China "Slows Down" To 10.4% Growth!

Good day… Well… I’m running a bit later this morning, no biggie though. The currency markets traded in a tight range yesterday, and they’re pretty much trading in the same clothes as yesterday. With that said, and nothing else to say… That’s all for today, I’ll talk to you tomorrow…

Wait! I can’t let that go that easily! There’s plenty to talk about with a rate hike in Norway, and some hawkish words from the Reserve Bank of New Zealand. So… Let’s go to the tape!

First off, we saw the Norges Bank in Norway hike rates 25 BPS yesterday, which surprised the markets who had the Norges Bank down for copycats. Yes, the markets believed that the Norges Bank would not raise rates until the European Central Bank (ECB) did… Hmmmm, guess they were wrong, eh?

Anyway… This move by the Norges Bank plays well with my harping about Norway and Sweden for the past 13 months. The Norges Bank is not finished with this rate hike cycle either! With an economy that is growing better than expected, and a rising number of businesses reporting labor shortages, which will turn up the wage pressures on inflation, the Norges Bank cannot afford to sit back with their feet up and sip on their beverages while watching Oprah! And this means the Norwegian krona should continue to be underpinned with a bias to continued strength versus the dollar.

OK… Now for a quick trip to the South Pacific, where the Reserve Bank of New Zealand (RBNZ) did leave rates unchanged, which disappointed me as I thought they would take recent reports and hike rates. However, Reserve Bank Governor Alan Bollard said, “While indicators show that economic growth was continuing to moderate in the third quarter of 2006, it is increasingly apparent that domestic demand has rebounded since then, with retail trade picking up, a resurgent housing market and consumer and business confidence recovering strongly.”

He went further to say, “In the absence of clear indications of a moderation in housing and domestic demand, it is likely that further policy tightening will be required.”

OK… The markets liked those words, and pushed kiwi past the 70-cent level and it continued to move higher throughout the overnight session, settling right now around 0.7025… Good Show!

However, I have a problem with Mr. Bollard… First of all he’s no Don Brash (former RBNZ Governor), and second… If you say that something is “most likely to happen” then why not just go ahead and do it then? That stuff drives me crazy… Like that’s a long drive! NOT! Probably about as long as my driveway! HAHAHAHAHA! But seriously… Why not go ahead and hike then? Oh, well… This is what the markets call “being transparent”… I call it “no intestinal fortitude to do what’s needed!”

Japanese yen has recovered just a bit in the past two days, as traders say the charts show yen was oversold. Really? They needed a chart to tell them that? Geez, Louise! If you looked up “oversold” in the dictionary, there would be a picture of a yen note! Of course the majority of the “oversold” position in yen comes from the yen’s position as the “funding currency” of the carry trade… Swiss francs are also used as a funding currency, but for the most part, it’s yen. So, yen is sold short, and the proceeds are used to buy a higher yielding currency (i.e. Iceland, New Zealand, and even the U.S. dollar).

But I won’t get too lathered up by this “mini-move” (I have to go off on a tangent here, because any time I say or hear or type the word “mini” I start smiling and laughing thinking about Austin Powers, and the “mini-me” character!)… Anyway, I’m not going to get lathered up about a yen move until it starts trading south of 115!

Oh… So much for the plans of mice and men, eh? And wonder of wonders – inflation grew too! Amazing how that all works, eh? I’m going to send a memo to the People’s Bank of China’s Governor Zhou… And remind him that one of the best tools to fight inflation is a strong currency! Think he cares what I have to say? Well… If he doesn’t care, it’s his weakness! Because a strong currency would go a long way toward bringing that inflation under control.

Well, as I look at the currency screen, I see that the Chinese renminbi did indeed move higher versus the dollar overnight! The renminbi is now trading below the 7.77 level. Hey! It wasn’t that long ago that it first traded below the 7.80 level… So we’re heading in the right direction… Now all China needs to do is to put the pedal to the metal!

In Germany this morning, business confidence, as measured by the think tank IFO, declined this month, which offsets the investor confidence strength that was seen last week. The decline wasn’t huge (107.9 from 108.7), but it does remind the markets that Germany does have to chew on a VAT (added tax) this year. This news has caused some slippage in the euro this morning, but right now the slippage is minimal.

Right about the time that the IFO was showing their business confidence report, the German 2007 growth forecast was being raised to 2%!

And what’s going on with Thai baht? The currency moved stronger versus the dollar by one whole baht overnight, to the highest level versus the dollar since 1997! Basically, the Thai government is finding out that the “currency controls” they placed on the baht a month ago, have caused a currency shortage, and when you’re short something, it costs more to buy it, right? You bet your sweet bippie that’s right!

Ain’t that a shame… That the Thai government has blocked investors from this currency? Anyway, the good news is that when the remaining Thai CDs that we have on the books come due, at least the currency will have remained strong!

And on that news… I’ll head to the Big Finish!

Currencies today: A$ .7815, kiwi .7030, C$ .8485, euro 1.2995, sterling 1.9730, Swiss .8040, ISK 68.55, rand 7.16, krone 6.31, SEK 6.98, forint 195.50, zloty 2.99, koruna 21.64, yen 120.50, baht 34.10, sing 1.5350, HKD 7.80, INR 44.23, China 7.7688, pesos 10.94, dollar index 84.78, Silver $13.42, and Gold… $651.80 (the recovery continues!)

That’s it for today… Had a ton of meetings yesterday, that took me away from the trading desk… Hope that’s all over with! So, we have this two-week void, waiting for the Super Bowl… I wish they would just skip this “media week” and go right to the game! Looks like I’ll be spending more time in Jacksonville going forward, at least once a month, which should be a good thing! Add that to my travel schedule for 2007… Keep moving, is what my dad used to tell me… When you stop moving, well… Let’s just say, I’ll keep moving! Have a great Thursday!

Chuck Butler, January 25, 2008

The Daily Reckoning