A Three-Ring Circus

Good day. The weather is heating up. And so, too, are the currencies, as they continue their 2006 rebound from the SIRT and HIA pumped-up trading of the dollar in 2005. Go ahead and take a peek at the currency roundup if you want, but come back, because I’ve got the skinny on this huge move!

OK. Glad you came back! What we have today is akin to a three-ring circus. The Fed’s Big Ben, the ECB’s Trichet, and the Bank of Japan’s Muto will speak side-by-side today in Washington, D.C. This has the currency traders all lathered up; they believe Big Ben will signal that the Fed is about to pause rate hikes, and that Trichet and Muto will signal rate hikes are on the way.

But more importantly, the data that Big Ben said would dictate the next Fed rate move has been disappointing to say the least, while the economic data from the Eurozone and Japan has been pleasantly surprising. Thus, playing out the scenario I laid out for you with regard to how 2006 would unfold. The U.S. slows down; the Eurozone and Asia speeds ups. The gap narrows and voila, the markets focus once more on the financial stresses and the global imbalances, thus pushing the dollar back to 2004 levels. Depending on the negative momentum, they may even push them further!

Speaking of the disappointing economic data lately, the Jobs Jamboree was no exception last Friday, as it fell way short of meeting the expectations, which weren’t strong to begin with! Only 75,000 jobs were created in May, with the manufacturing sector losing 14,000 jobs. The average hourly earnings and average weekly hours didn’t provide any illusions for runaway wage inflation either. Then, the icing on the cake came in the form of a 1.8% fall in factory orders for April.

There’s not much in the way of economic data in the cupboard this week, until we get to Friday, when the April trade deficit will be printed. By then, we could be seeing the euro at 1.30 for the first time in over a year! I’ll talk more about the trade deficit as we go on this week, but its too early now to start feeling bad about the forecast for a $65 billion trade deficit!

Somebody at the IMF is going to hear about this one! You just wait until your father comes home! The IMF’s director of the Middle East and Central Asia, Moshin Kahn, has suggested that the Persian Gulf countries consider pegging their currencies to the euro, instead of the dollar. “We’re advocating the Gulf states stay with the dollar for now, but think seriously about the euro,” Moshin was quoted as saying. There are six countries currently pegging their currency to the dollar that want to form their own single currency by 2010. So, this proposed move to the euro might not come for some time, but I found this to be quite interesting that the IMF would propose this.

Did you see the story that developed over the weekend regarding Iran? Well, Iran is suggesting that U.S. actions may disrupt oil shipments. That news sent oil soaring – yes, even over the weekend. Oil is now trading at $73.75 per barrel. That’s over $1.50 higher than it was on Friday, and more than three cents higher than it traded on June 1, 2006!

Now, don’t get me wrong here. I don’t like filling up my tank with high-priced gas either, but I told everyone that cheap oil wasn’t in the near future, when everyone else was saying that oil was going to go back down. This rise in oil has gold back in the rally seat.

OK. China allowed their renminbi to gain versus the dollar, last night, for the first time in about a week. Recall, last Friday, I told you that China had promised to get their hands out of the cookie jar and allow renminbi flexibility. Well, if last night’s trading is any indication, we could definitely have something here! The renminbi is hanging onto the eight-handle by the skin of its teeth. I would really like to see the next move really push into the seven-handle!

I know that I keep talking about the economic growth in Asia and how strong each country’s growth has been, but I don’t think there can be enough data to prove that the region is really kicking some tail and taking names later! For instance, Thailand reported last night that their economy grew at more than three times the pace that was expected.

Did you see that Japan’s capital spending jumped 13.9%! So, there you have it! Japanese consumers are spending, and so are the companies! Rates have got to get off the zero mark soon! I know this has been a long struggle for the Asian currencies, but I’m not going to back off my call for Asian currencies to push higher versus the dollar.

Currencies today: A$ .7520, kiwi .6330, C$ .9110, euro 1.2965, sterling 1.8850, Swiss .83, ISK 71.05, rand 6.6250, krone 5.99 (first time for the krone to get into the five-handle! Wow!), forint 203.72, zloty 3.05, koruna 21.87, yen 111.25, baht 38.05, sing 1.5745, INR 45.77, China 8.0057, pesos 11.2775, dollar index 83.86, silver $12.40, and gold $645.30

That’s it for today. We began baseball life without Albert yesterday, as our MVP player most likely will miss a huge chunk of time with an injury. Ouch! We have our legal team in town this week and they wanted to go to the Cardinals’ game tonight. Aw shucks, I guess I’ll take them. Yeah, twist my arm. HAHAHAHAHA! Everyone is back on the desk this week. Now, let’s make those phones ring! Have a great Monday and week!

Chuck Butler
June 5, 2006

The Daily Reckoning