80-cent Currency!

Good day… A pretty quiet day in the currencies yesterday, with little or no movement until the overnight session. Overnight we’ve seen some slippage in the yen with more Bank of Japan jawboning the currency down. One of my fave currencies, Aussie dollars, finally hit the psychological level of 80-cents. This and more on a Tuesday morning, two days before I leave for my spring vacation! YAHOO!

OK… First the good news… I’ve long said that Aussie was an 80-cent currency, and I noted to the people on the desk yesterday that it was oh-so-close to that level, and I hoped it didn’t disappoint us like sterling did when it got oh-so-close to the 2.00 level. But as I turn on the screens this morning, there it is, right before my eyes! Aussie dollars trading at 80-cents! This is the highest level for the Aussie dollar since 1996.

So… Now you ask, “Is that it for Aussie?” Ahhh grasshopper… That’s a good question… And I don’t know anything more than the next currency analyst, but my opinion is no! There’s just too much “good stuff” going on in Australia, and with high yield currencies really doing well right now, I expect more gains from the Aussie dollar.

I could say that I expect it to get to… No wait! That’s like going ahead and putting your head on the slate for the executioner! But, if you ask me really nicely… I will tell you that I wouldn’t be surprised to see it stretch five more cents… But you can’t hold me to that, because you asked nicely!

Oh, and it’s not just Aussie that’s moving higher in the South Pacific… Kiwi has crossed the 70-cent level.

Now onto, Japan. The Bank of Japan (BOJ) Governor Fukui was at it again last night. And by “it” I mean simply dissing the yen, to keep it weak. Last night, Fukui said that interest rates in Japan would stay low. Talk about giving the green light to carry trade enthusiasts! He basically told these carry trade people to go ahead and short yen, because the borrowing costs aren’t going higher, and that he would do his best to keep the currency weak, to allow them even more profits.

Geez Louise… Where did this guy come from? Oh… And now the Big Boys from Goldman are telling investors to sell yen versus the dollar, and that the unwinding of carry trade was overdone. Now they may be correct, but I find it very interesting that they didn’t come out with that little ditty until Fukui gave the “green light”!

While I’m in Asia, let me share with you a note that a long time reader sent me yesterday regarding rising inflation in China, “I am a reader of your DP, and really enjoy it. I was in China last week visiting a vendor in Dong Guan. The owner of the factory was complaining to me that he was having a lot of trouble hiring workers, as there were so many factories going up and bidding up the wages. I asked him how much more he is paying his workers today than 12 months ago – his answer was 50% more!”

WOW! Talk about wage inflation! As I said the other day, I can’t believe China doesn’t have a huge inflation problem at this point in their economic expansion. You don’t book plus 10% gains in GDP year after year without experiencing inflationary problems. I know that I talked about the Central Bank’s tiny step interest rate hikes yesterday, but something has got to give here…either higher interest rates, or a more flexible currency, which at this point would result in a stronger currency. And we’ve all learned many years ago in the Pfennig that a strong currency goes a long way toward keeping inflation in check.

OK… Speaking of inflation… The United Kingdom received a surprise this morning, when their February consumer prices rose 2.8% versus a year ago. Uh-Oh! With the Bank of England’s (BOE) target ceiling of 2% for inflation, this has got to be very alarming to them!

Let’s stop for a minute here and recall words that you’ve seen in this Pfennig, when the markets began marking down sterling because they believed the BOE was finished with rate hikes, and that is that the BOE had more work to do with regards to interest rates.

The U.K. economy is strong, domestic spending is widespread, and inflation will remain a problem if the BOE stops now. WOW! They ought to give the guy who stood up to the markets and told them how it would be, an honorary economic degree, eh? Lisa, are you reading? HAHAHAHAHA! Seriously though… I just didn’t buy what the markets were doing… And I know that the markets are “always right”.

I know, I know, the BOE hasn’t raised rates yet, and there’s no guarantee that they will… But it’s all laid out for them to do so… Just like I said it would be! The best part is that this inflation report has the pound sterling moving up versus the dollar again!

The U.S. economic data cupboard is relatively bare except for some numbers due on housing starts and building permits today. I imagine these reports will be disappointing. If I were a builder, I certainly would be concerned with the number of unsold homes… And I doubt I would go out on a limb and begin to build even more. But, I’m the logical sort… Not much that happens these days is done using logic!

On Friday last week I told you that Reuters had called me to do an interview. At the time, I told the reporter that in addition to the housing problems, the U.S. stock performance was really calling the shots. And then yesterday, stocks rebounded, and the euro lost ground to the dollar.

I don’t expect this pattern to remain in the markets for very long, as with any other pattern, the market participants move onto something else. Sort of like one of my fave Saturday Night Live characters… Dieter… “I grow tired of your babble… We dance now”! A little Sprockets to start your Tuesday!

How about that Indian rupee? It finally got below the 44 level overnight, and while the moves here aren’t big, the trend has been your friend with rupees! Let’s not forget that a trend is not a one-way street, and there could be slippage from time to time. But the trend remains in place… And for the rupee, that’s a good show!

Currencies today: A$ .80, kiwi .7025, C$ .85, euro 1.3285, sterling 1.9560, Swiss .8230, ISK 66.80, rand 7.40, krone 6.1350, SEK 7.00, forint 185.30, zloty 2.9150, koruna 20.96, yen 117.70, baht 32.80, sing 1.5260, HKD 7.8120, INR 43.77, China 7.7365, pesos 11.12, dollar index 83.42, Silver $13.27, and Gold… $654.40

That’s it for today… Look at that… I went a day without mentioning the subprime meltdown (except for here of course!). I’m heading to Las Vegas two times this spring… First for the private, International Living Conference in April… And then the free to the public Money Show in May. I’m also heading back to the country of Panama in early May. I sure hope that my beautiful bride doesn’t catch the rainforest flu again! I have a ton more travel dates as we head into the year, so I’ll keep you up to date on them right here! Next week while I’m away, our little Christine will return from maternity leave, and it will be great to see her at the trading desk again! Have a great Tuesday!

Chuck Butler — March 20, 2007

The Daily Reckoning