Good day… And a Happy Friday to one and all! Looks like it could be a Fantastico Friday as traders are finally coming around to Chuck’s way of thinking regarding Fed rate hikes… And as traders remove their bets for aggressive Fed rate hikes, the luster begins to fade on the dollar rally. The meetings are over for this week (they start up again next week!), YAHOO! I get to spend the day on the trading desk… I’ve missed everyone!

OK… Front and center this morning, we have the euro (EUR) trading 1-cent higher, knock, knock knocking on Heaven’s Door, I mean, the 1.56 handle. As I said in the intro, it appears that traders don’t have the stomach to hold on to their bets that the Fed will aggressively raise interest rates this year. Recall, the other day, I told you that the bets were ratcheting up and had reached 75 BPS of rate hikes this year… I doubt we have any. In fact, as I told you the other day too, I believe that when the dust settles on the fact that the Fed isn’t going to raise rates, things will have gotten so bad here that the Fed will be entertaining thoughts of cutting rates again!

Japanese yen (JPY) had really been beaten about the head and shoulders this past week, as it re-visited the 108 handle… But with the stocks looking soft, it recovered a bit the past two days. The Royal Bank of Canada (RBC) says that the dollar is overbought versus the yen. Hmmm… I agree with that, but I think RBC’s call for a yen rally to 105.60 is not enough. That’s too conservative for me… But then, I get emotional about these things. I called for yen to rally to 100 this year, and while it got very close, it didn’t quite have the strength needed to reach that level. I based that call to 100 on the fact that we would have another “risk” event in the markets this year, which would lead to risk aversion, stock selling, carry trade reversal, and a yen rally! We still have half a year to go, but the year is moving fast!

Speaking of the carry trade… I receive dozens of emails each week from people asking me what the carry trade is… For long time readers, we’ve been through all this more times than you can count… But for new readers, well… It’s all new! So here you go! The carry trade is basically selling a low yielding currency (whose borrowing costs would be low) short, and taking the proceeds to buy a higher yielding asset. When the borrowing costs go up, or when the currency that was sold short rallies, it makes this trade very costly, and it then gets unwound/taken off.

OK… Back to currencies… Yesterday, I told you about Brazil’s Central Bank chief, and his calling out the Bank of England’s handling of inflation… Well, Mr. King of the Bank of England (BOE) heard that and came out with his own strong words… King said in an interview that the BOE needs to focus on rising inflation, not growth… OK… I’m with you there! The markets will take that to mean higher interest rates, considering the fact that inflation is well over the BOE’s 2% ceiling. And when that thought process enters the markets, the pound sterling (GBP) will be underpinned, and in fact it is rallying as I type my fat little finger to the bone here!

Here’s a story I doubt you saw on your news station yesterday… China said it will raise domestic gasoline and diesel prices by 17%-18%, as it responds to near-record crude-oil futures and criticism of its fuel subsidies. The surprise move is the largest increase in over four years, although local prices will still be below the international market. In case you weren’t aware… The Chinese government subsidizes fuel prices for their people… You see a country that has over $1 trillion in currency reserves can afford to do that! However, with the price of oil continuing to rise, even the Chinese had to say “no mas!”

I doubt this will be too heavy a load for the Chinese economy to bear… He ain’t heavy, he’s my brother! So… Expect the beat to go on in China, which means a slow, drip of currency appreciation at a time.

This news led oil prices lower for the day… And that’s OK in my books! And looky there! The euro just went back above the 1.56 handle! No more knocking… Someone’s knocking at the door, somebody’s ringing the bell; do me a favor, open the door and let them in… Why hello, Mr. Euro! How are you today? It’s good to see you back in the 1.56 neighborhood! Why thank you… It’s good to be back… I was lost in the 1.53 block for a long time, and people kept telling me I wasn’t worthy any longer, but I sure showed them, eh? HAHAHAHAHAHAHA!

OK, I’m back now, that was silly… But, you know me, once I get typing, I can’t stop, it’s simply a stream of consciousness!

Bank of Canada’s (BOC) Governor Carney gave a speech last night, that should be quite the underpin for the Canadian dollar/loonie (CAD). Carney indicated that the BOC was finished with their rate cuts and have moved to a neutral bias. He also talked about how a strong loonie would help exert a “dis-inflationary” influence. The loonie took notice and is rallying this morning.

Yesterday, we saw the color of the latest Philly Fed Index (manufacturing in that region), and it looked awful! The Index was “expected” to fall to negative -10, but instead it fell to negative -17… Uh-Oh! This leaves this index near the lows of earlier in the year. Significantly worse levels have occurred only in outright recessions. And you know me… I contend this to be a recession!

The data cupboard is bare today… No data, nothing, nada, zilch! And for the dollar, that’s probably a case of “no news is good news”!

Next week we’ll have the first Fed FOMC meeting since Big Ben began “fighting inflation”. The markets will be greatly disappointed when they leave rates unchanged, and leave the “downside growth risks” on the board… But don’t let that get in the way of dollar bulls still thinking they have the upper hand here… Too bad they’ll get that hand slapped next week (and the following weeks) when the Fed continues to do nothing, absolutely nothing, say it again!

Did you see that the ratings agency, Moody’s, announced that they were cutting the ratings of MBIA and Ambac, citing impaired ability to raise capital and write new business? Well… Just another item being swept under the rug! But you can depend on me to pull back the rug and expose these things!

And… Has anyone seen the warnings issued by the Royal Bank of Scotland (RBS)? Pretty scary stuff for a conservative bank to make this kind of a call, but they did, and I’m proud of them for going out on the limb! It gets lonely out on the limb all by yourself! Here’s the meat of the warning…

“The Royal Bank of Scotland, warned clients to be prepared for the biggest crash in stock and credit markets in the next three months as inflation and the dwindling fiscal growth continues to hit [the] world economy. The views were expressed in a report by the bank’s strategists Bob Janjuah, Kit Juckes, Tim Jagger and Richard Smith.

“The report stated, ‘Our macro economic road map is playing out – slow growth for longer, deep into 2009, with the pain spreading globally, gradually.’”

Well… That warning plays well with my warning that another “risk event” will play out in the United States this year… The liquidity/credit crunch losses booked so far will turn out to be merely the appetizer to this four course meal! Of course that’s my opinion… I could be wrong.

Good day… And a Marvelous Monday to you! And welcome to June! Hey! June is busting out all over, all over the meadow and the field… Buds are busting out of bushes and the rompin’ river pushes every little wheel that wheels beside the mill! (And you thought I was just a rocker!) We are having network problems this morning, as some heavy storms ripped through St. Louis on Saturday night. So, the Techie people need to come in and get stuff re-booted, etc. This may go out late… And it may not… At this point, I at least have my laptop working!

Well… Friday saw little movement in the currencies… As I signed off I had told you that maybe someone had said “enough” with the euro (EUR) selling… As the day went on, it certainly looked like that had happened, given the euro’s rise to 1.5550, after looking up to 1.55 early in the morning.

There’s been a return to risk aversion overnight, as some news from the United Kingdom has reignited the fears that the banks may still be sitting on a ton of bad debt… Of course, as Pfennig readers, you already know this, as I’ve told you over and over again there are many more “risk events” for the markets to digest.

Here’s the skinny on the U.K. news… The United Kingdom’s largest lender of buy-to-let mortgages, Bradford & Bingley, came forward to reveal that they had booked a pre-tax net loss of 8 million pounds (after accounting for reductions in the value of its structured investment assets. They also announced that they were going to restructure, and that TPG, Inc. would invest about 179 million pounds.

Well… There you have it… More melting of the U.K. mortgage meltdown… But, hear me now and listen to me later, this isn’t isolated to the United Kingdom.

This is a Big Central Bank meeting week around the world, with the Reserve Bank of Australia (RBA) meeting Tuesday, the Reserve Bank of New Zealand (RBNZ) meeting Wednesday, the Bank of England (BOE) and European Central Bank (ECB) meeting on Thursday. I don’t expect any of these to move rates one way or another at this time. There’s a tiny light shining on the RBA to raise rates, but I think that will come at a later date.

As always, with an unchanged rate environment, the press conference following the meetings will be the more important of the events. I expect the RBA, and ECB to remain hawkish with their intentions to fight inflation, while the BOE and RBNZ are grasping at straws.

The ECB has to deal with the fastest inflation in its 10-year history… That’s not a good thing folks… Not for a Central Bank, whose mandate is to provide price stability. The economy may be cooling, which I’ll talk about in a minute, but inflation is rising – which means rates remain at current levels, or may even go higher as the summer days get hotter.

With the return to risk aversion overnight, the Japanese yen (JPY) has rebounded along with Swiss francs (CHF). It will be interesting to see if the risk aversion can set its teeth into all the “euphoria” surrounding the U.S. markets these days.

The Eurozone economy seems to be slowing down, which shouldn’t come as a surprise. I’ve said all along to expect a slowing of the economy… But not a complete shut-down/recession, and this “slowing” might just be what’s weighing on the euro these days. There’s an important thing to remember about the euro… It’s the “offset” currency to the dollar. So… Look at the two currencies… The dollar, with all the awful fundamentals, a recession, low yields, a war, etc. and then the euro, with a slowing economy… Eventually, the markets will return to the underlying trend.

But first, we might have to endure some euro weakness. But, remember, the dollar has all the bad fundamentals… Sort of like a gauntlet to get through… And while it’s getting beaten, the offset currency is likely to be in favor.

OK… A reader sent me a note about the one-year auction of Treasury Bills, and said, “This is scary isn’t it?” OK… Here’s the skinny on that… You see U.S. Treasury Secretary Paulson is feeling like he’s been “through the desert on a horse with no name” these days. The Treasury is going to issue one-year T-Bills tomorrow for the first time since 2001. With the expanding budget deficit, they have no other choice. The cheese that binds here is the fact that Paulson is indicating that the Fed Reserve, who in the past, had been a regular purchaser of the debt, may not be willing to do so… You see, the Fed is focusing on taking on all that bad debt from mortgage lenders… (Can you say, “The Fed’s focus is all screwed up?”… I knew you could!)

Want some proof that our deficit situation has become completely out of control… How about this little ditty… In the first five months of 2008, the Treasury sold $1.4 trillion of bills, an increase of 36% from the same period last year. Oh, but don’t let that get in the dollar bulls’ way of buying dollars! Deficits don’t matter, right? HOGWASH! You and I know that! But these guys running the country don’t believe it… And that’s a real shame, or sham… Pick one, either one applies!

OK… I have to spend a minute talking about the announced investigation of the CFTC (Commodities Futures). A lot of people believe the investigation will reveal some bad stuff being done to push up the price of oil… Now, I’m not going to sit here and pretend to believe there’s nothing to that… But come on! If the authorities really thought they were going to find something noteworthy, do you think they would announce to the public they were going to investigate? Wouldn’t you want to sneak around and zip the lips until you had the thieves?

I think that this has more “calm the nerves of the public” to it, than it has “to catch a thief”. I mean, come one, we don’t build refineries; we don’t drill where we KNOW there is oil; we haven’t done a darn thing about alternative fuel, despite knowing that we’ve needed to do something since 1973; and we drive gas guzzling cars… But wouldn’t it be better to “blame” someone else for the fact that gas is $4 a gallon? Let’s go after the commodities guys… There’s got to be something there!

It’s supply and demand folks… We have two large countries with billions of people that now demand oil that never really had a demand before… China and India… Take that supply and demand, and mix in a falling dollar, and you have high oil prices.

OK… Today, the data cupboard will show us the color of the ISM Manufacturing Index. You may recall this index has been holding out below the line in the sand of 50, which indicates contraction or expansion, for the past four months. The experts believe the index will have inched up to 48.5 in May – still below 50 – and that should weigh on the dollar a bit today.

We’ll have some other minor reports as the week goes on, leading into the Friday Jobs Jamboree… But I’ll talk more about the Jobs Jamboree as we get nearer to Friday.

The Aussie dollar (AUD), which has been the belle of the ball lately, showed some pimples this morning, after a report showed that retail sales in Australia had unexpectedly declined. I wouldn’t let my shorts get all bunched up over this. As I always say… One swallow does not make a summer… And this is the first “soft” economic report we’ve seen from the land down under. I don’t think we’ll see the RBA back off the rate hikes either!

Currencies today 6/2/08: A$ .9555, kiwi .7850, C$ 1.0045, euro 1.5550, sterling 1.9625, Swiss .96, ISK 75, rand 7.7175, krone 5.12, SEK 6.0175, forint 155.33, zloty 2.1750, koruna 16.15, yen 104.90, baht 32.58, sing 1.3630, HKD 7.8040, INR 42.35, China 6.9325, pesos 10.33, BRL 1.6240, dollar index 72.97, Oil $125.81, Silver $16.86, and Gold… $892.10

That’s it for today… My long time friend and colleague, Chris Gaffney, traveled to San Diego with his lovely family this past weekend to run in a marathon there. I marvel at his determination to do these marathons. Yesterday was darling daughter Dawn’s husband, Jerry’s birthday. We all celebrated at little buddy Alex’s baseball game! Alex just finished four games in five days… That’s crazy! Congratulations to Alex, as he just finished 6th grade! School’s out for Summer! School’s out for ever! OK, enough Alice Cooper for a Monday morning! Kristin’s back from Cancun today! It will be interesting to get her take of the conference! OK… Enough! Time to go! I hope you have a Marvelous Monday!

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Source: Reigniting Fears

Good day… And a Wonderful Wednesday to you! We received more rain yesterday, and the spotting of a twister less than five miles from our office! I’m beginning to feel as though we should be gathering up the animals in twos. The old saying, “right as rain” is losing favor on the list of things I say!

Yesterday, I left you with the thought that the London traders had been buying dollars since they arrived back from their three-day Holiday weekend. The U.S. traders did the same… And I believe profit taking was the order of the day. Unfortunately though, it left the euro (EUR) down one-cent on the day.

The data for the U.S. yesterday wasn’t anything that would lead one to buy dollars, but that’s the game that people play now, every night and every day now… So, let’s go to the tape on the data and be finished with that!

First off, the Case/Shiller Home Prices data showed more rot on the housing vine, as their 20-city home price index fell 14.4%y/y in March – a new record low in data back to 2001. Las Vegas led the way (-25.9%), with Miami a close second (-24.6%).

You can’t tell me the housing meltdown has “bottomed” – not with data like this! And… You can’t tell me that consumers are not being just beaten around the head and shoulders daily with gas prices, food prices, falling house prices, and debt up to their eyeballs!

Speaking of consumer debt… I’ll bet a dollar to a Krispy Kreme that the next big shoe to drop will be the “maxed out” credit cards that consumers have been busy running up, since their “ATM” (house) has closed. I’m not wishing this to come true, folks… I’m simply talking about what I see happening. Sure hope I’m wrong about that one, because credit card debt is the absolute worst thing to have hanging over your head!

OK… Down from the soapbox, and back to the data… The U.S. Conference Board’s consumer confidence fell more than expected in May from 62.8 to 57.2. This is a new low for the data since October 1992, and a depth surpassed only during and just after the depths of recessions since 1970. Need more data that spells “recession”?

Speaking of a recession… A reader sent me a note yesterday saying he was surprised that I didn’t mention that George Soros and Warren Buffett were both “Pfennig readers”, since both were quoted in Europe Saturday as saying that the United States is in a recession, and both said it will be long and deep.

Alrighty then! Hey! My friends down under sent me a note that said they fully expect the Reserve Bank of Australia (RBA) to increase interest rates 50 BPS before year-end. That’s two 25’s… With the first coming in August. Basically, I agree totally, and think these rate hikes will grease the tracks to parity for the Aussie dollar (AUD).

The news didn’t help the Aussie dollar yesterday though, as it looks as though the selling of the Big Dog (euro) affected all the little dogs, even down under!

I’m going to step up on the soapbox again here folks… So if you don’t want to subject yourself to more “Chuck’s views” then skip ahead. OK… If you’re reading this, then that means you’re ready… So, here goes… I was reading stories on the Internet last night and seeing how bloggers and writers are ripping the oil companies. Hmmmm… I guess the “rippers” don’t realize that the guys that head the oil companies don’t own them! The oil companies are owned by pension funds – you, me, and the guy down the street that cuts his grass with his shirt off! We even had some dolt representative from California mention “nationalization” for the oil companies. Of course, she called it “socialism”… Doltness showing there, folks… I shake my head in disbelief.

OK, I’m back now… I have more to say on the subject, but I had better stop there!

In the overnight markets of Asia and London, we haven’t really seen much movement to follow on yesterday’s selling, which is why I believe it was profit taking. Most of the “Big Boys” were out on Friday and Monday… So when they came back and saw the levels, they said, “By Joe, let’s take a profit or two”!

The only currency to see more slippage was the Japanese yen (JPY), with a little slippage from Swiss francs (CHF), as stocks were back en vogue yesterday, and thus the carry trades were back at work.

And the yen’s losses weren’t just against the dollar. Yen is losing lots of ground to the euro again. The losses to the euro had stopped for a while, but they are back!

So… The bad earnings reports of the past 10 days are swept under the rug, eh? Let’s go buy stocks again, the coast is clear! UGH!

Gold saw an end to its rally yesterday too, with a $14 sell off… UGH! The gold sell off also coincided with a big drop in oil price the past few days. Of course, the oil price sell off is the only “welcome” price drop! Oil has dropped from $135 last week to $127 this week… I guess maybe someone in the oil biz got the memo that U.S. drivers are putting the brakes on and not driving so much. Who can? Not with gas prices around $4!

OK, I know that those that own Prius cars can, but you are a very low minority of drivers…

In Germany this morning, we’ve seen some data that should keep rates right where they are if not eventually push them higher. I’m talking about inflation data. Five of the six German regions have reported higher inflation this morning – which points to an increase of 0.06% month-on-month. The consensus was for an increase of 0.04%, so this upside surprise reverses the sharp fall we saw in April. I knew that the April number was questionable.

Norway’s Norges Bank is expected to leave rates unchanged this morning… However, with oil prices being what they are, I expect the Norges Bank to revisit the rate hike table this summer… And that thought should underpin the krone (NOK).

Fed Head Fisher, one of the two dissenting votes of the last rate cut, will speak today. He will speak on “inflation and debt”. This ought to be interesting folks.

Today, we’ll see the color of the U.S. April durable goods, which is not expected to be a “warm and fuzzy for the economy” data print. The forecast is for a decline of -1.5%… But, hear me now and listen to me later… If the print is really this bad, the media will sweep it under the rug, or spin it to sound like good times at Ridgemont High!

So… There you have it! The currencies are drifting about, and are waiting for new signs to give them direction. With that, we’ll head to the Big Finish.

Good day… And a Wonderful Wednesday to you! I had a long time friend – once a colleague and teammate on the company softball team – send me a note from Credit Suisse yesterday, that called for an end to the European currency strength versus the dollar. I love getting this stuff because, as they said in the Godfather… Keep your friends close, but your enemies closer… Yes, I like to see “their” side of the story.

In this case, it’s not too far off… While I think the European currencies, led by the euro (EUR), have more room to gain versus the dollar, you have to admit that the bulk of the euro’s gains are in the rear view mirror. But before everyone picks up their phones to call and sell their euros… WAIT! Think about this for a minute… The euro is the second most liquid currency in the world. It has taken over as the offset currency to the dollar. So… If the dollar were still going to weaken (which C.S. admitted it would), then the euro would see the offset trade. And… If the Asian currencies take over as the next shoe to drop for the dollar, as I’ve said they would for two years now, then the euro would see strength on the flip side of cross trades.

I’ve explained these cross trades before, but for the new readers, let’s review… Class, get out your #2 pencils… Currencies are traded in “pairs”. You are always shorting one currency and going long another currency. As U.S. investors, your base currency is dollars, so when you buy euros or yen (JPY), you are shorting the dollar and buying euros or yen. But U.S. investors aren’t the only players in this arena. You have investors around the world that have a different base currency… So you end up with “cross” trades – currencies that cross each other in this arena. Clear as mud? Sorry… This is the way I know how to explain it.

So… Euros, for instance, could gain in value due to people buying yen… On the crosses… And so on…

Alrighty then… I’m sure this will all sink in as you sink your teeth into your morning Honey Bun!

This morning, the euro has added to its gains from yesterday, as the German Business Confidence – as measured by the think tank, IFO – unexpectedly increased this month. I was all set to talk about the IFO being the more important measure of the German economy this morning, so… Let me go ahead and do just that! Yesterday, we saw weakness in the ZEW report on economic expectations… But that didn’t hurt the euro too much. The reason? The markets put more stock in the IFO report because it measures “current conditions” and therefore can be used as proxy for the European Central Bank (ECB) and their interest rates projections.

I saw a report on the IFO’s correlation with the euro’s past moves to higher ground… Made sense to me, as strong IFO reports came out right before the euro moved past previous big figures… Could certainly be the case again for the euro, eh?

So… The 1.56 level was taken out overnight, and as I write, the euro is trading well above the 1.57 level. Again, it’s too soon to tell if this is a “true reversal” of the sell off the past few weeks, or a false dawn… But to me, it certainly looks like we’re heading higher once again, and the negativism toward the U.S. dollar is slowly creeping back into the mindset of the markets.

The commodity currencies of Aussie (AUD), Canada (CAD), and Brazil (BRL) all “have it going for them” these days. Shoot Rudy, the Canadian loonie doesn’t even have the high interest rate like Aussie and Brazil, but with oil hitting $129 yesterday, it doesn’t seem to matter. I think that the markets have fully priced in one more rate cut from the Bank of Canada. With that out of the way, and commodities booming, the loonie could shake loose the pull down from the Bank of Canada!

I’ve heard a lot of talk about how people believe this commodity bull market is the latest “bubble”. Hmmm… That may be… But historically speaking, we’ve got a ways to go (time wise) before this bubble pops! Remember a month ago, when I kept telling you that the mass media didn’t know what they were talking about when they kept saying the bull market for commodities was over? I don’t hear these guys spouting off now. I wonder where they went? To hide under a rock?

I’m not going to dwell on this… But it just didn’t make sense to me that the bull market in commodities was over… And, now, we know why it didn’t make sense! Because it wasn’t over!

Second in command, Fed Head Kohn spoke yesterday, and sounded quite upbeat about the economy. Singing Ray Stevens… Everything is beautiful… What else did you expect? These guys have backed us into a corner that has three roads out… And none of them are a road to prosperity! 1. Inflation 2. Deflation 3. Stagflation… Oh… And they all merge with the recession highway!

Anyway… Fed Vice Chairman Kohn, speaking about interest rates said, “[it] appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term.” The markets took this statement to mean Kohn was telling us that the Fed is unlikely to lower rates further.

Well… Baby, baby, it’s a wild world… And it’s hard to get by on just a smile. Kohn should be reminded of these words when the Fed comes back to the rate cut table later.

Speaking of the Fed… We’ll see the color of their last meeting minutes this afternoon. This was the meeting that they cut rates from 2.25% to 2%. I wonder if these meeting minutes will be in line with the press conference that was held after the rate cut… The reason I say this, is the suspicion I have toward the Fed after reading Bill Fleckenstein’s book, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

The Fed will also be releasing their new growth and inflation forecasts. This ought to be worth the price of admission folks. What yarn will they spin for us? I’ll bet they tell us the future is so bright we gotta wear shades! And inflation? Don’t worry about it! Yeah, when the Fed says, “Don’t worry about it” you had better run for the hills!

How about gold? Did you see that rise in gold yesterday? When I left it was up over $15 on the day. The London Exchange issued a report showing that demand for gold was down 16% in the first quarter. That makes abundant sense given the losses gold put on the books in the first quarter… But now that the markets are coming to their senses, and the dollar is weaker (while oil continues to set records every day), gold is back in demand.

And speaking of gold… Remember about a month or so ago, I told you about how the dollar’s weakness had caused so much loss of purchasing power for us, and illustrated it with this: If you purchased oil with euros instead of dollars, the price increase in oil would represent 92%, which sounds high right? Well, since you don’t purchase your oil in euros, but dollars instead, your price increase represents a 319% gain! Well… To take this exercise one step further… If you had purchased your oil with gold, your price increase would be 57%! Now tell me again, how gold isn’t doing its part to provide an inflation hedge?

Good day… And good morning from beautiful downtown Panama. Chuck had to get on a plane back to St. Louis early this morning, so he asked me to pfill in this morning. The dollar mostly traded within a range versus most of the major currencies yesterday as negative news from the United States was offset by predictions of a possible FOMC rate rise. The biggest movers yesterday were the commodity currencies and the ISK, which was helped by the Nordic central banks. More on that later, but lets start with the data due out in the United States.

The Reuters/University of Michigan consumer sentiment index will likely show a drop to a 26-year low when it comes out later this morning. The other major report released today will probably show that housing starts in the United States fell to a 17-year low in April. Home construction and property values “seem likely to decline well into 2009,” Federal Reserve Bank of San Francisco President Janet Yellen said earlier this week. And a jump in foreclosures, as values fall and adjustable rate mortgage costs rise, is adding to concern. Foreclosure filings climbed 65% and bank seizures more than doubled in April compared with a year earlier, according to figures issued this week.

The U.S. economy is in a recession, and the over-leveraged U.S. consumer won’t be able to ride to the rescue as they have in the past. And I don’t expect the stimulus checks to help much either, as they are way too little too late. The fundamentals of the U.S. economy don’t look good and this dollar rally will not last past the end of the second quarter. But short term, we could see additional dollar strength as investors focus on future FOMC moves.

Both the Federal Reserve and the Bank of England have had to admit that inflation is rising faster than they expected, leading currency traders to predict an end to their interest rate cuts. Higher inflation numbers have caused future traders to increase their bets that the Fed will reverse recent cuts later this year. This change in sentiment has helped push the dollar higher, but the move will likely be short-lived as the markets will realize that the FOMC is just too far behind in their fight with inflation. As prices continue to move higher, the U.S. economic growth will slow even further and the dollar will resume its steady decline.

Nordic central banks rode to the rescue of the Icelandic krona (ISK) this morning as they announced they have agreed to provide as much as 1.5 billion euros in emergency funds to Iceland’s central bank. We’ve written at length about how the credit crisis has spilled into the Icelandic banks, and recently the liquidity in the ISK has all but dried up as currency dealers questioned the financial stability of the Icelandic central bank. Traders have been concerned that the Atlantic island’s commercial banks may seek help from Sedlabanki (Iceland’s central bank) which doesn’t have the funds to bail them out. While the size of the swap agreement wasn’t large enough to move the krona, the announced cooperation seems to have restored at least some of the lost confidence. With the support of the central banks of Norway, Denmark, and Sweden, the Icelandic krona rallied more than 4.4%, the biggest gain on record.

In other news from the Nordic region, the Danish central bank raised its benchmark interest rate by 0.1% to 4.35% today.

Japan’s economy grew faster than economists estimated as exports to the rest of Asia helped offset the U.S. slowdown. Gross domestic product in the first quarter of 2008 grew 3.3% in Japan, well above estimates. Net exports accounted for most of Japan’s growth as demand from Europe and Asia continues to be strong. The figures coincide with reports released yesterday that showed the German economy expanded at the fastest pace in 12 years. Both of these reports confirm our thought that the global economy will not be dragged down by the slowdown in the United States.

But the currency markets ignored the positive surprise in Japan and the yen (JPY) continued to sell off. As Chuck pointed out earlier in the week, the carry trade is back as market volatility has eased. Japan’s currency slid the most against the Aussie dollar (AUD) and New Zealand dollar (NZD), both of which benefit from the return of the carry trades. With the markets generally range bound, volatility has decreased encouraging investors to borrow funds in the nations with low rates and invest where returns are higher. This week’s sell off of yen reflects a return to risk-taking activity and a revival of carry trades. Ultimately the currencies will return to trading on economic fundamentals, but for now the carry trade is continuing to dominate.

Currencies today 5/16/08: A$ .9449, kiwi .7675, C$ .9992, euro 1.5457, sterling 1.9479, Swiss .9465, ISK 74.43, rand 7.4835, krone 5.0855, SEK 6.0402, forint 160.20, zloty 2.1922, koruna 16.16, yen 104.77, baht 32.285, sing 1.3715, HKD 7.80, INR 42.65, China 6.9950, pesos 10.436, BRL 1.653, dollar index 73.28, Oil $125.58, Silver $16.81, and Gold… $886.90

That’s it for today… Had a great dinner with the folks from the Sovereign Society last night. I know it sounds like I came down here to Panama kicking and screaming, but this conference has far outweighed my expectations. The investors are knowledgeable and excited by the opportunity to diversify out of the U.S. dollar. Hopefully I will be able to convert a few of them over to the EverBank family. Got to get back downstairs now, as I don’t want to miss an early presentation by one of last night’s dinner hosts. Hope everyone has a Fantastico Friday and a great weekend!!

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Source: U.S. Housing Continues to Slump

Good day… And a Tub Thumpin’ Thursday to you! Well… It’s the third day of the show today and I’m beginning to hit the wall. I’m draggin’ the line, as Tommy James used to sing. The people here at the show have been great, stopping by to see how I’m doing, and so on. We had a great Town Hall Meeting for EverBankers yesterday, and today, I finish up my duties here, as I am the moderator of a panel this morning.

The currencies remained in a tight range with a bias to sell dollars yesterday and in the overnight markets. The euro (EUR) received a boost when Eurozone GDP printed stronger than expected, coming in at +0.7 or 2.2% annual. At the same time Eurozone inflation was reported to register a 0.3% increase or 3.3% annual. These reports will ease some of the pressure on the European Central Bank (ECB) to call off the dogs – (interest rate hikes).

I was talking during the Town Hall Meeting yesterday, and emphasized to anyone listening to me that a central bank that is willing to stick to its guns, and fight inflation to provide price stability is the kind of central bank you want the currency you own to have! There’s no two ways about it folks. Inflation is a baaaaaaaaaddddddd thing… And I believe we will all rue the day that the Fed turned its back on inflation here in the United States. But Hey! That’s just me! Don’t let me get in the way of a “feel good” party.

The New Zealand dollar (NZD) received a smack in the face overnight as they printed an extremely weak first quarter retail sales report. Retail sales in the first quarter fell 1.2%, six times worse than the forecast for a negative 0.2% (see how I used that new math to figure that one out?) I think this could mean a sea change in New Zealand interest rates by this summer. This has worked for the Reserve Bank of New Zealand (RBNZ). They had tremendous growth and inflation that the RBNZ fought with aggressive rate hikes… Now, the growth is slowing and inflation might soon follow, which would indicate to me that the RBNZ could be easing rates by the end of this summer. That won’t be a good thing for kiwi, as its strength is derived mostly from the high interest rate it sports.

In Japan, March Machine Orders printed worse than expected at a negative 8.3%… But, a funny thing has happened on the way to the forum lately for yen (JPY). As has become the norm lately, yen simply ignores the data and has its fortunes decided by carry trades, which in last night’s case, showed carry trades being unwound. So, that means that yen gets some lovin’ today.

This data update can get a little boring so stick with me here as we’re almost to the end…

U.S. industrial production printed much worse than expected this morning… Production for April fell -0.7% (versus -0.3% forecast), and the prior report was revised lower from +0.3% to +0.2%. The declines were broad based, with auto production collapsing -8.2%! This print was so bad that a look back to see if we’ve had anything like this before shows me that since 1990, worse prints than this one have only occurred around Katrina, the start of the Iraq War, and during the 1990 recession.

So… Doesn’t it look more and more everyday that I was bang on with my call that we’re in a recession now?

And then finally… The TICs data… You know, the net foreign security purchases that are used to finance our current account deficit… As I’ve been explaining to people for months now, the United States has experienced a shortfall when it comes to the financing of its deficit, which requires about $80-85 billion per month in foreign investment in U.S. assets. To relieve that shortfall, the government has chosen the lesser of two evils by allowing a debasement of the dollar, which is used to purchase the assets at a discount, rather than aggressively raising interest rates.

This move has paid off, at least for March (remember that’s when the euro was knocking on the door to 1.60). The total for the TICs in March reached $80.4 billion, up from the nearly $65 billion attracted in February. The trick here is to keep the dollar weak to allow the deficit to continue to be financed! I love it when a plan comes together!

So… Gold has finally caught some wind in its sails. Gold has gained almost $16 today. My friend, and writer extraordinaire, David Galland wrote a piece on gold that was featured here in The Daily Reckoning a few days ago, and he’s soooooooo good that I thought I would treat you with a snippet of his thoughts on gold…

“The current correction is not yet exceptional: Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%.

“During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 18% at its worst, is only marginally worse than average.

“Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

“And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 – falling from $725 to $567 – analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

“I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they’re the norm for any sustained bull market. In the 1970s’ sustained gold bull market, a similar pattern occurred.”

Time to head to the Big Finish… Thanks to David Galland for his thoughts on gold! Be sure to check out his full article here.

Currencies today 5/15/08: A$ .9370, kiwi .7575, C$ .9990, euro 1.5480, sterling 1.9445, Swiss .9490, ISK 77.70, rand 7.6075, krone 5.0760, SEK 6.02, forint 161.20, zloty 2.19, koruna 16.19, yen 104.70, baht 32.35, sing 1.3775, HKD 7.80, INR 42.59, China 6.9940, pesos 10.49, BRL 1.66, dollar index 73.21, Oil $126, Silver $16.93, and Gold… $883.10

That’s it for today… Can’t wait to get home and off my feet! I hear that my little buddy Alex didn’t fare too well in his baseball game last night… Tough night at the plate… That’s OK, there’s always the next game! An old Mark Twain Bank colleague dropped by the booth to say hi and catch up yesterday. It was good to see Mark Elmore again! Mark was our assistant back “in the day”, and now he’s doing quite well trading bonds, so I like to think that I taught him well! HA! I’ve gotta get out of this place… If it’s the last thing I ever do! Can’t wait to get out of here, this place is just too spread out for me! So… Let’s get the last day of the Show over with, and I hope you have a Tub Thumpin’ Thursday!

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Source: I Love it When a Plan Comes Together! 

Good day… And a Wonderful Wednesday to you! Well… My first day at the Las Vegas Money Show went well. This place (Mandalay Bay) is so big and spread out; there’s just too much walking for me. My presentation went well, I think; it’s just too difficult to tell anymore for me.

Front and center this morning we have the government telling us that inflation was less than forecast last month. Just who do they think they’re kidding here? I didn’t just fall off the turnip truck! CPI rose 0.2% versus 0.3% forecast, putting the annual rate at 3.9% versus the previous 4.0%… Just doesn’t sit well with you does it? Oh well… We carry on despite the dolts we have to work with!

Another piece of data already out this morning has foreclosures in the United States climbing 65% in April, and bank seizures more than doubling in the same period. RealtyTrac Inc. said this morning that there are more than 243,300 properties, or one in every 519 households, that were in some stage of foreclosure, which happens to be the highest monthly total since they began to keep the data!

Oh, but don’t worry about all of this folks… Fed Chairman Big Ben Bernanke says the worst of over! And before I get away from all this, Freddie Mac, the second largest mortgage finance company, posted a $151 million first quarter loss… And… I would bet they “fudged” the numbers to make them look “this good”!

I shake my head in disgust of the stuff we have to deal with… The lies, the cooked books… UGH!

Alright, I’m back now… I was away for a minute to yell at the walls!

The softer inflation data this morning is allowing the euro (EUR) to gain some ground versus the dollar, as the market puts the Fed warnings of rising inflation and eventual rate hikes in the United States on the back burner.

Yesterday, we saw the euro lose a little ground after Fed Head Janet Yellen was wishing, and hoping and thinking and praying that the economy would be strong enough to raise rates. Oh give me a break! She’s grasping at straws! Yellen stated that she “would be pleased” if the economy was strong enough to raise rates by year-end. That’s all nice and sweet, Ms. Yellen… But did you realize you would move the markets with that “wish upon a star”?

Our friend, Jim Rogers, is back in the news today talking about the dollar rally. Let’s listen in…

“The dollar is going up, which is useful for people who want to sell the dollar down the road. With things the way they are, I would rather buy the Swiss franc and Asian currencies.”

Jim Rogers was also of the thought that carry trades are going to be reduced…

I’m all about this, and agree with our friend… This is the stuff I pound out on the keyboard almost every day. The carry trade is a “risky trade”, and when risk enters the markets in a big way, like I believe it will this year, the carry trade will be unwound, thus benefiting Swiss francs (CHF) and the low yielding Asian currencies.

Last week I told you about the Chinese renminbi (CNY) and how it had stalled at 6.98. There was a report this morning that Central Bank Governor Zhou signaled that slowing exports would see an easing in the pace of renminbi gains. If you recall that talk last week that I gave, this is what I was talking about… Slowing gains in the renminbi, (as if they weren’t slow enough already!)

The Canadian loonie (CAD) is knocking on the door to parity with the dollar again this morning, as it swaps places with the Swiss franc, which was at parity last month but has fallen back.

The Japanese yen (JPY) is getting sold again. This is a back and forth tug-o-war with yen… But in the long run, I still see yen gaining versus the dollar… But we’ve got to get that stupid carry trade off the books first!

One currency that has remained pretty “steady Eddie” during this recent dollar strength is the Brazilian real (BRL)… Of course I just put the “Chuck’s kiss-o-death” on the real… Anyway… I was talking to a customer yesterday here at the show, and listed the positive balance of payment currencies from Norway (NOK), Sweden (SEK), Switzerland, euro, Japan, and Singapore (SGD) as currencies an investor should look to. But added that Brazil and Australia (AUD) have the “things” the world needs, and should keep these currencies underpinned…

Currencies today 5/14/08: A$ .9350, kiwi .7630, C$ .9995, euro 1.5470, sterling 1.9445, Swiss .9485, ISK 79, rand 7.6550, krone 5.07, SEK 6.0150, forint 161.50, zloty 2.1920, koruna 16.15, yen 105, baht 32.40, sing 1.38, HKD 7.8, INR 42.45, China 7, pesos 10.50, BRL 1.6665, dollar index 73.31, Oil $125.37, Silver $16.89, and Gold… $870.20

That’s it for today… The BIG GUYS from Jacksonville were in town and came to my presentation yesterday. That was pretty exciting for yours truly. Since I got sick last summer, I haven’t had much opportunity to be around the Big Guys from Jacksonville (the home office), and just talk to them, etc. So, that was good… We also have two of our NY Operations people here with us at the show… Rachel and Tom are doing great! And Kathy from Jacksonville is also here, so we’ve got plenty of help. I go back to the days when it would just be Chris Gaffney and I all day at the booth… Chris is on his way to Panama this morning… Better him than me, that’s all I can say! I hope you have a Wonderful Wednesday!

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Source: More Bad Data for the U.S. Economy

The Jobs Jamboree… Can you believe that so much attention and drive to the markets is tied to this?

The dollar is a bit softer this morning going into the Jobs Jamboree, and rightly so, given the forecast. However, the dollar is still swinging a mighty hammer and I’m a bit perplexed by this. Last night I was up late (for me) and decided to put down some thoughts that were bouncing around in my head.

Well… How about that U.S. dollar? That’s some currency, Rudy! Why, look at it rallying against the euro (EUR) and other currencies as if it’s on a mission from God! It looks as if the United States has turned things around. The deficit no longer needs to be financed with over $2 billion a day in foreign investment… Interest rates are where they need to be to fight this soaring inflation… The government has stopped spending wildly, and the budget is balanced… The mortgage lenders have recovered all of their losses… There is no longer a credit crunch… And finally, the war is the Middle East is over.

But Wait! Unless I pulled a Rip Van Winkle and slept through all of that… These things haven’t happened, nor do they look as though they might begin to happen any time soon! So, what the heck has the dollar bulls dancing in the streets swinging a mighty hammer?

You’ve got me on this one. Folks, for once, I’ll admit that I have no idea what the heck is going on here… Serenity Now! Is this the pullback in the euro that I said we should look for in January, but never saw? If so… When will the tourniquet be applied to this gushing wound? Hmmmm… Good question! And I don’t have an answer to that either! I thought back in January when the euro was around 1.45, that we could see it fall back to 1.40, before moving ahead again… But that never happened. Instead we saw the euro climb to 1.50, then 1.55, then 1.60 in a little over three months time. Was it too quick? Is that what we’re seeing, merely a technical correction? Or is there something else in the works here?

Again… I don’t know the answer… But I’m hoping that in the days to come, it becomes apparent, and when it does, I’ll be Johnny on the Spot in reporting it to you! (Notice I said, “I’ll be Johnny on the Spot”, and not I’ll be “A” Johnny on the Spot! HAAHAHAHAHA)

This dollar rally has got the “naysayers” coming out of the woodwork too. Oh, the whole lot of them are pointing fingers and claiming they knew the dollar was undervalued, and blah, blah, blah… Where were these guys when the euro hit 1.60 about 10 days ago? They were hiding under the sheets!

Forgive me for this but this reminds me of when I coached my darling daughter Dawn’s girls softball team. The girls would do these chants on the bench that drove me nuts! But there was one that would just make me want to scream! We would be getting beat unmercifully, and the girls would be chanting something that ended with, “We can beat your team any old time.” UGH! But that’s what the naysayers are reminding me of right now. They are chanting about the dollar, when it has gotten beaten unmercifully for six years.

OK… Onto other things… The U.S. ISM Manufacturing Index remained well below the 50 level for the third consecutive month. I saw a news story yesterday where the writer was seriously talking about how Manufacturing will pick up due to the stimulus checks, as the receivers of those checks go out and spend them. Folks… The writer was serious…

I’ve told you over and over again that these stimulus checks might get spent by some… But I don’t see the checks getting spent by most. Instead, I see them using the money to pay down a credit card, or some form of debt, as the past couple of months has been quite sobering to the U.S. consumer.

Hey! You’ve got to feel good this Fantastico Friday, as U.S. Treasury Secretary Paulson is telling anyone that will listen, that we are “closer to the end” of the credit crisis. Oh, now that gives me a warm and fuzzy, given his track record of spouting off stuff like that in the last year!

I’ll bet him a shiny quarter that we’re only halfway through the credit crisis! The Bank of England (BOE) said yesterday that they feel as though the “worst is over” . Hmmm… Maybe these guys know something I don’t!

Down Under in Australia, retail sales surprised on the upside, printing at +0.5% versus the +0.3% that was forecast. Retail sales account for 40% of private consumption, which in turn accounts for around 60% of GDP… So this is important data for the Reserve Bank of Australia (RBA). The RBA will not need any excuses to keep rates at current levels given the strength of this data… And that thought should be a good underpinning for the Aussie dollar (AUD).

The U.S. stock market has been on a feeding frenzy since the rate cut on Wednesday. All this euphoria in stocks has the carry trade going great guns once again… This is being reflected in the price of yen (JPY) and Swiss francs (CHF)… I just don’t see how this can continue to go on and on and on. The carry trade has longer lasting power than the Energizer Bunny! But one day, it will all come crashing down like a house of cards… At least that’s my opinion.

There was another story yesterday about the Gulf States ending their dollar peg. This is getting out of control! About every three months these guys get together and make big plans to drop their dollar peg, and the media goes hog wild over the story. Shoot Rudy, I used to get all caught up in it too until I realized they were just being the boy who cried wolf.

Good day… Chuck will be a little late this morning, so he asked me to get the Pfennig out for him today. As usual, he sent me his thoughts on the big news of yesterday – the rate cut and announcement by the Fed. So here are Chuck’s thoughts on the FOMC move:

“Well… The Fed did cut 25 BPS to 2% on Wednesday, just as I thought they would… And they tried a back door curve ball to try and wiggle out of a basses loaded jam. You see, the Fed had loaded the bases with rate cuts, and the markets were at bat, looking for the Fed to pull a Roberto Duran and say ‘no mas’ with the rate cuts…

“The Fed decided to leave out some language that had the markets thinking they had figured out the Fed… But in reality they know nothing more than they did earlier in the day! You see… The Fed removed the ‘downside risks to growth’ clause as well as the statement that, ‘the committee will act in a timely manner as needed to promote economic growth and price stability.’

“OK… On the outside looking in, this looks like a wink and nod from the Fed that they are finished… But… I don’t think they are! And you know what? I don’t think everyone else will buy it either, once it sinks in to some of the hard heads on Wall Street.

“The currency participants didn’t go for the back door curve ball, and they took the hammer away from the dollar… But not a huge swing back in the currencies’ favor… Not yet…

“I explained yesterday that the Fed wouldn’t come out and say ‘no mas’ because they would have egg all over their collective faces when the jobs report for April prints on Friday… And the Fed didn’t… They removed some language, but left Pandora’s Box of interest rate cuts cracked open.

“A couple of months ago, I told you that I believed the Fed would cut rates down to 1.50% before stopping… They are now at 2%… And I’m not backing off that statement!

“Oh, and before I go and hand this back to Chris… (No there’s not a word from our sponsor!) I wanted to touch on the GDP preliminary printing for the first quarter yesterday… It came in at 0.6%… And you should have seen the media jumping all over this saying, “See we averted a recession!”. Yeah, right… Without a good dose of government spending, and a swing in inventories, GDP would have been negative…

“Household spending grew at the slowest pace since our last recession of 2001…

“So, hey! You dollar bulls… Keep propping up those dollars… There’s no risk in the economy or markets these days! NOT! Knuckleheads… The whole lot!”

Thanks to Chuck for making my job a whole lot easier this morning! So with the Fed cut ‘in the bag’, and no clear sign from them if in fact this is the last cut, the dollar held its ground. But overnight, Asia decided the recent dollar rally was a bit overdone, and took the dollar back down, moving the dollar index below 72.50, where it was trading at the beginning of the week. But Europe turned it back around again, and rallied the dollar back to where it was trading right after the FOMC announcement.

As Chuck suggested, the language of the FOMC statement isn’t clear, so everyone is trying to put their own spin on it. There are several stories out this morning that suggest we have avoided recession and are starting to move forward again, while others suggest we have several more quarters of negative growth before we see a turn around. Treasury Secretary Paulson seems to be right in the middle, suggesting that the credit crisis is probably about half over.

“We are closer to the end of this problem than we are to the beginning,” Paulson said in a Bloomberg interview. Even with “headwinds and despite some of the things that we’re going through, this economy is still growing, albeit modestly.” Sounds like Paulson is still pushing the Kool-Aid (and drinking some of it himself). The FOMC will meet next on June 24-25 and current expectations predict they will leave the overnight lending rate at 2% for the rest of the year.

But a pause in interest rate cuts doesn’t necessarily mean the dollar would rally over the next several months. Mike Meyer pointed out a research piece yesterday from Credit Suisse Group that showed the that dollar index fell 8% by the end of the year after the Fed stopped lowering the target lending rate in June 2003. So even if the Fed does decide to pause, which I don’t believe will happen, the dollar may still have some room to fall.

After all, even though the GDP figure was slightly positive, the fundamentals haven’t changed. “Economic activity remains weak,” the FOMC statement said. “Tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.” The gain in GDP reflected an increase in inventories as consumers retrenched and companies cut investment. Spending by households, the biggest part of the economy, grew last quarter at the slowest pace since 2001, amid mounting job losses and surging food and fuel prices. Data that will be released today will probably show further weakness in employment with the weekly jobless claims coming in above 365K.

We will also see the ISM Manufacturing number which will show a further weakening in the manufacturing sector. Finally, we will get the monthly construction spending and total vehicle sales, both of which will show continued weakness. On the drive in this morning, I heard a piece on the number of U.S. consumers who are getting behind on their car loans. Loan delinquencies in the auto sector are at 17-year highs. When you think about it, the two biggest loans U.S. consumers take out are on their home and car. We have all heard about the crisis in the housing market, and it looks like we will have a similar crisis in the automobile sector now. Several customers are ‘upside down’ in their car loans, as they paid too much for huge SUV’s, which are now worth substantially less with gas prices skyrocketing. Just another drag on our already over leveraged consumer, and further proof that we are still nowhere near the bottom of this economic downturn.

The FOMC wasn’t the only central bank meeting yesterday, as the Bank of Japan announced they would leave rates unchanged. This was again largely expected by the markets, but some of the accompanying language showed their concern with inflation. The BOJ predicted that inflation would accelerate but also cut its economic growth forecast. The report tried to downplay any predictions of interest rate moves, and the markets seem to think the BOJ will leave rates unchanged through the end of the year. The yen (JPY) didn’t really react to the news, as markets had already predicted the outcome.

The Japanese yen will continue to be at the mercy of the ‘carry trade’. When the markets are worried about risk, the carry trades will be reversed and the yen will rally, but when risk is no longer a worry, the carry trades will be put on and the yen will fall. Right now, the markets are putting carry trades back on, so the yen has been sold. But I believe there will be another ‘event’ similar to Bear Stearns, which will remind the markets that all is not well and these carry trades will again be reversed and the current 104 levels on the yen will look cheap.

With the Fed failing to raise concern on inflation, gold continued to drop. Investors move to gold as both an inflation hedge and as a safe haven during high-risk periods. Lately, investors have started moving back into riskier assets and away from the relative safety of gold. Again, I don’t share the rosy picture that these investors have, and believe we will soon be reminded of the risk that remains.

Currencies today 5/01/08: A$ .9386, kiwi .7792, C$ .9827, euro 1.5528, sterling 1.9867, Swiss .9558, ISK 75.07, rand 7.5793, krone 5.1122, SEK 6.0179, forint 162.72, zloty 2.22, koruna 16.295, yen 104.11, baht 31.65, sing 1.3582, HKD 7.7930, INR 40.59, China 6.9914, pesos 10.489, BRL 1.6622, dollar index 72.88, Oil $112.92, Silver $16.68, and Gold… $856.20

That’s it for today… We are all hoping and praying that things go well for Chuck this morning! He got to see a great game yesterday, and the weather helped out with temps staying in the ’70s. I can’t believe it is already May, this year is really flying by. Both Chuck and I will be traveling during May with the Las Vegas Money show and a Sovereign Society meeting in Panama. All the travel can be tough, especially on Chuck, but he loves ’spreading the word’ on EverBank and the benefits of portfolio diversification. Hope everyone has a Terrific Thursday!!

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Good day… And a Marvelous Monday to you! Two of three from our second most heated rival, the Astros, makes for a good weekend at the Butler House! Should have been a sweep, but I won’t get greedy! The currencies in the overnight market have started to show some healing from last week’s meltdown… So, let’s get to it!

First off, front and center this morning, the euro (EUR) is leading the pack (vroom, vroom) this morning after rallying all night in Japan, and now Europe. I was talking to a trader from a BIG BROKERAGE HOUSE the other day, and I mentioned that I had seen plenty of stories in the past few days that made it sound as if the markets had changed their mind regarding a Fed rate cut this week. The trader mentioned that the percent of those polled thinking there would be a cut had fallen during the week, but was still around 75%.

I really thought at that time that the fall from the high 90% thinking there would be a rate cut to 75%, probably had a lot to do with the dollar rally last week. I still think that’s the case. One of these days we’ll see Big Ben change his tune on rate cuts to appease the markets, and affix his eyes on the inflation balloon that is now hovering over us. I even heard some dolt on our local radio station yesterday tell the audience that “inflation isn’t a problem”. HAHAHAHAHAHA! You should have heard me yell at the radio!

The dollar has two items hanging over its head like the Sword of Damocles this week… First, the Fed meeting on Wednesday… And Second, the Jobs Jamboree on Friday. We’ll be into May by then and the dollar bulls might be yelling “May Day” once that Jobs report prints on Friday, given the forecast right now stands at a negative -78K.

So… Who’s mast are you going to pin your colors to this week… The dollar’s…or the euro’s?

OK… Long time readers know how I continue to believe that the balance of payments is going to continue to weigh on the dollar. I tried to make this point on CNBC but they would hear nothing of it… So, instead I turned to my Pfennig readers, of which, there were probably more reading what I wanted to say than people watching CNBC! HA! (I jest, I know better!)

Well… Wanna see something that really plays well with my thought that the financing of the deficit is going to be the biggest problem for the dollar? Japan owns more Treasuries than any other nation. After raising their holdings by $9.2 billion to $620.6 billion between March and July 2007, Japanese investors trimmed that stake by $34 billion through February, the U.S. Treasury said April 15. And why not? The Japanese just posted a 7% loss on their Treasury holding in the last quarter!

So… The “pain meter” for the dollar just went up a few notches… As the story on the Bloomie said… “Add another ailment to the U.S. misery index of soaring gasoline and wheat costs and falling home values: a Federal Deficit that’s is burgeoning as foreign investors led by the Japanese recoil from the slumping dollar.” Couldn’t have said it better myself!

This is scary stuff folks… I don’t mean to cry wolf here… But it’s something to keep an eye on. This is a scenario that I’ve explained over and over again the past few years… That it was something back in the deep dark closet of scary things for the dollar. I don’t think that it has been dragged out of the deep dark closet just yet, but it has moved closer to the closet door.

On Friday, we saw a little bit of healing in the currencies after the U. of Michigan Consumer Confidence Index fell to it’s lowest level since 1982 in April. This was alarming, given the fact that the “experts” had thought the report would not show additional weakness from the previous reading. The 53.3 index level is firmly in the range that is historically associated with a recession.

I had two radio/podcast interviews on Friday… Since I have the face for radio, the PR people are lining the interviews up for me… I like these, because the interviewers let me talk… Too bad they have just regional reach.

OK… Besides the Fed meeting – which by the way is a two-dayer – what these guys do for two days, besides playing Battleship or Risk is beyond me! OK, back to what I was talking about, besides the Fed meeting, and the Jobs Jamboree, this week is chock-full-o-data, that will probably really weigh heavily on the dollar. Here’s the roster o-data…

Tomorrow we get to see the color of the latest GDP report for the first quarter (should be an anemic 0.4% growth, which without Government spending (we are fighting a war) would most likely be very negative. We’ll also see personal consumption, which the Fed looks at for signs of inflation. (I think they need another barometer… It’s called the Pfennig!) We’ll see the Chicago Purchasing Manager Index (manufacturing), and then two of my faves, personal income and spending.

On May Day, we’ll see the latest ISM Manufacturing Index, which is expected to remain below the contraction line of 50. There are other second tier reports sprinkled throughout the week, so it’s not going to be an easy week for the dollar, as it was last week!

With the dollar weakness overnight, gold has bounced back over $5. Oil has pushed back to within spittin’ distance of $119. Could this be the beginning of the next leg up for the commodities against the dollar? Don’t know the answer to that question… But figured it was worth everyone taking a moment to think about it.

One currency that’s not following the euro higher this morning is Japanese yen (JPY)… The Bank of Japan (BOJ) is expected to lower its growth projection for the current year when it releases its twice yearly outlook on the economy this Wednesday. In addition, the BOJ will most likely leave rates unchanged at the meeting on Wednesday. I think that yen gets more play in the carry trade than it does on its own data. And so it goes with yen… I still fully expect it to recover this lost ground and get back to 100 and beyond, but it will require a risk event to play out, that unwinds carry trades again.

In New Zealand, could the trade deficit finally be getting some relief? The February report showed a trade surplus for the month, at NZ$ 258 million. The March report will print tonight and is expected to be an even larger surplus number! WOW! New Zealand turning the tables on their HUGE deficit? Well… That would be grand! But, they’ve got a hard row to hoe with getting their trade deficit straightened out. But these monthly surplus reports are certainly a step in the right direction!