Reaching a 17-Year High!

Good day… Yesterday and overnight we’ve seen further weakening in the dollar, as the euro and the Aussie dollar both pounded it – the latter of the two actually reaching a 17-year high versus the greenback. There were Fed Heads on the speaker circuit, but these days they just don’t seem to have the words to move the markets. And let’s not forget the Cardinals win in the 12th!

OK… First I want to talk about the Aussie dollar. Recently, I’ve been talking about the rebound in base metals and how that will fuel the Aussie dollar’s fire. Yesterday, I looked at the CRB Index – which isn’t the end-all for tracking commodities, but it’s darn close – and since hitting a low in the middle of January this year, the CRB is up almost 11%! So there’s the proof that what I’ve been talking about regarding base metals is on the up and up.

And there’s further proof in the performance of the Aussie dollar. Didn’t I say that once it reached the psychological 80-cent level that it wouldn’t stop there? I even went out on a strong limb and said that 85-cents looked about right. Well… The 17-year high for the Aussie dollar was reached last night of .8267 – and it hadn’t seen that level since October 1990. Shoot Rudy, that’s even before I began writing the Pfennig every day! That’s a long time!

And with China’s demand for base metals, I would look for this pattern of higher base metal moves to fuel the Aussie dollar’s move higher.

While I’m in the South Pacific, I might as well cross the Tasman and see what’s going on in kiwiland. Here’s an interesting story, this guy named John Key, who leads the Opposition Party in New Zealand – and who used to be the head of currency trading at the brokerage house that owns a bull – said that he sees kiwi reaching a new record level of 80-cents in the next six months. Mr. Key believes that New Zealand’s interest rate differential to the rest of the industrialized world will be the key driver. And, he believes another rate hike is in the cards for the economy, thus driving that rate differential even higher.

80-cents? I know that’s his opinion, but it seems pretty high to me. Although, I’m sure that our kiwi owning investors would – like me – love to see his forecast come true, eh?

Back in Europe, the United Kingdom printed their latest retail sales report this morning. In March they rose 3.9%, following up February’s rise of 3.3%! WOW! The pound sterling is really rallying on this report, and rightly so! This is just another arrow in the Bank of England’s rate hike quiver… And I’m quite certain that they will use that arrow in May. Thus taking the U.K.’s rate differential to the Euroland, Norway, Sweden, and Switzerland, quite impressive. Maybe, maybe I’m wrong… To go on singing, singing my song… But a May rate hike could finally be the last piece of the puzzle that brings pound sterling to 2!

But don’t think for a minute that the rate hike cycles in Norway, Sweden, Switzerland and the Eurozone have come to an end. No… Quite the opposite. Inflation pressures in all of these countries will keep the rate hike cycles on notice!

I mentioned last week that the G-7 ministers would meet this week and that Canada’s Finance Minister, Flaherty, had mentioned that Japanese yen would be discussed at this meeting. Well, the meeting will be this weekend in Washington D.C., and I think that as we head into the weekend, currency traders might be a bit apprehensive about a significant directive in the G-7’s communiqué regarding yen. But that’ s just me. I’ve been doing this long enough to recall G-7 meetings that meant something… And one in particular that lit a fire under yen, and moved it so strong that the Bank of Japan had to step in and intervene with trillions of yen to stop the move.

So… It could happen. I think the best thing to do is be prepared for the kind of wild swing we saw with at the end of February, and if G-7 ministers decide to pass on yen, like they’ve been known to do, then it’s business as usual with yen – waiting for the Bank of Japan to raise rates, and bang nails in the carry trade.

OK… The Fed Heads… First we had Fisher, who is normally very hawkish, keep his hawkish tone, saying that the Fed needed to be especially vigilant regarding inflation, that it has kept inflation reasonably low, (who’s he kidding?) but not as low as some on the FOMC would like, and that it was the Fed’s responsibility not to let “inflation out of the bag”.

OK…I just can’t let this one slip by without saying something… 1. Who’s he kidding regarding keeping inflation reasonably low? What a dolt! And 2. Ahem… Mr. Fisher… You and your Fed Head brothers in arms failed miserably with regard to “not letting inflation out of the bag.” Geez Louise, where did this guy come from? Wrong, and Wrong.

Back to the Fed Heads… Then there were the dovish tones of Mishkin. Fed Head Mishkin emphasized the Fed’s dovish considerations: Inflation will slow and economic shocks could force a temporary trade-off between employment and inflation.

Obviously, there are two different forces there within the FOMC. That tells me that interest rates in the United States are going to remain stuck in the mud for some time to come, which plays well with what I’ve been talking about for a while now, which is that the Fed is stuck between a rock and…well, another rock!

We’ll see the color of the minutes from the FOMC’s last meeting on March 21st, and I think they’ll be reflective of these two speakers, Fisher and Mishkin. I don’t see the minutes giving the dollar any love!

Currencies today: A$ .8255, kiwi .7290, C$ .8735, euro 1.3430, sterling 1.9785, Swiss .82, ISK 66.35, rand 7.1215, krone 6.0330, SEK 6.8925, forint 182.70, zloty 2.85, koruna 20.83, yen 119.10, baht 32.60, sing 1.5170, HKD 7.8130, INR 42.87, China 7.7250, pesos 10.99, dollar index 82.68, Silver $13.95, and Gold… $679.30

That’s it for today… I had to sit through three hours of HR training yesterday. UGH! You know me; I don’t like meetings, especially ones that take me away from my trading desk! But, you’ve got to keep the lawyers and regulators happy… Cardinals win in the 12th inning last night… Of course I was sleeping when that took place, but I did see them tie the game in the 9th inning, so I went to bed knowing that I didn’t see them lose! Another baseball game for my little buddy was rained out last night. The season is going to last forever at this rate! Time to hit send… Have a great Wednesday!

Chuck Butler — April 11, 2007

Chuck Butler is the senior vice president of EverBank World Markets. He oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single-Currency and Index CDs .

Chuck is the author of The Daily Pfennig, which is reposted here at The Daily Reckoning. His respected analysis is frequently quoted in or referenced by: the Wall Street Journal, U.S. News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.