China's GDP Grows To 11.3%!

Good day. It is Hot, Hot, Hot! I know I said yesterday that it was a scorcher here, but as I look at the map on the TV right now, I don’t see many places in the United States that aren’t feeling the heat! Shoot…Rudy, my trader friend in Toronto, said it was fry-the-egg-on-the-sidewalk heat, too!

Now, if we could just get past all this geo-political stuff weighing down the currencies, so they could heat up too!

I’m not making light of the bombing going on in the Middle East. As I said yesterday, for reasons other than currencies, I would like to see that all end very soon! I’m just trying to point out what’s really weighing down the currencies and giving the dollar such strength.

Of course, it didn’t help the euro this morning to see that the German investor confidence, as measured by ZEW, fell out of bed in June. The index, which has been ratcheting up, took a beating in June, falling from 37.8 to 15.1. Ouch! Well, you can blame all of that fall on oil prices. And either this index gets worse, or the German people make adjustments with their disposable income going forward, because, in my opinion, oil isn’t getting any cheaper.

Last night, China printed their second quarter GDP, which grew at the fastest pace in over a decade at +11.3%. So much for all that talk about China’s economy slowing down, eh? This news was music to the ears of the base metals, like copper, zinc and aluminum. I like this news for the metals. It’s also good news for the renminbi, which should lead the other Asian currencies higher. As I see it, the Chinese government has a couple of choices. They have a soaring economy, and have had one for over four years! Inflation is soon to be a major problem. They can raise interest rates, and they can allow their currency to get stronger versus the dollar and other Asian currencies. I’m sure, at first, the Chinese government will want to take the easy road and raise interest rates, but unless they allow the renminbi to appreciate, I don’t see higher interest rates alone doing the trick.

Speaking of higher base metals prices, the Aussie and Canadian dollars have been able to weather the dollar’s storm, and I would think that this puts them in good standing once the geo-political tensions back off. You know, I don’t know that Australian and Canada will go higher. But what I’m saying is that it sure looks like they should, given the base-metals rebound.

Kiwi also looks like it has weathered their trade-deficit storm. Again, I don’t know that their trade deficit is going to continue to get better, but as I explained last week, when I talked about this, it sure looks to me as it is going to get better, and that should provide the kiwi with some spark. Speaking of a spark, the kiwi is rallying lately, and has taken back the 61-cent handle. It’s on its way to 63-cents!

Pound sterling is looking a bit perky this morning after traders saw a report showing U.K. inflation accelerating more than expected in June. The Bank of England has been hanging its hat on the fact that inflation, while banging on the door to the inflation ceiling, has remained at or below the inflation ceiling of 2%. Well, no more. Year-to-year inflation rose 2.5% in June. Someone’s knocking at the door, someone’s ringing the bell. Do me a favor, open the door, and let them in! That’s right, the Bank of England can’t sit back any longer. They have to get up and answer the door! Look for a rate hike at their meeting in August.

OK. Since I came in an hour ago, the euro has reversed the selling after the ZEW report, and is rallying. I’ll go find out what’s up, and come back in a minute. Well, I’m back! And I couldn’t believe my eyes! I actually saw a story that highlighted the fact that the benefit the dollar has been receiving from the geo-political tensions might not be enough to keep it strong over the long run. Wow! The writer must be a Pfennig reader!

There has been “a general move into safe haven currencies namely the U.S. dollar, but this doesn’t reflect a shift in asset allocation,” said Monica Fan, head of foreign exchange strategy at RBC Capital Markets in London.

OK. You’ve all waited patiently. I’ve promised an announcement for today. With no further adieu…I asked you what you would like to see in a MarketSafe CD. You talked, and we listened! Here’s the skinny:

EverBank is pleased to announce its latest entry to the MarketSafe CD family. The EverBank MarketSafe Commodity/Resource CD. This CD, like all the MarketSafe family of CD’s, gives you 100% principal protection in a three-year CD that is tied to the performance of the Dow Jones AIG commodity index! As in the other MarketSafe CD’s, we will take an average of six prices taken every six months, average them out, and any gain over your original entry point is yours! If the DJ AIG commodity index does not perform in the next three years, you get your principal back! How about that one! And, the minimum remains $1,500!

If you already have a World Markets account, you’ll need to complete a MarketSafe quick application. Just call the desk, or e-mail us, and we’ll send one to you! The funding deadline for this issue is August 22, 2006. But you don’t have to wait; we’ll pay you our top ongoing interest rate (not the introductory rate), while you wait for the funding date!

OK. I’m very excited about the newest MarketSafe. And, I’m told that we will continue to offer the MarketSafe Gold CD again next month, too!

Back to a final thought before the Big Finish: July has been geo-political tensions month, starting with North Korea’s firing of missiles. I sure hope we can just get everyone to calm down.

Currencies today: A$ .7530, kiwi .6275, C$ .8815, euro 1.2550, sterling 1.83, Swiss .8030, ISK 75.75, rand 7.1750, krone 6.3230, SEK 7.38, forint 222.10, zloty 3.21, koruna 22.69, yen 116.80, baht 38.10, sing 1.59, INR 46.68, China 7.9982, pesos 10.98, dollar index 886.73, silver $11.08, and gold $648.95

That’s it for today. How about that new MarketSafe CD, eh? I’ll be very happy to have that one in my pocket as I head to Vancouver next week for the Agora Wealth Symposium! Congrats to my little buddy. Alex made the swimming finals of his conference in backstroke and butterfly. Carrying on the great tradition of his older siblings. OK. Try to remain cool. It’s mucho caliente out there!

Chuck Butler
July18, 2006

The Daily Reckoning