustomed to seeing other currencies in play, the more they will think about diversifying their dollar denominated investment portfolio! And… That's where I come in!

Currencies today: A$ .9285, kiwi .8095, C$ 1.0075, euro 1.4865, sterling 1.9720, Swiss .9195, ISK 66.10, rand 7.61, krone 5.3070, SEK 6.2460, forint 174.33, zloty 2.3750, koruna 16.80, yen 108, baht 30.57, sing 1.4040, HKD 7.7940, INR 39.90, China 7.1580, pesos 10.76, BRL 1.7025, dollar index 75.34, Silver $18.08, and Gold… $932.25

That's it for today… A long day yesterday… But today's a new day! Hey! Two weeks ago I told you about a new book titled Biography of the Dollar. It's written by Craig Karmin and was reviewed by The Economist magazine this week! Well… His book can now be purchased! I received my copy of the book and love it! Amazon has it… So check it out! I'm talked about in the book too! In Chapter 6! While I'm on books… Another Wall Street Journal writer, Jeff Opdyke, has just finished his book on investing, and I'm waiting for a copy of that one to review too! More later!  I sure hope you have a Terrific Tuesday! Time to eat my fruit for the day! Bye!

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Chuck is the author of The Daily Pfennig, which is reposted here at The Daily Reckoning. His respected analysis is frequently quoted in or referenced by: the Wall Street Journal, U.S. News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.

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