Who's Going to Say "Uncle" First?
"It all depends on what you believe the actual rate of inflation is. Big Al tells us there are no worries regarding inflation…if he really believes that, then interest rates shouldn't go much higher than 4%…"
by Chuck Butler In This Issue… - Looking for a cool front!
- How high will rates go?
- Latam currencies get rocked!
- First Day of School!
--- Advertisement --- Looking for the nation's best checking account? Everbank's FreeNet Checking Account at www.everbank.com is a Forbes "Best of the Web" pick for five consecutive years and ranked #1 by Bankrate.com! --------------------- And now…today's Pfennig! Who's Going To Say "Uncle" First? Good day. Hope your weekend was grand, it sure was hot here! The heat that the dollar has applied to the currencies lately hasn't let up; we sure could use a cool front in both places! It certainly looks as though talk of higher interest rates in the United States is giving the dollar some push. So, that begs the question of just how high interest rates in the United States are going to go, right? How high do you think they will go? I think it all depends on what you believe the actual rate of inflation is. Big Al tells us there are no worries regarding inflation…if he really believes that, then interest rates shouldn't go much higher than 4%… But if you believe like I do that inflation is really around 6-7%, then rates need to go much higher to just fight that inflation. And here's where I have my bone of contention with the markets right now: Rising interest rates to fight inflation that is already in your economy shouldn't be a draw for your currency… Did you happen to see the sell-off in the Latin American currencies on Friday, including the Mexican peso? Yes, all the "Latam" currencies, as they are known by, got tarred with the same brush when Brazil was rocked by a political scandal…we'll have to see how this plays out in the long run, as political scandals are a way of life in Latin America. One thing to also think about with the Mexican peso is the fact that I pointed out to you over a month ago, when pesos started to rally: Interest rates have pretty much peaked out in Mexico, and once they begin to drop, you will see interest in the peso drop too. Be careful here… It look as though the sell-off in Australia was a bit overdone last week, as the A$ has come back strong. Giving the A$ some strength was a report that came out late Friday on wages. Wages growth hit 4% last month, which has to be a concern of the Reserve Bank of Australia (RBA). If that puppy ticks up toward 5% in the coming months, we could very well see the RBA come back to the rate hike table. We all know they pricked the housing bubble without causing harm to their economy, and they will stop this wage bubble in its tracks, if needed… Hey! Did you know that the Asian region's Central Banks own a total of over $1.2 trillion in Treasuries? Pretty amazing amount I must say…and makes you wonder just when someone is going to say "uncle", and stop buying. Last Friday I told you about the Royal Bank of Scotland's(RBS) $3.1 billion entry for a 10% holding of the Bank of China…something else occurred to me later, that completely went over my head on Friday… China's fragile banking system must not be as fragile as they would like us to believe, and why they need to keep the renminbi under wraps… Look… RBS isn't going to put money into a "fragile bank"… Is it time for China to take another block away from their currency wall? I think so. We'll have to see what the Chinese premier has to say when he visits the White House next month. Also…did you see Secretary of State Rice's attempt to make China have a conscience last week? I wonder how that will play out next month too! Japanese yen has recovered some of its lost ground last week, after PM Koizumi received a shot from a recent poll. Recall that Chris told you a couple of weeks ago that Japan will hold elections next month, and the most recent poll showed increased approval for Koizumi, and his reforms. I think this type of poll should keep the inflows into the Japanese stock markets going, and going, and going… Not much in the way of data this week in the U.S. with Existing and New Home Sales, Durable Goods being the most important, and even those are second and third tier data reports. Next week we'll see Consumer Confidence, Income and Spending and a Jobs Jamboree. But this week is devoid of data, so we'll have to see which way the markets want to take the currencies, for it is a new week, and with it could come a new currency sentiment! As I type that I look up and see that the euro has just popped back over the 1.22 handle improving from the 1.2185 level when I first turned on the screens this morning. So, this could be a good week! Currencies today: A$ .7570, kiwi .6980, C$ .8280, euro 1.2220, sterling 1.8010, Swiss .7880, rand 6.4680, krone 6.5330, forint 199.75, zloty 3.29, koruna 24.10, yen 109.50, baht 41.01, sing 1.6666, China 8.1056, pesos 10.7440, and gold… $438.75 That's it for today. Hey! Did you see the Big Boss, Frank Trotter on CNBC Squawk Box Friday morning? My bad, I forgot to tell you he was going to be on in the Pfennig! Good job as always, boss! First day of school for my little buddy, Alex today. I remember rushing home after writing five years ago, to see him get on the bus the first time. WOW! Time flies, as he enters the 4th grade! Have a great Monday and week! | 
