Big Dog For a Day!

Good day… Well, the currencies tried to make a run at the dollar yesterday… But since the dust settled on the Asian session overnight, we’re back to yesterday morning’s levels… Except in pound sterling (GBP). Here’s the skinny on that!

Yesterday, I told you that sterling had received some love from the Bank of England’s (BOE) minutes that showed the rate decision last month was a unanimous decision. As the minutes were printed I also noticed that 50 BPS was discussed and even had some backers in the BOE! This news really lit the fire under sterling, and for once in a blue moon, da da da dadada, sterling was the Big Dog on the porch! I really thought at one point in the day that sterling would hit 1.99 and lead the euro (EUR) back to the 1.35 level…

But NOOOOOO! That all changed overnight.

This morning, there’s more good news from the German economic standpoint. German business confidence as measured by the think tank IFO remained high this month, near the record level established last December. This is the second report this week that is flashing a great big green light on the Eurozone economy. With Germany’s economy booming right now, the Eurozone is set for higher interest rates next month. And that’s all good for the euro. But strange things have happened on the way to the forum. The euro just can’t seem to get any wind in its sails these days.

I think I know why… And it doesn’t have anything to do with investors believing the euro is overvalued.. The carry trade dominates the investment world these days… And if you aren’t Iceland, New Zealand, and other high yielding currencies, you’re just not seeing investment flows! There is no risk aversion these days… And I think the markets are setting themselves up for one big Armageddon when this carry trade begins to unwind. I can hear you saying, “But Chuck, when will this unwinding happen?” Ahhh, grasshopper, that’s the 64-dollar question! A global risk event seems to be the most likely candidate, as I don’t think the Bank of Japan is going to raise rates any time soon, at least not until August!

Yesterday, I talked about the Chinese/U.S. talks led by Wu and Paulson. I then got on my soapbox and chastised the U.S. lawmakers that keep blaming everything on China. One reader really thought about what I said and had this to say about my comments:

“Your comments today were right on target and not only described the illness but prescribed the cure. If more Americans would give up chasing the latest and greatest, such as ‘I’ve got to have this new cell phone with this feature…’ or ‘the New Daze-Com 4 is sooo much better than my Daze-Com 3 3/4’ and put that money into savings or investment (offered by EverBank of course) how fast would that trade deficit shrink? How strong would the American way of life be? How secure would the future be for our children?”

Now there’s someone who “gets it!”

Here’s someone else… MarketWatch ran a story yesterday, “Congress should resist the urge to slap protectionist measures on China because it will only make life more difficult for the domestic economy, Nobel Prize-winning economist Joseph Stiglitz of Columbia University said Tuesday.”

Mr. Stiglitz is high on my hit parade with these comments for sure!

Now the finger pointing will begin with a fever pitch… Already U.S. Treasury Secretary Paulson has said that the United States is ‘impatient’ with China’s currency policy. And China’s Central Bank governor Zhou, said that gains in the renminbi (CNY) are “already moving fast enough”. This is going to end up ugly folks.

Japan posted a higher than expected trade surplus yesterday. Following up March’s moon shot trade surplus growth of 62% Japan’s trade surplus rose 51.8% in April. Talk about having their cake and eating it too! The weak yen (JPY) just keeps adding reserves, and that filters down to support Japan’s economic expansion. There is simply no reason whatsoever that the Bank of Japan leaves rates at 0.5%! But they do… And that keeps the yen weak! UGH!

Today we’ll see April durable goods orders and new home sales, along with the usual Thursday fare of weekly initial jobless claims. Durables are forecast to fall from last month’s strong 4.3% gain to just 1%. And new home sales are expected to remain at 860K in April. I don’t see how, why or when with the new home sales, but I’ll not throw myself under the “make the U.S. Consumer feel good” bus.

This has been a very slow week for data… I don’t remember a week that was so slow! But that’s OK… I needed some rest after all my travels!

I don’t know if you’ve seen my friend Addison Wiggins’s latest work. It’s called the “5 Minute Forecast”… And is quite good. Well, I don’t say that just because he’s my friend… Or that I’m quoted in it from time to time… I say it because I love the clock…

In the South Pacific, the slow, small healing we’ve seen recently in the New Zealand trade deficit was erased in April, as the trade deficit widened more than expected to NZ $6.02 billion in the year ended in April. This, however, hasn’t dampened kiwi (NZD) too much, as the report really points out the consumer demand/spending that the Reserve Bank of New Zealand (RBNZ) has been trying to curb, with rising interest rates.

Maybe the latest rate hikes haven’t filtered through the economy yet… And once they do, the consumer spending will slow. But what happens if the spending doesn’t slow? Well, it means the RBNZ will have to review raising interest rates once more, and that will add to the carry trade debacle going on. One big vicious circle, going ’round and ’round.

How about that Canadian dollar/loonie (CAD)? It just continues to act like the Energizer Bunny, and keeps going, and going. The loonie is maintaining its 30-year high status, aided by the mergers and acquisitions keeping the flow of investments coming into Canada. I highlighted this renewed interest in Canadian companies about a month ago, and it has not slowed down! Here are some figures to help explain why investment into Canada is soaring… In the past two years… Oil is up 21%, Gold is up 53%, and Copper is up 87%…

I’ve explained before that Canada is considered a commodity currency, and the fact that commodities account for 54% of Canadian exports validates that claim.

Not much else to talk about today… So onto the Big Finish!

Currencies today: A$ .8220, kiwi .7288, C$ .9247, euro 1.3450, sterling 1.9880, Swiss .8140, ISK 62.15, rand 7.11, krone 6.03, SEK 6.8350, forint 185.60, zloty 2.8270, koruna 21.02, yen 121.40, baht 32.85, sing 1.5250, HKD 7.8230, INR 40.60, China 7.6510, pesos 10.81, dollar index 82.35, Silver $13.08, and Gold… $661.70

That’s it for today… Cardinals and Pirates at noon today at the ball park… Need I say more about where I’ll be? Up very late last night, as my little buddy had a late ball game. My beautiful bride kept worrying about whether he would be able to get up for school today… And I said, “why are you worrying about him getting up, he gets up 5 hours after I do!” But, that carried no water… Have a great Thursday!

The Daily Reckoning