Putting the Soapbox to Work Today!

Good day… How about that BIG news item yesterday regarding EverBank? That was something! I love it when a plan comes together!

Another yawner of a day in the currencies… The euro (EUR) tried to put together a run after the ZEW Business Confidence printed at 24 (versus 16 in April), but it was much like the kid at the ballpark trying to get the fans to start the wave. A few people stand up, and then it fizzes out. That was the euro’s day yesterday.

I have a difficult time thinking that currency desks have already shut down for the Memorial Day weekend… But it certainly looks as though that’s the case. This has been as exciting as watching paint dry…or counting flowers on the wall.

Speaking of Germany’s ZEW Business Confidence report… There was one other piece of the report that I left out of yesterday’s Pfennig. Want more confirmation that the German economy is strong and pulling the Eurozone economy out of the woods? How about the jump in current conditions to a new all-time high at 88.0? WOW! This really underlines the very positive growth theme in Germany right now.

And no one group loves to see this more than the European Central Bank (ECB). They keep harping on inflation pressures when inflation has dipped below their target of 2%. Now, the ECB can hold their collective heads up and be proud of how they have guided the Eurozone economy to this point, while providing price stability… Not that shameful mess that the Fed created in the United States, that’s for sure!

The Bank of England (BOE) printed the minutes from their last meeting, when they disappointed me, with only a 25 BPS rate hike. The report confirms that the rate vote was unanimous. This report has helped pound sterling (GBP) to gain some lost ground versus the dollar, as traders feel confident that the BOE will come right back in June with another rate hike.

I fully expect, in my opinion, the pound sterling to get back to the lofty “2” level and beyond… But it will take strong growth reports and another BOE rate hike to do the heavy lifting.

Back in December when the Thai military government announced that currency controls were being placed on the baht (THB), we thought the roof had collapsed on us. Thai baht had been one of the best performing currencies for over a year, and was a part of one of our most popular currency basket CDs. At the time of the announcement, I was on vacation, and received a call from Jennifer regarding the currency controls. I immediately got on the phone to many a trader friend, and they assured me that we would be able to trade out of baht on a spot basis. I feared the worst for the currency… But the baht rallied, which was good for our holders that needed to sell the currency.

The reason I’ve gone through this history is that we’re almost out of all baht positions, and only now the currency is seeing some pressure. The government announced last night that they were cutting their interest rates for the fourth time this year… Not good news for the baht. And I expect it to get a lot worse for the baht going forward. Good thing we’re almost out of all positions!

The Paulson/Wu meetings continued yesterday. The U.S. Treasury and Chinese Vice Premier are trying to work out the trade frictions that have developed between the two countries. All I can say to their aspirations is… Good luck, and Godspeed! I just don’t see it happening! China’s economic growth continues to rock the boat, and as long as they continue to grow at hyperspace speed, their trade surplus will continue to soar. And the U.S. trade deficit will keep having sand kicked in its face, and that will bring the lawmakers out of the woodwork with their protectionism bills.

We’ve been through this for some time now… But for anyone new to class… The currency markets do NOT like protectionism measures… And historically, protectionism measures bring about a much weaker currency.

The poor Japanese yen (JPY); it is the favorite funding currency of the carry trade crowd, and as long as the stock market here in the United States keeps sending the “There’s no risk” smoke signals, the carry trade grows. And that, unfortunately, keeps the yen on the slippery slope. Personally, I think that there are a ton of risks… And the biggest one is that the stock market runs out of rally steam. I think the higher interest fears for Japan have been put on the back burners until at least August.

So… Without a stock market meltdown, or even risk in the world, this could be the summer of discontent for the yen. As a holder of yen, I don’t even want to think about how low it could go.

I saw a report yesterday that said Russia’s inflation rose to 7.6% in April. That means that Russian interest rates will go higher, and in this day of emerging market mania, because of “no risk”, the ruble (RUB) is going to benefit. But before I go on, I need to make it perfectly clear that we do not, and CANNOT offer Russian rubles… Or Brazilian real (BRL). I get lots of emails asking about these two. They are just not mature enough, or liquid enough in the forward markets for us to offer yet. But I wanted to point out the “no risk” story.

This just came across the screens and is a great story to lead into the Big Finish… China’s Vice Premier, Wu, told an audience that the U.S. shouldn’t blame its record trade deficit on China. Uh-Oh… There goes two days of talks with Paulson down the drain! The sad part is that Wu is absolutely correct! We could blame China for some of the imbalances in the world… But think about this for a minute…

Let’s say, a U.S. corporation sells t-shirts that have some saying on them that kids absolutely love and can’t get enough of, but parents are tired of shelling out the bucks to buy them, and their credit card debt keeps growing. Is that the corporation’s fault? Should they sell them at a higher price so that their appeal dies and parents can reduce their spending budget?

OK… That may be too simplistic… But it really points out just how stupid Paulson, O’Neil, and Snow have all looked trying to get China to sell their goods to us with a stronger renminbi (CNY) to make them more expensive, and thus reduce consumer spending on these more expensive goods. It’s just not going to happen!

It would be far better to have U.S. consumers SAVE MORE, instead of buying the cheap goods from China! But… That’s the way we do things in these days… It’s always someone else’s fault, right?

Currencies today: A$ .8245, kiwi .7285, C$ .9205, euro 1.3455, sterling 1.9820, Swiss .8140, ISK 62, (is krona ready for a 61 handle? Sure looks like it! Talk about no risk taking!), rand 7.0450, krone 6.0375, SEK 6.83, forint 184.10, zloty 2.82, koruna 20.9850, yen 121.70, baht 33, sing 1.53, HKD 7.8240, INR 40.58, China 7.6520, pesos 10.78, dollar index 82.42, Silver $12.98, and Gold… $659.75

That’s it for today… On the soapbox a couple of times this morning… Plus some yelling at the walls for dolt mistakes. I had better calm down, or the blood pressure will be trouble! Hey! July always brings about my fave conference to attend… And the hosts have been kind enough to ask me to speak the last two years! I’m talking about The 2007 Agora Financial Investment Symposium, in beautiful Vancouver B.C. July 24-27. It’s not too early to get working on your travel plans. Here’s a link that gives you more information on the conference, which I could go on and on about what a great conference it is, but won’t, I’ll let the link do the talking! Have a great Wednesday!

Chuck Butler — May 23, 2007