Theme of the day again: NZD strength. NZD/JPY and NZD/USD two of the biggest % gainers on the day. EUR/NZD, AUD/NZD the biggest losers on the day, all in NZD strength.

General euro weakness abounds across the board.

NZD GDP expands the first time since the March 08 quarter.

BOE voted 9-0 to keep rates on hold.

Fed announces interest rates today @ 2:15pm EST. No change expected BUT it’s what they say in their statement that could make a difference. Supposedly, they’ve been talking with bond dealers about taking some of the stimulus back out of the economy. We’ll see if there’s any mention of this today.

Tomorrow: German IFO, U.S. Unemployment Claims, U.S. Existing Home Sales, G-20 meeting starts.

NZD going up on milk? Recovering Dairy prices could help New Zealand. Fonterra says that global dairy prices may make a slow, gradual recovery. Since they are one of NZD’s biggest companies & exporters of one of their biggest products…that’s a good sign for NZD.

kay, the recovery will not be “V” shaped.  It may not be “W” shaped, so today’s media experts now refer to the recovery as “U” shaped, even if it is an extended “U.”

Well, one thing is for sure, the longer this recession-recovery goes on, the smarter the Oracle of Omaha looks.  Yes, Warren Buffet has a way of putting his finger on the pulse of the economy.  Frankly, the real mystery is why everyone else either does not see what he sees or why they are unable to express their vision as succinctly as the Oracle.

For the past three months, every time Buffett has appeared on CNBC he stresses one consistent symptom.  Hey guys and gals, listen up will you!  This guy gets it, plain and simple.

This recession was in large part caused by faulty and probably unscrupulous lending practices that inflated the value of the residential real estate market and loaded the banks with toxic assets.  The Oracle has said repeatedly that this recovery will not take hold until the excessive residential real estate inventory is brought under control, meaning sells out.  Everything else may be “less bad,” a popular news slogan these days, but that simply stands for baseless.

This recovery has no foundation until the existing residential real estate market is cleared up and moved out.  And, even the Oracle admits that the depth of the backlog may be bigger than expected.

As more and more residential mortgages fail and as more than 1 in every 355 homeowners is in the foreclosure process, the inventory ceiling has yet to be identified.  Buffett does not get too specific about this figure, but the facts are the facts.  There is at least one year’s worth of inventory backed up now.

Are Housing Starts Really Encouraging?

The Commerce Department released figures showing that new housing starts increased by 1.5% from July to August.  The seasonally adjusted rate is now at 598,000.  New building permits rose sharply by 2.7%.  Year-over-year permits applications were 37.3% ahead of last year.  On the surface, that looks like good news.

However, single family home construction actually declined by 3% to a seasonally adjusted rate of 479,000 units.  The figure had risen each of the previous five months.

Earlier in the week, this was precisely what Buffett had predicted.  In order to clear out the excess residential inventory, new single family housing starts needs to suffer further.  It is becoming increasingly evident that government initiatives are driving the recovery, not national or global economic growth.  Joseph Brusuelas of Moody’s Ecconomy.com explained; “We are at the stage where an economy exits recession.  The recovery is going to be moving along due to policy initiatives and inventory restocking.  It’s a U shaped recovery with some parts of the U a little bumpy.”

The rise in housing starts is partly fueled by the upcoming November 30^th expiration of the first-time homebuyer’s $8,000 tax credit.  On Thursday, Treasury Secretary Timothy Geithner reported that the administration has not decided to renew the first-time homebuyers tax credit or any version thereof.  This tax incentive is responsible for more than 375,000 single-family sales so far this year.  Real estate lobbyists have been pushing an expanded version of the tax credit that would put more money on the table and would not be limited to first time buyers.

The ball seems to be in the hands of the Federal Reserve, who meets next week.  As Chairman Bernanke has indicated, the recovery is underway.  The Federal Reserve is believed to be more interested in finalizing an exit strategy rather than pumping more money into the economy.

This is bad news for the 9.7% of Americans receiving unemployment benefits.  It is also bad news for the housing market.  The majority of existing home sales are in the low-end, first home buyer price range.  In addition to the first time buyer, 33% of home sales are distressed sales, meaning either facing foreclosure or already in the system.

Would someone please tell Secretary Geithner that a 2010 tax credit is absolutely necessary.  Let’s get this U moving upwards.  Rather than pull back from the tax credit policies of the past, let’s expand them and put some fuel on the fire.  This is important work.  Tim, talk to the Oracle of Omaha!

In a surprise move early in the New York morning, members of the Bank of England elected to expand its quantitative easing program following its scheduled interest rate decision. Although there was latent speculation that the measure would surface, for the most part, traders were expecting no real changes to QE with recent pickups in economic data. According to the release this morning, the Bank of England saw it necessary to pump another 50 billion pounds in to the economy to the tune of 175 GBP billion. A good plan to continually increase liquidity and credit in the country, the measure will likely produce more harm than good. As before, the more cash the MPC pumps into the economy, the higher the likelihood that the underlying currency will come under selling pressure. The more pounds that are available in the market, the lower the price will fall. Moreover, the increased supply of cash will likely lead to further inflationary pressures down the road, eroding potential growth in the near term. The sentiment can already be seen in today’s market action as the GBPUSD currency pair lost a whopping 150 pips in a matter of 5 minutes following the announcement. Once trading above the $1.7000 figure, the British pound is now trading about 220 pips lower (as of this writing, the pair is trading at $1.6771). A necessary evil, the chosen expansion will push British leaders of monetary policy to teeter a fine line when it comes to an exit plan.

Traders Profit On Cable Drop

Traders Profit On Cable Drop

Aussie, Aussie, Aussie

On the other side of the world, the Australian dollar received a nice lift on the day. The currency rose to as high as 0.8460 against the US dollar following an employment report that showed actual job growth. Optimistic, the report illustrates a more resilient Aussie economy as most other trading partners have shown continual weakness in labor reports. But job growth alone didn’t help the underlying currency. Traders now looking ahead to a yearend interest rate increase were supporting the Aussie bid as a growing consensus now believes that 25 basis points are in the cards for the overnight cash rate. According to market sentiment, there is now an 80 percent chance that central bankers will opt to raise interest rates in the fourth quarter. And why not? Economic data has been nothing but positive for the land down under. Consumer and business confidence continues to remain relatively supported as retail sales kept a 4-month winning streak going until just recently. The streak ended as sales dropped 1.4 percent in the month of June. As a result, given the recent spark in interest rate speculation, longer term prospects continue to remain optimistic for the underlying Aussie dollar.

Scheduled on the same day, both the UK inflation report and FOMC rate decision are expected to jolt the FX market this week, at least a tad. Set for Wednesday, the UK report is anticipated to show a further slowdown in consumer and producer prices with additional central bank statements alluding to a continued slowdown in the UK economy. Recent reports show nothing but support for the near term decline in prices. For the month of June consumer prices rose a paltry 1.8 percent from the year before as producer prices rose at the lowest level in eight years. What pound bulls will most likely be attuned to will be the probable downgrade in overall growth by the Bank of England. Following the expansion in quantitative easing of an extra 50 GBP billion last week, traders are expecting the worse for the subsequent statements. If the same fears are proven right, the underlying currency will come under pressure as further accommodative policies are likely to emerge in the coming quarters. Even worse has been speculation of a deflationary trap in the country, where prices continue to move low enough to choke off spending by both consumer and producer sectors, leading GDP further lower. Adding fuel to the fire has been Governor King’s refusal to completely rule out further expansion of cash injections into the financial system.

To Buy or Not To Buy

Currency traders will also be eyeing the Federal Reserve’s interest rate decision later on in the day, following the UK inflationary report. Although most, if not all, are expecting the benchmark rate to remain the same, the question hovers over any further plans to expand the program to buy long dated government Treasuries. Heading into the month of August, the Federal Reserve has already fulfilled a majority of its previous commitment, purchasing approximately $250 billion of the allotted $300 billion. In addition, the central bank is set to purchase $1.45 trillion in mortgage debt by the end of the year. All of this in order to boost liquidity and lending while ensuring that benchmark rates remain relatively stable. However, given the recent unemployment report, will there really be a need to expand the program? Market participants answer with a resounding “no”. Given the uptick in non-farm payrolls last week, stable economic indicators and a relatively thawed credit market, central bankers will favor completion of the program over expansion. The sentiment is likely to give risk tolerance a boost as slim anticipation still lingers of a rise in interest rates at the tailend of Q4.

Retailers Find a Silver Lining

US retail sales are expected to have kept positive in the month of July, which would be the third consecutive month in a row and a definitive sign of economic stabilization. Set for release on Thursday morning, the report is forecasted to show a rise of 0.5 percent. Good support for market bullishness, speculative sentiment will be focused on the contribution and effects of the Cash for Clunkers program on the actual figure. Beginning last month, the administration’s plan for boosting auto sales may temporary increase the figure, leading some to believe the improvement will be a flash in the pan. Estimates are for the ex-auto number to be considerably lower, rising by only 0.1 to 0.2 percent for the month.