China Makes a Change

Good day… And a Happy Friday to one and all. I appreciate everyone’s patience with the Pfennig’s later arrival time this week.

BIG NEWS from China overnight… Well, kinda big news. Recall that just the other day I mentioned that I had seen greater flexibility in the renminbi (CNY) lately? Well, the Chinese government announced overnight that they would increase the size of their trading band versus the dollar for the renminbi in the currency basket they use. While on the outside the sound of it seems like we should be seeing the dollar on the run this morning, the increase in the bank only went from 0.3% to 0.5%.

One would think that even this small move would excite the markets… But NOOOOOOO! In fact, the renminbi only moved slightly higher and back in July ’05 when renminbi actually revalued and dropped the peg, yen (JPY) was trading around 115 and moved a couple of big figures lower. Showing how the market’s thinking has changed in the face of the carry trade, yen only dropped 60 points and from a 121 handle at that!

Oh well… Some news for a Friday morning!

So I got back in the middle of the night, and just can’t get my bearings straight this morning… Seems odd! Oh well, I carry on.

Hey! Didn’t I tell you that Canada’s dollar/loonie (CAD) had turned around the greenback’s strength and their sell off would be short lived? Well, looky here, what do we have? The loonie is at a 30-year high this morning! YAHOO! C$ 91.58… A 30-year high! The loonie received all kinds of underpinning this morning when it was announced that Canadian retail sales soared in March by 1.9% more than doubling the forecast by experts!

Then crude oil traded above $65, near a three-week high, and this is where you bring in the trumpets to sound the announcement, da, da da, da! And it’s all good for the loonie!

Another “winner” this week in the face of all this dollar strength is the Indian rupee (INR). The second fastest economic growth in the world resides in India. Interest rates are at good levels, and their relative attractiveness as a country is high, and therefore investors are willing to invest in India. So they may have the second fastest growing economy in Asia, but they are number one in the hearts of the fans when it comes to currency performance in Asia! For those of you keeping score at home, the rupee has gained 8.3% versus the dollar this year.

I sat on a “currency panel” yesterday at the Las Vegas Money Show with a friend, Jack Crooks of the Sovereign Society. At the end of the discussion on currencies, the moderator asked us which currency we would buy right now. Jack said yen… Because it is the most undervalued currency in the world. I was going to say the same thing! So, I said euro (EUR)! But Jack is absolutely correct in his statement! The problem that yen holders like myself have is that the currency is soooooooo manipulated by the Japanese government. And it takes the patience of JOB to hold onto it!

By the way… The panel discussion was great! Jack is great!

Speaking of the euro… I just can’t stop getting excited about the euro’s outlook… Not only has Germany, the Eurozone’s largest economy, been tagged with a VAT (tax) this year, but manufacturers have had to deal with a euro that keeps bumping up against it’s previous highs. But do these two potential problem makers keep the Eurozone economy down? NO! The 0.5% growth for the first quarter is only a small step for the economy. This economy has wings… And that should be all good for the euro!

Speaking of Germany… There’s a G-8 meeting in Germany this weekend. I’m sure that once again the ministers will moan and groan about the weakness in yen… But to no avail, I’m sure! But one can hope, eh?

The U.S. data cupboard only has consumer confidence to print in about an hour. I would suspect that even in the face of a go-go stock market, energy prices would push consumer confidence down further. And that might be the straw that breaks the dollar’s back today, and end this stupid dollar mini-rally!

Pound sterling (GBP) has really taken the news of a step down from Blair hard. The pound has fallen from the lofty heights of 2.02, just a month ago, to 1.9720. The Bank of England didn’t help things earlier this month when they only raised interest rates 25 BPS, and not the 50 BPS the fight against inflation needed. I don’t mean to sound like a broken record, ooops I mean scratched CD (the younger readers probably don’t know what a broken record is!) but, this looks like a screaming mini buying opportunity to me! Remember… When the pound finally hit 2, I said that I thought it wouldn’t stop there. So… It had better get on its horse!

Before I head to the Big Finish… Did you hear what our Fed Chairman said yesterday? “Subprime mortgage delinquencies and foreclosures will keep rising into next year, but they aren’t expected to seriously harm the broader economy”. He went further to say, “Fed officials do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

I’ll bet him a shiny quarter that he’s wrong on that one! And that I’m right as rain about the housing sector pushing the economy to near recession.

Currencies today: A$ .8225, kiwi .7290, C$ .9160, euro 1.3485, sterling 1.9720, Swiss .8155, ISK 63.30, rand 7.0525, krone 6.0615, SEK 6.8420, forint 185.60, zloty 2.81, koruna 20.9120, yen 120.80, baht 33.35, sing 1.5240, HKD 7.82, INR 40.7125, China 7.6820, pesos 10.82, Silver $12.94, and Gold… $659.10

That’s it for today… My little buddy, Alex was getting ready for school when I was beginning to write this morning, and I asked him if he wanted to help me. Long-long time readers may recall when I used to write from home every morning, while we did the set up work to begin EverBank, and Alex was only 3, but he would sit on my lap and bang away at the keys while I was writing and it would look something like this… 0e4t[thothnhlnvsd and I would have to say… Sorry… Alex is helping me write again today! No help from Alex today, he said he was too big to sit on my lap, and he’s right! Time to get him to school now… So have a great Friday and weekend!

Chuck Butler — May 18, 2007

The Daily Reckoning