A New Mr. Tough Guy!

Good day. Well, have you been following all the coverage of the fact that today is 06-06-06? Much ado about nothing. Tomorrow will be 06-07-06…

OK. I’ve got to get to the Big Ben Bernanke three-ring circus that occurred yesterday, because he really threw a cat among the pigeons with his tough talk. Big Ben came out firing from both sides yesterday – regarding inflation and how he thought rising inflation indexes were “unwelcome.” He said that the Fed would make certain that they are “not sustained.”

Oooh…Mr. Tough Guy! Look, the media and traders might have taken this bait and ran, but what they forgot was that with bait comes a hook. The hook is the fact that Big Ben is just about out of tricks. He was out to correct the thoughts (that he brought on himself) that he would not be a tough inflation fighter. So, he came out firing and when the smoke cleared, the dollar was rallying.

Never mind the fact that before he talked about inflation pressures, he admitted that the economy was slowing down. Doh! Of course it is! We’ve been hiking interest rates for two years. And what did they teach you in Economics 101? That interest rate hikes take about 12-18 months to fully work into the fabric of the economy. So, two years ago, we started at a base of one percent. And, it took two years to get to where we are now. So, if the economy has already shown signs of slowing down, as Big Ben and the recent data reflects, then imagine the state of things to come!

OK. I’ve had enough of this Big Ben talk. I just continue to think of an old power-hitter, sitting on the bench waiting his one last turn to hit a long ball. That’s Big Ben – one more homerun ball left.

So, the currencies were sold and dollars bought on the Big Ben tough-talk. And that dollar buying carried on through the night. It looks as though this dollar buying is certainly going to give some cheaper levels to buy currencies today! But, I wouldn’t count on that remaining that way too much longer. A report that just printed and came across the screens said that European services industries growth was the strongest it had been in more than five years during May.

This report, like so many in recent times, tells us that the Eurozone continues to show enormous growth. This growth, along with expectations of inflation will bring the ECB to the rate-hike table on Thursday. The only question at this point is will it be a 25-BPS hike or a 50-BPS hike. My initial thought on this is that it will be conservative and remain 25 BPS. But then my conspiracy vibes kick in, and I think back to the days when the Bundesbank was still calling the shots for Germany and basically the rest of Europe (since most Central Banks just followed whatever the Bundesbank did). And in those days, the Bundesbank was known for trying to surprise the markets with rate decisions.

Now, I know that France’s Claude Trichet is the current ECB President, but listen to me now and hear me later when I say that the ECB still has a strong Bundesbank makeup. That fact has me on the fence of a 50-BPS hike. And why not? Eurozone CPI inflation accelerated further above the ECB’s 2.0% target to 2.5% in May, and that definitely is getting the ECB’s inflation worries going.

All I’ll say now is that a 50-BPS hike is going to go a long way toward finally getting the euro over the 1.30 hump!

The Bank of England’s Monetary Policy Committee (MPC) will also meet this Thursday. And while most observers don’t believe a rate hike will come from this meeting, I’m holding out hope that the MPC will make a statement that an implied bias to tighter policy over the longer term is in place.

The Reserve Bank of Australia will meet tonight, and I don’t see them moving rates higher. But again, as long as they reiterate their tightening bias, the Australian dollar will remain a good currency to hold.

I was reading a story this past weekend on new U.S. Treasury Secretary Henry Paulson. Recall last week, I had reckoned back to previous U.S. Treasury secretary changes in the middle of an administration and that they had brought about a change in dollar policy? Well, we can have that, or we can continue down the same road of benign neglect when it comes to major currencies, which means he spends all his time trying to intimidate the Chinese into allowing their currency to float.

When I say benign neglect, I mean that the dollar is hung out to dry and fundamentals dictate its direction. You know where I’m going with this, so I’ll stop there!

The U.S. ISM non-manufacturing (services) index came in much lower in May, as reported yesterday, thus adding another piece of data that does not – and I mean does not – reflect any need to move rates higher at this time! There is nothing on the data docket today, and no Big Ben to contend with, so maybe we can get the currencies going in the right direction again!

Speaking of going in the right direction: Late last year, I was asked to write a piece for our 20-year anniversary of the World Markets Group. In the piece, I said that the currencies that enjoyed a current account surplus would be the biggest movers in 2006. Well, a quick look at the currency returns this year will show us that the currencies from “such” countries as Norway, Sweden, Switzerland, and Denmark all lead the list of “best returns” versus the dollar. And those Asian currencies with the positive balance of payments have also taken a run at the dollar.

Currencies today: A$ .7465, kiwi .6310, C$ .9025, euro 1.2880, sterling 1.87, Swiss .8260, ISK 72.80, rand 6.76, krone 6.03, forint 204.53, zloty 3.07, koruna 21.97, yen 112.40, baht 38.17, sing 1.5770, INR 45.92, China 8.012, pesos 11.31, dollar index 84.44, silver $11.97, and gold $634.60

That’s it for today. A fun night at the ballpark last night until our “closer” closed it out for the wrong team! Ugh! I’ll be back there again tonight; hopefully this game will have a different outcome! Have a great Tuesday!

Chuck Butler
June 6, 2006

The Daily Reckoning