A Quick History Lesson

Good day…Well, after taking a day off from its recent assault on the dollar, the euro – along with other currencies – is back on the rally tracks this morning, with the single unit hitting the 1.32 level once again. There’s still a lot of two-way traffic in the currencies, and while the volatility isn’t what it once was, it is certainly better than the “watching paint dry” tight ranges we experienced for six months!

The euro has shown the other currencies that it is the right time to outperform the dollar, and one of the euro’s best students is pound sterling. I looked it up this morning when I came in and saw sterling trading at 1.9560, and what I found was the fact that it hadn’t been at this lofty level since it was bounced out of the ERM in 1992.

You may recall this happening. I was trading foreign bonds at the time, and thought sterling would not see the light of day ever again! So, for a short history lesson… In 1992, the European Union currencies had all applied for conversion to the euro. But first they would have to trade in the Exchange Rate Mechanism (ERM) within a trading band. George Soros took on the ERM, and decided that sterling would not be able to remain within the trading range should speculation hit it hard. And that’s exactly what he did; he hit sterling hard with speculative trades, selling the currency short, and driving it from its trading range.

Once out of the trading range, sterling had to leave the ERM, and therefore not be eligible for conversion to the euro. At that time in 1992, sterling was trading roughly where it is trading this morning…14 years later!

I don’t believe it will stop here either! U.K. economic growth, rising inflation and house prices are going to keep the Bank of England at the rate hike table in 2007. Two years ago I said that I thought sterling could go to two, proving once again that patience with currencies is a virtue; the currency now looks to hit that prodigious level. Of course I probably just took sterling’s mojo away from it like Dr. Evil did Austin Powers’.

How about Aussie and kiwi? The move against the dollar hasn’t been lost on them. And then you have the “euro wanna-be” currencies of Hungary, Poland and the Czech Republic. These guys have been on the rampage versus the euro, which will help with their ascension to the euro.

Canada just posted a stronger than expected current account in the 3rd QTR, and an upward revision for the 2nd QTR. Here’s the skinny…Canada’s current account surplus unexpectedly widened to $5.1 billion in the third quarter, defying forecasts for a narrower surplus of $3.4 billion. The second quarter surplus was revised up to $4.7 billion from $4.2 billion. So…things are not in dire straits for Canada. If only lawmakers there could have kept their collective hands out of the income trusts cookie jar.

Yesterday’s data did not really shine a light on the dollar – even with 3rd QTR GDP being revised up to 2.2 percent. This isn’t going to save the dollar at this point. Recall that yesterday I said that the Fed’s preferred inflation gauging data was the Personal Consumption Expenditures…and yesterday Core PCE printed at 2.2%, less than the previous 2.3 percent? Hmmm…has the “Boy Who Cried Wolf” once again looked silly? Well…maybe not entirely…not yet at least!

New Home Sales sunk like the Titanic in October, falling 3.2 percent. There are still people out there telling us that: 1. There is NO housing slump, or 2. The housing slump is over. Obviously these are economists that have stocks in home builders! HAHAHAHA! I sure hope that wouldn’t be the case. I would much rather believe them to be dolts!

I told you on Monday that the data cupboard was chock-full-o-data this week, and so we look at the docket today to see that two of Chuck’s faves will print – personal income and spending. And while this data has shown recently that we have finally stopped spending more than we make, that’s not a good thing for the economy. Today, we also see a follow up to the PCE monthly figures from yesterday with the PCE year-on-year data. Once again, a chance for Big Ben to save face…but I doubt it. The egg has already been thrown in his general direction!

The Chicago purchasing managers (manufacturing for that region) also prints, as does the house price index. Both should be negative, and not dollar friendly.

Yesterday, I also mentioned how Thailand had removed martial law and the baht had rallied nicely. The rally continued last night, and the baht is now trading at the highest level since 1999.

I also showed some doltness yesterday when I typed “marshall” instead of “martial.” This was pointed out to me by quite a few readers. All I can say is that I guess I can’t be “bang on” every day at 5 am. I’ve said all along that this is a stream of consciousness, and that proves it!

Before I head to the Big Finish, I just wanted to shine the spotlight on the Indian rupee. We first offered Indian rupee CD’s about six months ago…and the currency immediately lost ground. But that’s in the rupee’s rear view mirror now, and the currency has been gaining versus the dollar almost on a daily basis. We did see the Indian Central Bank step in and stem the gains a bit, two weeks ago, but nothing since, and the rupee has continued its assault on the dollar.

Today, India announced that their economic growth had unexpectedly accelerated to 9.2% in the 3rd QTR. I see this news scaring the bejeebers out of the Central Bank, and we’ll probably see them react with a rate hike soon. That will give the rupee some additional fuel to move higher yet again…Good show!

Currencies today: A$ .7880, kiwi .6825, C$ .8785, euro 1.32, sterling 1.9566, Swiss .8295, ISK 68.22, rand 7.26, krone 6.1975, SEK 6.8675, forint 194.11, zloty 2.89, koruna 21.20, yen 116.10, baht 35.90, sing 1.5410, HKD 7.7781, INR 44.74, China 7.8334, pesos 11, dollar index 83.24, Silver $13.70, and Gold… $639.50

That’s it for today… I had a nice conversation/interview with a reporter from the San Francisco Chronicle yesterday. Her comment to me was, “Why isn’t the whole world buying these CD’s?” We also had some very BIG news on the trading desk yesterday…Jennifer is going to have a baby! Jen has been at my right hand side since leaving college in 1994, so I’m very happy for her! So next June, I’ll be going crazy with her gone on leave! So – on that great news – have a great Thursday! (Ours should be interesting as it is raining right now, and that’s supposed to turn to 1/2 inch of ice, before turning over to snow. YECH!)

Chuck Butler
November 30, 2006

The Daily Reckoning