Trichet Signals Additional Rate Hike

Good Morning and welcome to Friday! I flew back from Atlanta late last night, so I’m dragging a bit. Luckily, Chuck had some time to tap out his thoughts on yesterday’s market movements while sitting in the booth at the Atlanta Wealth Expo. So, I will share them with you to kick-start the Pfennig this morning.

Chuck writes: “Well, as I left you yesterday and headed to the conference exhibit hall, I told you of the super-ball bounce the currencies had performed, wiping out the brief sell off caused by central bankers ‘talking down their currencies.’

“The super-ball bounce came about courtesy of the ECB’s President, Claude Trichet. As I’ve been saying lately, I believe Trichet was squirming in his seat since he threw the markets off the scent of a May rate hike. However, he made up for all that when he strongly suggested that the ECB would look to raise rates three more times this year. That sent the euro to over 1.27, and the sterling to over 1.85 for the first time in over a year!

“But wait! Haven’t we heard someone say, over a week ago, that they were going out on a limb and calling for three more rate hikes this year? Ah, grasshopper, let me take you back to the Pfennig of April 25th. Here we go:

“‘Recall that last fall I told you the ECB would hike rates beginning in December, and follow that up with rate hikes in March, June, and September, thus bringing their base rate to 3%.

“‘Well, now I’m thinking that another December hike will be in the cards, given the price pressures of oil right now. So, I’m going out on the limb (a big strong one, don’t worry) and saying that the ECB will go one more and hike again in December.

“‘This thought will eventually enter into the minds of traders (ones that don’t read the Pfennig) and will help lead the euro back to the 1.30 range, later this year!’

“OK. I’m finished slapping myself on the back. My bursitis is acting up! But here’s where I really make a statement. Now that everyone else knows, this could be the harbinger to taking the euro all the way back to the previous highs! How about that?”

Thanks to Chuck for getting me started this morning! The bounce he wrote about yesterday has come back down a little this morning with the Euro trading just below 1.27 and the pound sterling a hair under 1.85. No real news from Asia or Europe last night, so the currencies just drifted slightly lower, awaiting the jobs data due this morning.

Expect the employment data released this morning to show continued strength in the U.S. labor markets for April and a slight increase in the average hourly earnings. I don’t look for these numbers to rally the U.S. dollar, as the ECB rate talk is still dominating the currency market.

Later today, we will get the consumer credit report, which will likely show the total debt owed to U.S. finance companies increased by 4.1 billion in March. A slowdown in mortgage refinancing has helped to slow the increases in consumer debt, but we are still borrowing too much as a nation. A falling dollar alone will not correct the twin deficits in the United States, we have to increase savings and rein in our spending. If we continue to borrow and spend, the eventual correction to the U.S. dollar and the U.S. economy will be even more pronounced.

The Canadian dollar fell slightly after a government report showed the economy added jobs at a slower pace last month, dimming speculation of further interest rate increases by the Bank of Canada. The unemployment rate was at 6.4% compared with 6.3% in March, which was the lowest since December 1974. We still feel the loonie has room to continue appreciating. Canada will continue to benefit from strong demand for the commodities, which make up a majority of their exports. Any weakness in this currency should be viewed as a buying opportunity.

At the risk of being called a MAK (inside joke), I want to wish everyone a happy Cinco de Mayo! We will be celebrating the holiday on the desk today. Ty Keough, who has both Mexican and Irish blood (he gets to celebrate both St. Patrick’s day and Cico de Mayo!), pointed out that the Mexican peso is up over one percent so far this month.

The Chinese renminbi is set to move below eight, next week, according to forward contract pricing in Hong Kong. The Chinese currency has not traded this week because of the “golden week” celebrations. With the U.S. dollar falling dramatically this week, we could see the Renminbi open up below eight on Monday. One year forward contracts currently put the Renminbi at 7.6805 by this time next year. Look for continued slow and steady increases out of China.

With that, I will move on to the big finish:

Currencies today: A$ .7695, kiwi .6405, C$ .9015, euro 1.2691, sterling 1.8509, Swiss .8127, ISK 71.84, rand 6.04, krone 6.12, forint 204.95, zloty 3.0133, koruna 22.33, yen 113.98, baht 37.86, sing 1.5763, INR 44.94, China 8.01, pesos 10.97, dollar index 85.56, silver $14.04, and gold $680.38

That’s it for today. The big boss, Frank T., just called in to get the bagel and coffee order, so we have that going for us. Hopefully Chuck will be able to get his flights re-arranged and come back early enough to bring you the Pfennig on Monday. Again, happy Cinco de Mayo to everyone; be careful for those of you celebrating tonight. Have a great weekend!!!

Chris Graffney
May 5, 2006