Another Dollar Mini-Rally

Good day… Day three in Las Vegas went well.  So far, so good, as the man that jumps from the 56th floor of the Empire State Building says. You know, I use that line in my presentations to describe the people that don’t believe deficits matter… Of course they do!

Well… Another mini-rally in the dollar yesterday, that was kick started by the housing starts surprise, (never mind that building permits hit an 11-year low), and then a very strong industrial production number that really was pulled like a rabbit out of a hat! Industrial production in the United States increased 0.7% in April, above the experts’ forecast, which called for a 0.3% gain. Production in March was downwardly revised to show a 0.3% drop (previous: -0.2%). So… Overall, the two-month result in industrial production was a nice figure of 0.4%. Not bad… Not exceptionally good either.

One of my fave pieces of data, capacity utilization rate, increased to 81.6% from the downwardly revised 81.2% rate in March (previous 81.4%). This has been one of the rare occasions in recent times that both industrial production and capacity utilization indicate some stronger manufacturing going on. I’m from Missouri, so I’m going to have to be shown. But surprise, nonetheless!

So… The dollar rallied on these reports, and the currencies all had to suffer through a day of dollar strength. No currency went unscathed, except the manipulated Chinese renminbi (CNY). The dollar strength also carried over to the precious metals, where gold lost $13 on the day. So… Throw in the towel and raise the white flag; the party’s over, right?

WRONG! Geez Louise, let’s get our heads on straight, and realize this is simply a technical correction in the dollar. We’ve seen these over and over again during the weak dollar trend that began in February of 2002. As I always tell my audiences, an asset begins a weak or strong trend because of a fundamental reason, and the trend will not end until that fundamental reason is corrected.

The trend, however, is not even close to being over! The dollar entered the weak trend when its Current Account Deficit reached the historically telling number of 4.5% of GDP. I say historically telling because over time, fiat currencies have always experienced a currency crisis any time their deficit to GDP percentage reached 4.5%.

Of course, the U.S. Current Account Deficit has only gotten worse, and now stands about 6.9% of GDP. So for all those traders out there buying dollars… Put that in your pipe and smoke it!

This morning, the dollar has received additional support from the weekly jobless claims, which came in under 300K. I don’t buy it, but the market does, so we have to look at it as an opportunity to pick up some currencies and gold or silver at cheaper levels.

As I said above, the only currency to go unscathed was the Chinese renminbi. The daily movements of the renminbi suggest that the Bank of China has allowed greater flexibility in the currency. I wouldn’t say that the flexibility is huge, but I do see some flexibility that hasn’t been there before. Baby steps, with renminbi, eh?

As we do a hop skip and jump over to Japan, we see that Japan’s first quarter GDP weakened, but there are some “great news” signs in the report. Here’s the skinny… Gross domestic product grew at an annual 2.4% rate in the three months ended March 31, and the fourth-quarter figure was revised to 5% from 5.5%.

Here’s the “good news” part… Consumer spending, accounting for more than half of GDP, rose more than expected and may cushion the economy from waning growth in the United States, the nation’s largest export market. “We’ve not seen such a balanced expansion for a long time,” said Richard Jerram, chief Japan economist at Macquarie Research in Tokyo.

We all know that Consumer spending goes a long way toward good domestic demand and a stronger GDP. Now, we need to see some capital expenditures by corporations, and this economy could be humming! I don’t see the Bank of Japan (BOJ) moving away from the rate hike table just because economic growth slows a bit in the first quarter. While I don’t think the BOJ is going on the warpath for higher rates… I do believe they are on a mission from God… No wait, that’s Jake and Elwood… The BOJ is on a mission to move rates higher, but at a slooooooooowwwwwwww pace.

Now, let’s jump over to Canada… The Canadian dollar/loonie (CAD) may have lost some ground yesterday, but that was short lived, as the loonie drives higher this morning on inflation news. Here’s the skinny on this move… A government report showed that inflation accelerated to its highest in more than four years in April.

The currency then strengthened on speculation the Bank of Canada will raise rates to curb inflation. The bank next meets on May 29. The Bank of Canada has been a real tough book to read, since first leaving rates unchanged about a year ago. But, I do believe that they take inflation seriously… How seriously, we’ll find out, eh?

You know… The emerging markets have really held their own in recent times, which indicates to me that there is no risk aversion going on in the markets. Shoot Rudy, even the Mexican peso (MXN) has rallied to levels it hasn’t seen in a while. And I talked about Icelandic krona (ISK) yesterday.

While, the major currencies of euro (EUR), yen (JPY), sterling (GBP), and Aussie (AUD), all look to move higher versus the dollar as we move along in 2007, I’m coming to the conclusion that the emerging markets are taking the spotlight away from the majors. But, that’s just too much of a walk on the wild side for me, babe… Take a walk on the wild side… Do, do do, do do, Oh, stop it Chuck, you’re almost to the Big Finish, and you slip into Lou Reed!

My point here is that I’m happy with the major currencies… The emerging currencies are for those that like to take chances.

Currencies today: A$ .8220, kiwi .7295, C$ .9085, euro 1.35, sterling 1.9750, Swiss .8155, ISK 63.10, rand 7.0150, krone 6.06, SEK 6.8320, forint 185, zloty 2.81, koruna 20.90, yen 121.25, baht 33.45, sing 1.5260, HKD 7.82, INR 40.84, China 7.67, pesos 10.80, Silver $12.92, and Gold… $663.40

That’s it for today… The show ends this afternoon; I’m taking a red-eye back tonight, along with my colleagues here, Chris and Kristin. That means the Pfennig will be just as late, getting to you tomorrow too. We closed the funding for our second Japanese REIT MarketSafe CD on the 15th, and began the funding period for the next one. That will probably be it for this CD, so if you’re thinking about it, act on it now, before we put it away in storage along side Bambi! I’ll be in the office all next week, believe it or not… So I’ve got that going for me. Maybe I can get this hip to heal without all this walking around! Have a great Thursday!

Chuck Butler — May 17, 2007