"A Feel Good Story"

Good day. Well, another month of “The trade deficit wasn’t as bad as expected” is in the cards, as yesterday’s printing of the trade deficit was “only” $63.8 billion instead of the forecast of $65 billion. Don’t let the fact that May’s $63.8 billion was almost 1% higher than April’s figure get in the way of a “feel good” story.

And “feel good” stories were all over the board yesterday after the printing. The media bit and took the bait hook, line and sinker! Why can’t people look at the number for what it is, instead of getting all lathered up when it isn’t as “bad” as forecast? The number was $63.8 billion, folks…$63.8 billion – no wait, let me repeat one more time: $63.8 billion!

So, guess what happened when the “feel good” stories hit the screens? You are correct, Sir! The dollar rallied. Again, let me say that one day, these dolts that buy dollars because the trade deficit isn’t as bad as expected are going to wish they hadn’t. But for now, the dollar gets to bask in the sun. Oh, it’s still down over 7% to the euro this year, but that’s chicken feed to what I believe is going to be the end result!

Well, with the bombs in India, and things heating up in the Middle East (again), the risk aversion that we talked about throughout May and June is back on the docket. The emerging markets are all looking a little soft around the belly again, just when it looked as though it was safe to stick a toe back into the emerging markets water again. India, South Africa, Turkey, Mexico, and Iceland all head up that list of emerging markets.

The Canadian dollar/loonie has really taken the Bank of Canada’s (BOC) pause in interest rates hard. The Belle of the Ball, has turned into a pumpkin, and I expect even more selling of loonies in the near future. But as I said yesterday, I’m not throwing in the towel altogether, because of what I believe commodities can still do, which plays into the pricing of the loonie.

But in case anyone is wondering why the markets would take the loonie to the woodshed over a central-bank pause in interest rates, let me set you straight. The BOC has left the barn door open to inflation, even though they believe they have a good hold on it. With oil prices rising, and the base metals back on the rally tracks, I just don’t agree with the BOC. And the markets don’t either!

There was good news from Canada yesterday, as Canada’s merchandise trade surplus improved to C$4.1 billion in May from a revised C$3.9 billion in April. You’ve got to love those surplus countries, even when they have a central bank that pauses when it shouldn’t!

Moving along down to the South Pacific, Australia and the Aussie dollar received a shot in the arm last night when the latest labor report printed. Australian employment hopped, skipped and jumped more than five times the forecast amount in June! A very strong labor report has traders and investors looking at the Aussie dollar again. Of course, I never took my eye off of Aussie dollars, but that’s just me!

Aussie interest rates look to be going higher as we head into the second half of the year, and that will only add to the Aussie dollar’s rally. As I reported here a long some time ago, the Aussie dollar got caught up in the “The rate differential to the U.S. is narrowing game.” Well, if the Reserve Bank is going to come back to the rate-hike table about the time the U.S. Fed pushes back from the rate-hike table, the Aussie dollar could revisit last year’s highs.

All these geo-political problems has investors looking to buying gold again. Gold has rallied 16% since hitting the $559 level just a month ago. However, since the North Korean missile tests on July 4, 2006, gold has gained 5%! I don’t know if gold is going to take off from here or go back down first, but what I do know is that is should be going higher, given the global inflation and geo-political goings on!

Tomorrow, Chris will be telling you about the Bank of Japan’s rate hike, and what the market reaction is. Just remember, the Bank of Japan wants you to believe that this rate hike is the “only one” they will make for some time to come. I don’t believe that for one minute and neither should you!

Well, I’m late. Mary Owens just came in, and I’m still typing away! So, onto the big finish!

Currencies Today: A$ .7540, kiwi .6170, C$ .8840, euro 1.27, sterling 1.84, Swiss .8125, ISK 74.45, rand 7.21, krone 6.2450, SEK 7.23, forint 220.70, zloty 3.19, koruna 22.47, yen 115.30, baht 37.90, sing 1.5820, INR 46.32, China 7.9899, pesos 11.08, dollar index 85.86, silver $11.66, and gold $652.00

That’s it for today. I’m heading to Washington, D.C., later today with the Big Boss, Frank Trotter. I’ll be back in the saddle on Monday, when I’ll have a big announcement on a new MarketSafe product! My beloved Cardinals begin the second half of the season in first place, but really haven’t been playing well. I sure hope they find the “magic” again for the second-half run! Have a great Thursday. And since I won’t be here tomorrow, have a great Friday and weekend, too!

Chuck Butler
July 13, 2006

The Daily Reckoning