A Conspiracy Theory?

Good day. Well, the Koizumi saber rattling really caught U.S. traders’ attention yesterday, which gave additional benefits to the dollar bulls, and the dollar. I got to thinking about this last night, and as usual, the end result was a “conspiracy theory.”

I got to thinking about Koizumi and his saber rattling, and thought: “I know that he knows the Bank of Japan is going to end the ZIRP this week.” I figured that the yen would rally on that news, which in fact it had already begun to do. If he did some yen-negative talk before the rate hike, it would be a wash, and yen would remain around 114. Think about it, these guys in Japan have pulled this trick a few times in the past 15 years.

However, I think it’s going to take a lot more from Japanese officials once the ZIRP (zero interest rate policy) is removed, because from then on, the bias for rates will be tightening. It will begin to scare the bejeebers out of investors that have shorted yen over the past 10 years! Game on, Wayne. Game on, Garth!

The Bank of Canada (BOC) meets today; this one slipped by my radar screen yesterday! The loonie has seen some major selling the past two days, on the thought that the Bank of Canada will pause rate hikes at this meeting. Gee, Wally. I just can’t get my arms around the fact that Governor Dodge would take the data since the last meeting, which has all been strong and showing inflation pressures all around, and decide to pause. So, let’s find me a big strong limb for me to climb out on again. I think the BOC does the right thing and keeps Pandora’s box of inflation pressures closed with a rate hike.

If the BOC does decide to pause, well, then watch out loonies. This could be a real blow to the belly for the loonie, as the markets see inflation, whether the BOC does or not. And the markets will take the BOC’s non-action as dovish toward inflation. Perception. You are what you are perceived to be. The BOC had better think about that before deciding today.

You know, one of my old favorites, the kiwi, which got into very hot water when their trade deficit got completely out of hand, is beginning to show favorable signs. Here’s the skinny: The last couple of trade reports show the rot on the vine hasn’t gotten any worse. In fact, it has cleared up a bit. There should be more clearing up of this rot, because, as you know, a ton of New Zealand’s trade deficit came as a result of kiwi closing the gap with the Aussie dollar. This means that since the majority of the imports to New Zealand come from Australia, and if the two currencies were drawing close to each other in value, the trade deficit suffers.

With the kiwi backing off to the tune of over 10% versus the dollar this year, the spread to the Aussie dollar has also backed off. So, some additional clearing up of the rot on the trade deficit vine should occur. So, I’m going to put the “Amber” light on kiwi. I think it should gain favor as long as the Reserve Bank doesn’t cut rates, and the trade deficit continues to show signs of backing off…”Amber.”

Well, Henry Paulson was sworn in as the new U.S. Treasury Secretary yesterday, and once again, he failed to mention the dollar or the “strong dollar policy” that the other U.S. Treasury Secretaries had done when taking over the U.S. Treasury. I tend to believe that this is a much bigger black cloud for the dollar than the media does.

Yesterday on my ride home, I heard a song from the 70’s that I think we should adopt as a theme song. The title of the song was “The Power of Gold” and was performed by one of my favorites, Dan Fogelberg, along with Tim Weisberg. Here are some lyrics:

“The letters and calls
Got you climbing the walls
And everyone wants a favor
They beg to remind you
Of times left behind you|
But you know the past is a loser…
Are you…
The Power of Gold?”

Yes! I am! I’m a true believer that this shiny metal is headed higher after shaking out the “short timers.”

OK. That was fun. Next week, I’ve got a big announcement regarding a new MarketSafe CD product. So, stay tuned. Same Bat Time. Same Bat Channel!

Speaking of MarketSafe CD products, our gold bullion MarketSafe CD product, and a top-10 “Financial Innovation” from 2005, is about to be closed out in July (July 18, 2006). We may bring it back sometime in the future, should the demand call for it. But right now, we’re not seeing the demand, for a product that gives you 100% principal protection, and 100% of the positive move in gold based on an average price for the next five years.

Hmmm. Sounds to me like anyone thinking they would like to participate in the price of gold without experiencing any “market” loss, would be all over that CD like a cheap suit! But that’s just me.

In his last newsletter, my friend John Mauldin had a nice piece on his thoughts regarding the Federal Reserve’s next move. As usual, John presents all of his research and thoughts in an outline that is easy to understand and follow. If you want to read his thoughts, click here: www.2000wave.com

Oh, by the way, he doesn’t believe the Fed is ready to pause!

Currencies today: A$ .75, kiwi .6120, C$ .8885, euro 1.2740, sterling 1.84, Swiss .8135, ISK 75.15, rand 7.14, krone 6.2750, SEK 7.2175, forint 217.56, zloty 3.16, koruna 22.30, yen 114.30, baht 37.80, sing 1.58, INR 46.17, China 7.9911, pesos 11, dollar index 85.55, silver $11.32, and gold $630.00

That’s it for today. A St. Louis kid and Philadelphia Philly, Ryan Howard, won the Home Run Derby at the All-Star Game events last night. Let’s hope it’s a harbinger to a National League win – the first in 10 years! There are four Cardinals at the All-Star game, which will be played tonight. Have a great Tuesday!

Chuck Butler
July 11, 2006

The Daily Reckoning