FOMC to Hold Rates

Good day… The dollar was stronger yesterday and picked up some more strength in early European trading as the markets wait for the Fed’s announcement scheduled for 1:15 PM CST. As we have said over and over again, the Fed will keep rates unchanged, but the focus will be on the accompanying statement. Traders will be analyzing each word to try and figure out just how worried the Fed is about the credit crunch the markets are going through. Stock jockeys are all trying to convince the fed to lower rates, while the bond guys are still worried about inflation.

I would imagine that, given the recent market turmoil, the Fed will discuss the recent volatility of the credit markets and start to lean over toward the dovish side of the argument. If this occurs, the dollar will get hammered. If the Fed holds steady and re-iterates their recent statements that the economy will be able to weather this storm without FOMC intervention, then the dollar could hold on to these levels for a while. Again, I expect to see the Fed admit they may have to step in, and the dollar will get sold.

No matter what happens with the Fed, the ECB has already signaled the markets that another rate increase will occur next month. Europe’s economy is doing much better than the U.S. economy, and the ECB will have to hike rates to keep prices stable. Technical analysts say the daily and weekly charts show that the euro (EUR) is poised to rise to $1.39 in the next few days.

The Japanese yen (JPY) has held onto some of its recent gains, trading in a tight range between 119 and 118.50. Japan’s economy expanded at 0.9% in the second quarter, according to a survey, fast enough to encourage the central bank to raise interest rates as soon as this month. The Cabinet Office will release gross domestic product next week, and the report will be the last main indicator of the economy’s strength before the central bank begins its next meeting to decide whether to raise its key overnight rate. Any increase in Japanese rates will be another beginning of the end for the carry trade.

Chuck had the carry trade on his mind last night, and sent me the following email:

“Geez Louise… Just when you think the IMF has their head screwed on straight, they come out with a stupid statement like this one yesterday: ‘Japan’s interest rates, the lowest among major economies, are appropriate and the central bank needn’t rush to raise them because inflation isn’t a threat.’

“If you ask me, which I know you didn’t, but I’ll tell you anyway… The IMF is just saying this to protect the carry trade… Not that they endorse the carry trade… But they certainly don’t want to see everyone heading to the exit signs at the same time either!

“Today, we’ll see one of my least favorite pieces of data – productivity. We’ll also have an FOMC meeting this afternoon. I talked yesterday about what I expect from the Fed at this meeting, so I won’t go into that again. But remember, the most important part of this meeting is the press conference that follows their announcement.

“Speaking of interest rate moves… The Reserve Bank of Australia (RBA) meets on Wednesday (tonight for us) and I expect them to raise rates once again by 25 BPS. Let’s hope this rate hike isn’t the kiss of death for the currency that the last rate hike was for kiwi…

“Aussie (AUD), kiwi (NZD), and Canadian dollars/loonies (CAD) have all seen better days with the sell off/profit taking that went on with these currencies. While I believe they have better days ahead of them, we could see weakness continue for now.”

Yes, Australia will likely raise interest rates tomorrow after inflation has accelerated and lending has surged the most in 18 years. Consumer prices surged 1.2% in the three months ended June 30, and prices increased 2.1% from a year earlier. The interest rate move has taken on a political undertone with Prime Minister John Howard’s Liberal-National Party blaming the increased inflation on the Labor Party, and vice versa. While this move is already priced into the markets, currency traders will be watching for signs of ‘continued vigilance’ by the central bank and the possibility of more rate increases.

The Indian rupee (INR) has stabilized lately, trading in a tight range between 40.60 and 40.20 over the last month. According to HSBC Holdings Plc, India’s rupee may strengthen 3.6% to 39 by the end of the year, the strongest since February 1998, because the central bank will fail in its efforts to stem both currency gains and inflation. The Reserve Bank of India is selling rupees as quickly as it can to mop up the cash injected into the economy, causing overnight interest rates to fall to near zero. That rate is much too low for an economy, which is growing at 9% a year. The battle between inflation and a rising currency will bring more volatility to the Indian rupee, and we would agree with HSBC in their predictions of another sharp move up by the rupee.

Our friend Addison Wiggin talked about the outlook for gold in yesterday’s 5 Min. Forecast: Gold, finally, is showing its hedging qualities. As the market sinks, gold is steadily rising. Spot prices rose as high as $674 per ounce today.

“Right now, the reward in owning the precious metals, in my view, clearly outweighs the risks,” wrote James Turk of “In fact, I think the circumstances today are such that the bigger risk comes from not owning the metals, rather than owning them.” James sees $700 gold just around the corner, and perhaps even $800 by the year’s end.

Agora Financial recently published a book called Gold: The Once and Future Money, for which Addison wrote the forward. It investigates the inner workings of today’s global monetary system and calls NOT for a return to the gold standard, but a move forward to restore hard money to its rightful role as the world’s currency.

We think our pooled MetalSelect accounts are one of the best ways to own gold. If you want the hedge without the risk, our MarketSafe CDs based on either gold or silver are the way to go. No matter what form it takes, gold or silver should be in everyone’s portfolio.

We have received a couple of letters complaining about the length of recent Pfennigs, so I’ll stop here and go right to the big currency roundup.

Currencies today: A$ .8545, kiwi .7621, C$ .9464, euro 1.3787, sterling 2.0262, Swiss .8383, ISK 63.25, rand 7.075, krone 5.7842, SEK 6.6939, forint 181.87, zloty 2.7462, koruna 20.415, yen 118.74, sing 1.5146, HKD 7.8292, INR 40.415, China 7.5705, pesos 10.9592, dollar index 80.255, Silver $12.94, and Gold… $668.74

That’s it for today… I watched as the Cardinals had 10 hits in a row during the fifth inning last night, scoring 10 runs and cruising to a win. This tied the record for the most consecutive hits, although the last one was a little questionable. They need to continue winning to keep our hope alive! I’m looking forward to watching the game from an Air Conditioned box on Friday night! Time to get to work, hope everyone has a terrific Tuesday!!

Chris Gaffney
August 7, 2007