Beating On China Again!

Good day. Well, I made it back safely to St. Louis, ahead of the snowstorm that came through last night. Not a big storm for us, but to the north of us, they got hit pretty hard. So, we had that going for us! The trip to Delray Beach was good. Current customers still talk to me! And that’s a real good thing! I came back with yet another sinus “thing” though. Ugh…that airplane air!

Not much happened overnight, rhetoric wise, except of course, if you count Senators Graham and Schumer still harping on the Chinese to allow their currency to flow, right now! I just wish these guys would go home and worry about things that they can change! By the way, the renminbi rose to yet another post-dollar peg high! My favorite economist, Stephen Roach of Morgan Stanley, said, “They are asking for a lot”

You know, the Chinese may seem to move slow on the changes they have promised to make, but come on, they have the Goose and the Golden Egg, right now! You wouldn’t want the United States to mess that up, if they had that situation.

The dollar did come back a bit yesterday, sending the euro and other currencies down, but not much. The dollar’s ebb and flow continues to center around the “thought of the day.” Will it be “inflation is slowing, no need to raise rates more,” or the one that filtered through the markets yesterday: “the economy is strong, so more rate hikes are coming.” You know me, I don’t really care if rates here are going up; that just means the yield curve remains inverted, the housing sector’s balloon gets popped, and consumer spending comes to a halt.

What I focus on is the “overall fundamentals” of the country and whether or not they can support the currency. Here, the United States fails miserably and should show on the dollar eventually.

Now, having said that – what “overall fundamentals” are weakening in Australia that would cause the currency to slide recently? “Not much” is the answer. This is a real puzzler. “Riddle me this, Batman” – and all that! But the reason the Aussie dollar is weakening is centered around interest rates, too! The rate differential that Australia enjoyed versus the greenback for over three years is narrowing, and apparently traders don’t like that, even though the Reserve Bank of Australia has said interest rates will go higher, thus negating that narrowing of the rate differential. Hmmm. It is puzzling, for sure!

However, base metals have not held onto any rallies lately, and Australia’s kissin’ cousin across the Tasman has its own problems with currency weakness, which is spilling over to Australia. It’s sort of like being tarred with the same brush as New Zealand, but  I think this is short-term weakness only.

Good news for gold investors this morning. Germany announced that they will not sell gold this year. Germany had contemplated selling some gold reserves to reduce their budget deficit, which is in danger of exceeding the European Union’s target. You may recall that Germany received another year from the EU to reduce their budget deficit or face a fine.

I have to say that I applaud the Bundesbank’s decision to not use the sale of gold to make their job easier. However, if the deficit remains a problem next year, they may have to resort to this measure. I hope not!

Well, those that keep harping about how the U.K. needs rate cuts received a blow to the belly this morning. The latest U.K. inflation report showed a rise in inflation to 2%, which is the Bank of England’s ceiling. So, with inflation flirting to exceed the limit, I don’t see the Bank of England cutting rates any time soon! And that should underpin pound sterling.

There is nothing new on yesterday’s story about India making their currency fully convertible. I think this development is good news, and if you think about it, India is laying the groundwork and developing a blue print for China. India’s currency used to be pegged to the dollar, too. And then, they slowly moved to the current policy, which is now going to be replaced. That all took about two and a half years. China just dropped their peg last July!

In Japan, a spring holiday had the markets closed yesterday, but that didn’t keep upbeat comments from Bank of Japan policy board member Mizuno from hitting the streets. Mizuno commented the uptrend in Japan’s core CPI is “here to stay,” and that it was “not too soon” for a change in monetary policy.

Japanese yen seems to run into a buzz saw every time it gets close to 115. I just can’t help thinking that these current levels will be nothing but dots in the rear view mirror soon.

Currencies today: A$ .7190, kiwi .6235, C$ .86, euro 1.2145, sterling 1.75, Swiss .7720, ISK 69.90, rand 6.31, krone 6.5550, forint 217.70, zloty 3.21, koruna 23.51, yen 116.50, baht 38.80, sing 1.6180, China 8.0277, pesos 10.8290, dollar index 89.36, silver 10.28, and gold $553

That’s it for today. So much for the first day of Spring, eh? Snow. Wintry conditions? I knew this would happen when we had those nice days in January! How’s your NCAA bracket holding up? I’m still giddy about meeting with Ted Simmons last week – 25 years ago, he worked with me at Mark Twain Bank in the off season. I was as giddy as a schoolgirl then, too! My good friend Rick snapped a picture of Chuck and Ted.  Have a great Tuesday!

Chuck Butler
March 21, 2006