A Bank of Japan Meeting Week...

Good day… Well… A nice 3-day weekend for your truly… Got some work around the house done, and had time to rest, which was badly needed after a week on the road. I don’t know how the Big Boss, Frank Trotter, gets through all the travel he does!

This is going to be short-n-sweet this morning, (like the book by Bill Gates on “Things I cannot afford”), as I have some huge tasks to get working on. We’re short-handed on the desk, I have 350 emails in my box, and our voice mail box is full! On top of all that, I have to leave for a few hours in the middle of the day! UGH! So… Here we go!

On Friday, the title of the day’s Pfennig was “Bad Data Begins To Mount” and that thought carried through with Friday’s data… I told the desk on Friday, that the economy had that brief lift from the December sales, etc. but it looks like we’re right back to the negativity that was building toward the economy and the dollar, like it was as we began the year. Here’s a brief breakdown of Friday’s data…

Batting first, we saw The Producer Price index (PPI) had dropped 0.6% in January, which was bang on with expectations. While everyone will smile at the lack of pipeline inflation, this certainly doesn’t help the dollar with regard to additional rate hikes…

Second on the lineup card was the U. of Michigan Consumer Confidence… While there are lots of things that could play into this drop… The upward movement of gas prices probably was a player, as was what I believe to be a realization by homeowners that the gravy train has left the station, and the house ATM is about to dry up… Again, no friend to the dollar was this data.

And finally, the Housing data… U.S. housing starts collapsed 14.3% in January, reversing December’s rise… Uh-Oh… Here are some numbers inside the number… Starts were 3.8% lower than in January 2006. Single-family housing starts fell 11.2% to a
1.108 million rate, also the slowest since 1997. Multi-family starts fell 24.1% to an annual rate of 300K. Building permits, a precursor to future housing market activity, fell to 1.568 million, partly reversing December’s rise.

After rebounding in November and December, this data tells us that maybe, just maybe, that star burned brightest before it burned out!

OK… Enough of all that data! The currencies did rally VS the dollar on Friday, and held onto and in some cases added onto those gains during yesterday’s U.S. holiday. The Japanese yen has really been on a yo-yo string the past few trading sessions… You see, the Bank of Japan meets this week, and that 4.8% GDP that posted last week should be the key master for the gate keeper… The Bank of Japan (BOJ)… But then, they disappointed the markets many a time before, why would this time be any different? I’ll get some emails that tell me why the BOJ won’t hike, so please save yourself the time, I’m quite aware of this fact… But I’m still going to go out on the limb on this one and say they will hike… I say it’s 50/50…

A rate hike would go a long way toward the start of a reversal of the “carry trade”, but with rates still so low (probably 1/2% if they hike, as they are only 1/4% now) it won’t be any tidal wave move…

China is on holiday all this week… Must be nice! So the renminbi price will look like a broken record all week… Be careful though… These holiday weeks, when no one is looking can be barn burners! Set a new rate for the renminbi when the markets are closed, and let everyone sit and wait for the doors to open again… Sounds like a plan! Of course that’s just me talking… The Chinese aren’t going to play that game, right?

Gold has backed off the near $670 level it saw on Friday… My friend, John Mauldin, wrote a nice piece in his weekly newsletter Friday, on this level for Gold… John points out that $670 has been a level that brings out sellers… So… Someone loves to sell their Gold at $670… And if they have a great profit, like most people do that bought a couple of years ago, then why not? But sooner or later, love is going to get you, and so will the supply of Gold that the seller owns… Unless, a short sale is involved… Then, that’s a whole different ball game.

The U.S. data cupboard is pretty bare this week, with only the CPI (which long time readers know how much I dislike), and Leading Indicators the only real pieces of data that will print. We’ll also see the minutes of the last FOMC meeting tomorrow…

So… As we head into the remainder of the week, I would look for more dollar negativity building, and the currencies taking baby steps higher… Unless we get a rate hike from the BOJ, then currencies should take larger steps.

Currencies today: A$ .7865, kiwi .7015, C$ .8585, euro 1.3145, sterling 1.9505, Swiss .8075, ISK 66.25, krone 6.12, SEK 7.04, forint 192.10, zloty 2.96, koruna 21.40, yen 120.10, baht 33.40, sing 1.5325, HKD 7.8130, INR 44.10, China 7.7426, pesos 10.9710, dollar index 84.18, Silver $13.94, and Gold… $666.30

That’s it for today… Well, this turned out longer than I anticipated, but still, going out the door earlier, as I’ve got to get to work on my trading! In case you’ve missed the announcement, we brought back our MarketSafe Gold CD, and there’s a lot of interest so far… Tomorrow, I’ve got a treat from Stephen Roach, on the awful showing of the TIC’s data last week, so stay tuned, same bat time… Same bat channel! Have a great Tuesday and week!

Chuck Butler — February 20, 2007

The Daily Reckoning