Big Al Coming Over To Our Side?

Good day… May the force be with you. The Dark Side has lost a comrade to the “right side.” More on that in a minute, but first a look at what went on yesterday and in the overnight markets… And… The end of our MarketSafe Gold and Commodity CD’s… We’ll probably bring them out of the vault, much like Disney does with Bambi, at sometime in the future, but for now, we’re putting them to bed… Hope you acted in time!

We did see the euro stop the dollar’s rally at 1.3190, and then climb back to 1.3250. Most of the trading was in tight ranges ahead of the FOMC meeting today, thus leaving the currencies to fend for themselves.

This morning, we’ve seen U.K. inflation increase to 2.7%, the highest level in almost a decade. The Bank of England’s Monetary Policy Committee obviously has more work to do with regards to interest rates, eh? I told you so last week! I said that the latest two economic reports that showed weakness in the economy, and thus caused a sterling sell off, would be forgotten about and things like house prices and inflation would bring the markets back to sterling… I love it when a plan comes together!

We’ve also seen that investor confidence in Germany, as measured by the think tank ZEW, did bounce back this month from the previous month’s 13-year low. The falling unemployment and stronger stock market is given as the reason for this turn-around. Germany’s economic outlook continues to look strong, even in the face of the VAT (value added tax) that will go into place in 2007.

However, no one wants to make any directional currency moves ahead of the FOMC meeting today… Some market pundits were saying yesterday that they thought the Fed would mention that they will not be cutting rates any time soon… While others were saying the Fed will once again “cry wolf” and talk about inflation worries, while keeping rates unchanged. I think they will opt for the latter of these two thoughts, as it seems to be their M.O.

OK Luke Skywalker, meet your new comrade… Big Al Greenspan! Yes, he did use to work for the dark side, but recent words from the man known on the dark side as “Mr. Bubbles” have us believing that he has seen the error of his 18 years on the dark side. Let’s listen to the latest of his speeches.

I’ll first set this up for you… In a speech he gave yesterday, former Federal Reserve Chairman Alan Greenspan said, “the dollar will probably keep falling because it’s unlikely that international fund managers will continue to increase their allocations to the U.S. currency.”

Russia and other oil-producing currencies are shifting their assets out of dollars toward the euro and yen, a Bank for International Settlements’ quarterly report showed today.

Greenspan said, “the dollar, heading for its fourth annual decline in the past five years, will probably keep falling until the U.S. current-account deficit diminishes.”

And here’s the statement that should ring in every investors ear until they do something about it… “The dollar will continue to drift downward until there is a change in the U.S. current-account balance, it’s IMPRUDENT to hold everything in one currency.”

How about that? Big Al, Mr. Bubbles, talking the Chuck talk… Walking the Chuck walk. I find this to be interesting… But not out of the realm of possibilities. Remember… Long ago in a galaxy far away, Big Al, was a goldbug… Then, just like in the Star Wars Trilogy, he slipped over to the dark side… And the goldbug was gone. Instead he opted for a printing press, and a box of bath soap!

Enough of that little piece of award winning journalism! HAHAHAHAHA!

Don’t forget about the U.S. October Trade Deficit printing today… With the U.S. economy slowing down, which means consumer spending is slowing down (and I could really get on my soapbox as to the reasons for consumer spending slowing down, but I won’t), the trade balance will probably pull the reins in a bit on deficit… But, nothing to write home about… It will still remain above $60 billion per month, which keeps it on pace to be greater than $700 billion per year… Don’t let the media spin this to a “positive.”

And yesterday, when I was telling you about the high probability of rate hikes in Sweden and Norway this week, I forgot to add Switzerland! Yes, the Swiss National Bank should hike rates this week 25 BPS.

The Swiss National Bank continues to lag the European Central Bank with regard to rate moves… And I think this is what hurts the franc compared to the euro… Well, that, and the fact the euro is the 200-pound gorilla in Europe.

The Canadian dollar/loonie continues to give up ground versus the greenback. I’ve written several times as to what’s going on here in the past month, but wanted to update for any new readers – which, there should be quite a few, given the fact that only three in the crowd of people I talked to last week were Pfennig readers!

The loonie first saw weakness after it was announced that the Canadian Royal Income Trusts would be taxed. These Income Trusts became very popular with investors and the taxation would reduce the earnings of the investments… Immediately following the taxation announcement, the loonie began to get sold… And the selling hasn’t stopped, as I see loonies trading this morning under 87-cents. It’s my opinion that we won’t see the loonie recover unless we see $70 oil and $700 gold again.

Just about the time the loonie starts to show weakness, the South African rand starts to rebound. I’ve been watching the rand tick up day after day lately, and overnight it slipped below the seven handle (rand is a European style currency, so the lower the number the greater the value in dollars)… Recall last month I wrote about how investors were screaming at the South African Reserve Bank (SARB) to hike rates by a large margin, and the SARB sort of came through. They raised them but not to the degree investors demanded. So… The hope here by investors is that the next rate hike will be large, thus returning the “risk premium” to the rand, and attracting investors once again.

Long time readers know that I personally don’t care for the rand as it experiences these wild swings, and volatility. When it is bad… It’s BAD! But when the rand is good… Well, you get what you see going on right now.

Currencies today: A$ .7860, kiwi .69, C$ .8690, euro 1.3245, sterling 1.9625, Swiss .8310, ISK 69.40, rand 6.9870, krone 6.1480, SEK 6.85, forint 192, zloty 2.88, koruna 21.10, yen 116.90, baht 35.23, sing 1.54, HKD 7.7725, INR 44.83, China 7.8308, pesos 10.84, dollar index 83.16, Silver $13.83, and Gold… $629.65

That’s it for today… Are my days mixed up or what? Last week I didn’t know if I was returning Wednesday or Thursday… And then I said it was two weeks until my vacation… MY VACATION IS NEXT WEEK! YAHOO! How about the Rams Special Teams? They were SPECIAL last night, at least for Da’ Bears they were! Have a great FOMC Tuesday!

Chuck Butler
December 12, 2006

The Daily Reckoning