China Loosens The Purse Strings

Good day. Well, the government tells us there is no (or very little) pipeline inflation. Yes, that’s right, yesterday July PPI printed a measly 0.1% rise. Now, don’t get me wrong, if that’s correct, then I’m whistling a happy tune! But, come on! I know it looks, at times, as though I just fell off the turnip truck, but that number is a little far fetched for me to believe!

However, currency owners we took the news smiling like the Cheshire Cat and saw the euro gain half a cent on the news, with the other currencies falling in behind the Big Dog. Of course, that move could be wiped out today (in the short run), if consumer inflation, as measured by CPI, comes in big. But one has to wonder just what kind of numbers will print on the CPI side of the inflation ledger, if PPI was so subdued.

I would have to think that if CPI (by some great imagination) comes in lower than the 0.4% rise that is forecast, the dollar will get pummeled, because that means that the Fed Heads were “so smart” in pausing last week. And, it would give indication that no further hikes are needed.

Of course, to all that I say, “Balderdash!” If the Fed Heads were “so smart,” they would have nipped this inflation in the bud two years ago, but instead attempted to keep the flow of money and spending going by making “measured” rate hikes of 25 BPS every six weeks. I won’t even get on the Fed’s bandwagon on this one. They totally blew it, in my opinion.

OK. So, we had a half-cent move. No great shakes, but if we see another half-cent move today, then we’ve got something going, eh? The half-cent move yesterday was tempered by the net foreign security purchases report for June, which more than exceeded the amount needed to fund the current account deficit. Here are some points to think about regarding this report…

First of all, I don’t think the markets get so lathered up about this data since last summer, when the “Caribbean Hedge Funds” were carrying the ball every month. Recall that there were rumors all over the place accusing the Fed Reserve as being the actual “Caribbean Hedge Fund.” Second, we need to go back and observe what was happening during this time to create $75 billion worth of NFSP.

Recall the Middle East heating up, and the so-called flight to safety? Well, that’s reflected in this number, as U.S. Treasury purchases were the trade du-jour. Inflows into low-risk Treasuries jumped to $27 billion, the highest since November 2005. That all sounds like seashells and balloons, until you look at the outflow of equities. Foreign investors turned net sellers of U.S. equities (to the tune of $4 billion) for the first time since September 2004.

So, you had a “flight to safety,” totally illustrated by the selling of equities and the buying of U.S. Treasuries. Furthermore, last month’s number was revised downward by $6 billion. Therefore, the net of the two months is barely enough to cover the current account deficit. So, like I said, the euro’s move higher was tempered by this data, but the markets still see the danger in front of the dollar because of the data’s make-up.

OK. That was longwinded, but needed, I guess. So, while I’m on the problems that are being presented to the dollar, let me tell you about a report that was issued yesterday regarding the housing sector. Snap, Crackle, Pop. And I’m not talking about a bowl of Rice Krispies.

Confidence among U.S. homebuilders plunged this month to the lowest level in 15 years, as buyers canceled orders, and inventories of unsold dwellings piled up. Uh-Oh!

Don’t mean to be such a “downer” this morning, but it just seems as though the “bad news” just keeps piling up on the dollar. Either we’ll see CPI come in high, which will eventually eat away at the dollar’s value, or we’ll see it come in low, which means no need for further rate hikes, and the rate-hike prop for the dollar will be removed, thus causing a drop in the greenback.

OK. Down in the South Pacific where lots of people made bundles of cash during 2001 and 2004, the Aussie and kiwi dollars are stirring the pot again. While New Zealand fell out of favor in 2005 because of their huge trade deficit, Australia remained on my hit parade. Recall, a month or so ago, I told you that New Zealand had done a fair job of reducing the trade deficit? Well, that trend has continued, so I’m going to remove the amber light from kiwi.

Now for Australia. I’ve chronicled the potential rate hikes from the Reserve Bank of Australia (RBA) for some time now, and earlier this month the RBA did raise rates. Well, as I said then, and I’ll say again, I don’t think they’re finished. And that should bode well for the Aussie dollar. Last night, for example, the government printed a report on wage growth, and to no one’s surprise, wage growth grew more than expected in the second quarter (and I don’t think the entire wage growth can be blamed on my friend Dan Denning! HAHAHAHA!).

I’m sure the RBA has their focus on this report, and that should keep the dust covers off their rate-hike machine, which in turn, should help support the Aussie dollar as it attempts to get back to 80 cents.

It looks as though China is coming through on their promise to allow more flexibility that was made a week ago. The renminbi had its largest one-day move versus the dollar since the peg was dropped a year ago. Recall, the renminbi had a 0.3% governor placed on it when the peg was dropped, which meant it couldn’t gain more than 0.3% in one day’s trading. However, last night, the renminbi moved 0.24% versus the dollar. That’s Huge, Folks.

If, this carries through, we could see the Asian currencies really begin to move higher versus the dollar. Go flexibility, go flexibility. Doing the Cabbage Patch dance at my desk…Go flexibility!

I’ve got to get to the big finish, as I’m burning daylight!

Currencies today: A$ .7635, kiwi .6370, C$ .8915, euro 1.2785, sterling 1.8910, Swiss .81, ISK 69.97, rand 6.8675, krone 6.2550, SEK 7.20, forint 216.20, zloty 3.03, koruna 21.96, yen 116.10, baht 37.40, sing 1.5775, INR 46.57, China 7.9885, pesos 10.7750, dollar index 85.25, silver $12.17, and gold $626.60

That’s it for today. Well, 29 years ago, we received the news that Elvis had died. Has it really been 29 years? Wow! I remember my siblings and me listening to Elvis 45-records on our “portable turntable” and trying to emulate him! (OK, at that time I only had sisters, so it really was just me emulating him. I had to come clean on that one!) Where’s that Chris with the Starbucks? I need an out here. Have a great Wednesday!

Chuck Butler
August 16, 2006