A Day of Rate Hikes!

Good day. And a Happy Friday to one and all! This has been a very long week for yours truly, so I’m very happy that it’s Friday! It’s also been a long week for the currencies and dollar bears. A week that began, for the dollar bears, with all the promise of a new day, fizzled out quickly as Fed Chairman Big Ben Bernanke put the kyboshes on that promise. His tough words on inflation are still lingering throughout the markets.

Jawboning: Something that central bankers have used for years to keep from having to actually do what they threaten to do. Unfortunately, I think Big Ben will keep jawboning, and then even hike rates on June 29, 2006. But we’ll have to see what happens to the data as we head into summer.

The ECB did hike rates yesterday, but by only 25 BPS, which did not have a positive effect on the euro. Maybe only one economist surveyed thought the ECB would move 50 BPS, but the markets were wishing and hoping and praying for 50 BPS. And when it didn’t come, a ton of long positions were unwound. This caused the euro to fall another cent yesterday, which for those of you sitting on the sidelines with cash to invest in euros and missed the jump from 1.26 to 1.29, the currency gods have given you a second chance!

The ECB was very clear about how interest rates are still low and accommodating, and how inflation fears are real. They will keep with the program that I outlined last fall and hike rates again in September and December. And while we wait to pass those mileposts, ECB members will be out in force talking tough and keeping the markets’ interest in euros.

We had a surprise rate hike in South Africa yesterday, as the South African Reserve Bank (SARB) hiked rates 50 BPS. The SARB probably hiked rates more in reaction to global uncertainty in order to calm the markets than for real inflationary reasons. Yesterday, I told you of Turkey’s huge rate hike. Well, South Africa kept up with the Joneses, as we also saw rate hikes from fellow emerging-market countries of South Korea and India! I don’t believe this marks the beginning of a rate tightening cycle for South Africa.

So, yesterday was a day of rate hikes, eh?

Today, we finally get some data to chew on. The U.S. April trade deficit will print this morning and is expected to increase to $65 billion on the higher oil prices. But, as I’ve said before, it’s not just oil that’s kicking this trade deficit higher. Look at Japan and China’s trade surpluses with the United States. The last time I checked, we didn’t import oil from Japan and China! If the trade deficit does kick up to $65 billion or higher, I would think the dollar’s rally on the Big Ben banter to be over! However, we do have to weigh the chances of a weaker-than-expected trade deficit, to be fair and balanced! If that were to happen, the dollar would certainly continue to swing a heavy hammer, but unless someone in Washington D.C. is cooking the books again, I can’t see a weaker trade deficit!

You know, it occurred to me the other day that with the risk aversion going on and the world equity indices taking on water, there must be a “flight to safety” going on. But, and here’s where I had a big old belly laugh, which if you’ve seen me lately, you know that’s a big laugh! Anyone thinking that buying U.S. assets represents a “flight to safety” needs to have their head examined!

A reader passed this note to me yesterday. It had been posted on the GATA Web site. “To see hordes of investors indiscriminately choosing the world’s most over-owned, over-printed, un-backed currency as a safe haven suggests a serious degree of disorientation. It’s as if someone yelled fire, and the panicked crowd has rushed for the familiar exit door, trampling each other in the process. Unfortunately, that door no longer leads to safety.”

So, I’m not the only one with those thoughts! In fact, old friend Doug Casey’s June edition of the International Speculator has a great article in it: “The Coming Currency Crisis.” You can find the International Speculator Web site here.

He’ll even let you sign up for a free 30-day trial, which means you can then read the report! But, I think you’ll probably want to sign up for more, as Doug Casey’s letter is great!

The Group of Eight finance ministers are meeting today, and I would love to be able to attend given the bickering and rhetoric that has been going on among the members lately. I found a statement by Luxemburg Prime Minister Juncker to be pretty good. Juncker said, “as his region is not at the origin of the global imbalances it’s not up to us to take any initiative.” Seems appropriate doesn’t it? Europe doesn’t believe they have been the cause of the global imbalances, so why would they take any initiative?

One of my favorite economists, Brad Setser of Roubini Global Economics, said that the ministers that are meeting today promised “vigorous” action regarding the global imbalances, when they last met two months ago. Brad said, “The Big question is whether anyone is all that serious.” I agree with Brad. I think he’s hit the nail on the head with that statement. It all goes back to that comment by Luxemburg’s Juncker.

The Aussie dollar and the kiwi came back strong overnight, so while I usually say that Australia is a proxy for global growth, let’s hope these two are a proxy for a global currency rally versus the dollar!

OK. I’m ready to end the week with a latte’ and a scone, so it’s time to head to the big finish!

Currencies today: A$ .7495, kiwi .6330, C$ .8990, euro 1.2660, sterling 1.8440, Swiss .8120, ISK 73.80, rand 6.7075, krone 6.1810, forint 208.63, zloty 3.13, koruna 22.30, yen 113.80, baht 38.35, sing 1.5930, INR 45.95, China 8.0112, pesos 11.37, dollar index 85.80, silver $11.47, and gold $613.10

That’s it for today. Good luck to the 32 countries that have a team playing in the World Cup. That gets started today. The trade-deficit data will rule the day, so be prepared. No big weekend plans for me, so hopefully I can relax and refuel after this long week! Have a great Friday and weekend!

Chuck Butler
June 9, 2006