A V-8 Moment!

Good day. Well, the tent revival evangelist came back for something he forgot yesterday, and the euro rallied once again! Florida is the NCAA Basketball Champion, and the Cardinals started the 2006 season off on the right foot! Good stuff all around!

First of all, as I left you yesterday, I told you that traders were marking the euro down on thoughts that the U.S. manufacturing report (ISM) for March was going to be very strong. Well, a funny thing happened on the way to the forum: U.S. manufacturing in March actually fell 2.5 index points! The index now stands at 55.2, which, for new readers to class, means that manufacturing is still in an expansionary mode. The line in the sand is drawn at 50. Anything above is expansionary, and anything below means manufacturing is contracting.

Now, the media likes to spin this so you feel good about the economy. They only mentioned that the manufacturing sector was still expanding, which is true. It’s true, but doesn’t it start flashing amber in front of your eyes when an index that was supposed to kick some rear and take names later, falls? It does for me, and it did for the currency traders and investors; they immediately began a fire sale on dollars!

I was reading (again) my copy of Bill Bonner and Addison Wiggin’s latest book, “Empire of Debt,” on the plane last week. What a great book! I tell you this because I’m reading this book, and then I see a story yesterday morning, that our Corporate FX guru, Ashish, sent along to me regarding the current account deficit. This is from Goldman Sachs:

“The globalization glue that has helped fund the significant U.S. current account could be fraying at the edges – breaking the recycling of USD back to U.S. bonds. If that is the case, then the market could see a painful scenario of a weaker USD, a weaker bond market, higher inflation and a FED unwilling to ease.”

I’m not going to get up on my soapbox now and rant and rave about “How Deficits Do Matter.” I think you’ve all heard that song before from me. I just think that sooner or later, traders and investors are going to have a V-8 moment, and realize this…What? You don’t know what a V-8 moment is? You know, when you wish you would have thought to have a V-8 (drink) instead of some sugary soda pop, and you slap yourself in the forehead and say, “Wow! I could have had a V-8! HAHAHAHA!

OK. That was really going off on a tangent, eh? I was really pleased to see that Australia’s February trade deficit came in narrower than expected. The February deficit was the smallest trade deficit in nearly four years! And, if you take away the impact from the Sydney Olympics (remember them?), this is the biggest monthly improvement in the deficit of all time! Way to go Aussie!

The Aussie dollar, as I wrote before I left, had been getting tarred with the same brush as the kiwi, but it looks as though that connection has dropped.

While I’m down in that region, I’ll tell you that the Chinese renminbi is stronger overnight after a newspaper reported that a Chinese lawmaker has called for a widening of the trading band. OK, there might need to be some xplainin’ eh, Lucy? Yes! You see, when the Chinese dropped the peg to the U.S. dollar last July, they formed a basket of currencies that would be used to reach the renminbi’s value versus the dollar and other currencies, each day. The kicker was that they decided to put a governor on the renminbi, and only allow it to move 0.3% either way each day versus the dollar.

So, the peg was dropped, but the currency remained highly manipulated by the government, because they never revealed the weighting that each of the currencies in their “basket” held. So, they are the only ones that can do the math each day!

I found this story to be somewhat interesting in its timing; China’s President Jintao is scheduled to visit Washington later this month. Is he going to throw Snow, Schumer and Graham a bone, and tell them that the Chinese will widen the band? I smell smoke. You know, as I always tell you, where there’s smoke…there’s fire!

Getting back to the Eurozone: Yesterday, I reported to you that the German manufacturing report that printed on Friday was very strong. Now, we not only have the think tanks of IFO and ZEW telling us that business confidence is strong, we also have the actual proof in the pudding!

This will continue to keep the ECB at the rate-hike table and I expect (and I’ve been bang on these rate hikes from the ECB so far), that we’ll see another in June, and September, bringing the Eurozone rates to three percent by year’s end. This will go a long way toward giving the euro the push it needs to get back to the 1.30 level that I’ve told you about.

Hey! Did you hear about the FDIC’s announcement regarding IRA’s? The FDIC has announced that self-directed IRA’s can now hold up to $250,000 and carry FDIC insurance. This change became effective on April 1, 2006! Tre’ cool! So, to all of you that have been asking me how to hold more in an IRA, you have your answer!

Gold and silver kept the heat on, yesterday. I was looking at some old Pfennigs in the archives yesterday, and I saw where I made a big deal out of $500 gold. And, that wasn’t that long ago! I’ll have to really hoot and holler when it reaches $600, eh?

Currencies today: A$ .7195, kiwi .6070, C$ .8555, euro 1.2175, sterling 1.7455, Swiss .77, ISK 72.30, rand 6.06, krone 6.48, forint 217.40, zloty 3.24, koruna 23.42, yen 117.60, baht 38.63, sing 1.6130, China 8.0165, pesos 10.8460, dollar index 89.46, silver $11.76, and gold $589

That’s it for today. No real data today. I’m still keyed up from last night’s episode of 24! Everybody was back at their desks yesterday. It was a good thing too, as the phones were lighting up all day long! Our Markets Select product is really gaining momentum. It’s not too early to tell you that Frank, Chris and myself will be in Las Vegas for the Money Show on May 16-18, 2006. Make plans now to come see us! Have a great Tuesday!

Chuck Butler
April 4, 2006