A Surprise Down Under!

Good day. Well, for the first trading day in a week, the currencies settled down yesterday and range-traded. That’s not a bad thing in that everyone needed to take a breather, sit back, and ponder what’s happened in the past week. As I discussed yesterday, the Fed is scrambling around trying to recover credibility. Although, a couple of readers told me I didn’t know what I was talking about there.

Of course, that didn’t stop me; nor did it stop the 50 other stories by the media, discussing the same thing yesterday! For the dollar, this issue of credibility is absolutely crucial. Do you recall how damaging it was for the euro in the beginning because the ECB hadn’t established credibility yet? If the Fed loses the markets’ trust, at a time when the current account deficit is requiring about $3 billion a day to finance, I don’t even want to think about the consequences and damage it would cause for the dollar.

Well, good news from “down under.” Last night, the Reserve Bank of Australia surprised the markets by raising interest rates 25 BPS. I said that recent strong data probably wasn’t enough to get the Reserve Bank of Australia to move rates just yet (although I did expect them to raise rates eventually). Well, apparently it was enough! This move has propelled the Aussie dollar past the 77-cent handle.

Here’s the thing I liked about Australian Reserve Bank Governor Macfarlane’s statement after the rate hike announcement. Macfarlane said that he raised rates on concern that quickening world economic growth and record commodity prices would spur inflation.

OK. First, he’s being proactive on inflation pressures. Give him a gold star! Second, he mentioned something that I continue to highlight: Global growth! Gold star! Third, he mentioned commodity prices. Macfarlane gets another gold star!

So, Macfarlane gets to move to the head of the class! I think the markets are now looking for a follow-up rate hike this summer; that thought is probably going to be enough to get the Aussie dollar back to 80 cents.

The strong move by the Aussie dollar allowed its kissin’ cousin from across the Tasman, the kiwi, to move past the 64-cent handle. It’s been a tough row to hoe this year for kiwi, and rightly so, given their current account deficit size. But, this shows you that sometimes you can put lipstick on a pig and it might just attract a frog! No, really, what I’m saying is that the kiwi has its problems, but with all the negative momentum toward the greenback these days, the kiwi’s problems are being swept under the rug. But, be careful, because the rug can always be pulled back exposing the problems once again – at any time!

So, this theme that I’ve been talking about recently, regarding global growth, is really beginning to show some muscle, and when you see central banks around the world recognize this by raising interest rates, then you’ve got confirmation! As I said before, it’s a lot easier to talk about why someone would buy a country’s currency when economic growth is soaring, interest rates are rising, and they experience a positive balance of payments!

Tomorrow, the Bank of England and the ECB will meet. While I don’t expect the Bank of England to move rates, I do think that the ECB is squirming in their collective seats. You see, since throwing the markets off the scent of a May rate hike, the ECB has seen very strong business and investor confidence reports. They’ve seen oil continue to move higher, along with other commodities, thus applying inflation pressures. So, while I still expect the ECB to make us wait until June to raise rates, I do think the ECB wishes that ECB President Trichet had kept his trap shut about the next rate hike.

Look for some hawkish statements from both central banks tomorrow, which should keep the wind in both currencies’ sails.

Today, the data cupboard shows us the color of the April non-manufacturing (services sector) index. Here the “experts” expect the index to have weakened, but they’ve been so wrong on their forecasts lately, they could be stand-ins for weathermen! OK. No e-mails from weathermen – love what you do!

Friday is a Jobs Jamboree Friday. We’ll also see the latest increase in consumer credit. As I look at the Calendar, I see that Friday is Cinco de Mayo! I’ll be in Atlanta, so I’ll miss the party this year. As I get to Cinco de Mayo this year, I will think about the beautiful sunsets on the ocean that I was lucky enough to get to see last week while in Puerto Vallarta. In fact, I even saw the “green flash.” If you’ve ever watched a sunset on the ocean carefully, you know what I’m talking about. Anyway, it’s just absolutely beautiful!

OK. Back to now. Oil has gone above $74, and once again, its rise is attributed to the instability in the world. At the center of attention, once again, is Iran. A 17% rise in oil prices in the past two months is really putting a damper on things – unless, of course, you’re an oilman, or have investments that generate profits from oil! But then, that’s just a hedge versus the money you spend at the gas station!

Gold and silver continue to soar. Overnight, gold is up another five bucks to $674.15. And, guess what the main driver of higher gold prices is. That’s right, instability in the world. And, at the center of attention once again, is Iran! Wait, didn’t I just say that about oil? Yes. Yes, I did! Sure would have been easier to just “cut-n-paste.” But Noooooo, I had to type it all out again!

Silver continues to recover from that awful day a couple of weeks ago, when it lost 18% in one day. It certainly looks as though this time, silver will overtake the $15 level without a huge sell off, but we’ll have to wait and see, eh?

Currencies today: A$ .7710, kiwi .6440, C$ .9050, euro 1.2640, sterling 1.84, Swiss .8085, ISK 74.25, rand 6.06, krone 6.15, forint 206.66, zloty 3.02, koruna 22.42, yen 113.20, baht 37.55, sing 1.5740, INR 44.84, China 8.01, pesos 10.96, dollar index 85.85, silver $14.44, and gold $674.15

That’s it for today. Tomorrow, both Chris and I head out to Atlanta at 6:00 in the morning. So, tomorrow’s Pfennig will be sent out later in the morning. Everyone is back on the desk today – at least for one day! Mother’s Day is sneaking up on us. If you’re lucky enough to still have your mother around, make sure you don’t wait until the last minute! This public service announcement has been brought to you by ME! Have a great Wednesday!

Chuck Butler
May 3, 2006

The Daily Reckoning