A Fair Currency Act?

Good day… Well, the European Central Bank (ECB) and the Bank of England (BOE) are meeting this morning as I begin to type away. As I’ve explained before, I fully expect the ECB to hike rates, and I am 50/50 on the timing of whether or not the BOE hikes rates at today’s meeting.

The key with the ECB is all focused on ECB President Trichet’s comments after the rate announcement. There are some in the markets that believe Trichet will stop sounding so hawkish, and that the ECB has come to the end of its rate hike rope. Those “some” do not include me! I believe that, with the growth in the Eurozone in both GDP and money supply, the ECB and Trichet still have a lot of work to do regarding interest rates.

Trichet needs to talk about how “rates are still accommodating” and “how low they are” to keep the fire lit for future rate hikes and momentum for the euro. And “droppage” of terms used in previous statements would be very damaging, so I doubt that “droppage” will happen!

The BOE have the same type of work to do with their interest rates. However, they did begin to raise rates before the ECB, so they have a head start! But there is at least one more rate hike if not two from the BOE in my book!

OK… The Reserve Bank of New Zealand (RBNZ) did raise rates last night 25 BPS to bring their internal official cash rate to 7.50%. RBNZ Governor Bollard, who I’ve had my differences with over the years, did have some good thoughts as to why the RBNZ decided to raise rates now. Let’s listen in…

“The short-term inflation outlook continues to ease. CPI inflation is projected to be around the middle of the target band through 2007, benefiting from lower oil prices and the high exchange rate. Our concern is that the recent pick-up in housing and domestic demand may gain momentum, giving rise to a stronger cyclical upturn at a time when resources are already very stretched. This could reverse the rebalancing of the economy that has been underway since late 2005 and present substantial risks to the medium-term inflation outlook.”

Enough with the rate hike talk! The currencies continued to come back to normal yesterday with euros bouncing higher, and yen giving back some gains. All the volatility that came into the markets last week has just about gone away.

Alright… Did you hear about this story yesterday? The “Fair Currency Act?” Great… Here we go again, throwing out the protectionism shields and swords. It’s all fun and games with these guys until somebody loses an eye! Here’s the skinny…

A half a dozen senators, primarily from economically struggling manufacturing states, unveiled legislation Wednesday that they say would protect American firms from unfair competition with companies whose governments manipulate their currency (read Japan and China).

This Fair Currency Act states that countervailing duties rules apply to nonmarket economies, which is how China is categorized, and identifies exchange rate misalignment as a factor to be considered in Section 421 market disruption cases filed under the 1974 Trade Act. The legislation requires that the Treasury continue to assess currency “manipulation” in semi-annual reports to Congress, and calls for an additional report issued by the Treasury twice a year on the “fundamental misalignment” of currencies.

OH BOY! Where do I sign up for this? NOT! While it would be great to help out manufacturers, I find it interesting that the lawmakers found it necessary to “help manufacturers” as we head into elections next year. Putting that aside, the real problem is that we talk about free markets and then place tariffs and duties on items. And the markets do NOT take kindly to protectionism measures.

In the end… You get what you really wanted… A cheaper dollar. But now you’ve gone and ticked off your major trading partners – the ones that buy your debt. HMMMM… I wonder if these lawmakers ever thought about the other side of the coin on this, as it will soon be a debacle of enormous proportions!

When this “ACT” was first announced yesterday, the dollar got taken to the woodshed. The euro was near 1.32, yen was back to below 116, and so on. But after the dust settled, these gains were given back. I think the markets said, “This bill will never get passed”… And that we can only hope!

Last week at this time it was “all about the yen”. But the past few days have seen this fade away, which is a good thing. Here are my thoughts… 1.) Yen moved too fast in too short a time 2.) It wasn’t the end of the carry trade; otherwise we would still be talking about how it was “all about the yen” and 3.) It did open some market participants’ eyes to the reality of how swiftly yen could move, should the carry trade really unwind!

So… I’m still thinking that after the dust completely settles on last week’s volatility, that yen will continue to move stronger versus the dollar, which then by nature of cross trades will allow yen to move stronger versus euro and sterling too. I would really love to see 110 from the yen this year.

Before I head to the Big Finish… Did you see that former Undersecretary of the Treasury, John Taylor, has written a book that bases the Treasury over Japan’s yen policy? It’s a tell all book that I’m sure will be a popular gift item for the Democrats this year. I’m not talking politics here… Just stating a fact, that’s all. Please do not read anything into this… U.S. politics and all that are strictly taboo in the Pfennig!

I fired off that disclosure the minute I talked about politics, eh? Anyway… I find it interesting that Mr. Taylor, who had a lot to do with setting policy, is now ripping away at the Treasury. I thought I was the only one that got to do the bashing of the Treasury! HAHAHAHA! And in the end the current administration… Wasn’t he a part of that? Oh well… I guess he needed to make a shekel or two in his retirement!

Currencies today: A$ .7785, kiwi .6845, C$ .8480, euro 1.3160, sterling 1.9360, Swiss .82, ISK 67, rand 7.38, krone 6.19, SEK 7.0650, forint 191.29, zloty 2.9540, koruna 21.40, yen 116.70, baht 32.90, sing 1.5265, HKD 7.8150, INR 44.34, China 7.7380, pesos 11.15, Silver $13.20, and Gold… $655.50

That’s it for today… Did you notice in the currency roundup that silver and gold have rebounded from last week’s sell off? Fully expected on my part! It was great to see the EverBank Jacksonville people last night. We sure have a great group of people at this bank that have their heads screwed on right, with lots of gray matter! Chris beat me in gin rummy on the plane yesterday… That’s cause for him to celebrate, as it rarely happens! Sometimes the cards come your way… And sometimes they don’t. That pretty much sums up everything else too! HAHAHAHAHA! Have a great Thursday… No word from the BOE or ECB yet.

Chuck Butler — March 08, 2007

The Daily Reckoning