China's GDP Soars!

Good day… Well, with no data to review yesterday the markets just took some profits in the currencies (and why not?), which brought the euro back below 1.36, but by the end of the day, the single unit was playing with the big boys above 1.36 again.

The profit taking was quite evident, because it was across the board, and very limited. In other words, there wasn’t an axe to grind with one particular currency, and the movement was small.

The dollar index is very close to an all-time low, and yet, I’m not seeing the markets panic – and that’s a good thing. Let’s just keep this dollar selling flying under the radar, and controlled. The last thing we need right now is to get the markets all lathered up and have them begin to panic. That would bring about some wild volatile trades, and before you knew it, we would be setting records for the currencies every day, much like the end of 2004.

Overnight, China posted their first quarter GDP. I’m chuckling right now, because once again the economists, and market observers got China all wrong! Collectively, they said that China’s economy would slow down, and that’s what really led to the mid-term pause by the commodities last year. China slows down, their demand for commodities/raw materials dries up, and so does their prices.

But something funny happened on the way to the forum – these economists and market observers got it all wrong! China’s first quarter GDP grew even faster! HAHAHAHA… That’s right, china’s economy grew at 11.1% versus the previous year (the previous quarter’s growth was 10.4%). How’s that for your Sunday picnic? It’s like I always say… These people don’t know what’s going on in China. Oh, they go there, and they think they know it all… But we all know that they know about as much as Bullwinkle! Did anyone that forecasts GDP for China even come close to that 11.1% gain? No sirree, Bob!

Anyway, I’ll get off my soapbox now, and just talk about China for a minute. Investment in China continues to be off the charts. And now something that I’ve warned about for some time now is beginning to take shape. Inflation in China has accelerated to 3.3%. The Chinese Central Bank does have a ceiling target on inflation of 3%. So, obviously this exceeds that ceiling. I wonder what the Chinese will do about this?

Well, you know my solution. It’s the same one that I’ve had for as long as I’ve been warning about the surging inflation in China – to allow the currency to strengthen. A strong currency goes a long way toward keeping inflation in line. Look what it did for the United States in the late ’90s and into the new millennium. The U.S. economy was rocking and rolling, and the dollar was strong. Inflation wasn’t the problem it is today, with the dollar much weaker, eh?

When it all adds up, the amazing 11.1% growth in China is going to throw gasoline on the fire that’s already lit under commodities.

Here we go again with Japanese yen. The yen has rallied overnight, even trading below the 118 handle on thoughts once again, that the Bank of Japan (BOJ) is going to raise rates at their next meeting. Here’s where traders are getting ahead of themselves. They’re doing the same thing I did for a while with the Bank of Japan. They are saying to themselves that the BOJ “SHOULD” be raising rates considering the economic growth in Japan. But what the BOJ “SHOULD” do… And what they do get around to doing are two different roads. And I’ve been dropped off on the wrong road quite a few times when it comes to the BOJ!

Anyway… Traders are going down the “should do” road right now and marking up yen, which I’m not going to argue with. I’m not going to throw myself in front of that bus! However, I don’t think this current rally in yen will continue though. I just don’t see this as the beginning stages of the “unwinding of the carry trades”. A slump in global stock prices has people thinking this could lead to carry trades unwinding. But like I said, this is like a merry-go-round, with painted horses going up and down. Ooooh, a little Bad Co. on a Thursday morning!

However, this yen rally has the Aussie and kiwi back on their heels this morning. And once again gives us a peek at what will happen to the high yielders when the carry trade does finally unwind – not that I see it happening anytime soon! But you never know!

My two euro-alternative currencies – Norwegian krone, and Swedish krona – have really been flying stealth missions versus the dollar. With all the focus on euro, sterling, yen and the commodity currencies recently, these two have very quietly gained some nice ground versus the dollar. I highlighted these two currencies in 2006, and they have not failed me! Yes, they don’t get off the porch and chase the dollar unless the Big Dog, euro goes first, but these little guys can run faster than the euro and will outperform the Big Dog on occasion.

2006 was one of those occasions… And so far this year, Norway’s krone has outperformed euros, with Swedish krona lagging behind, but still gaining versus the dollar. I took Sweden’s Riksbank to the woodshed a few months ago for saying that they had reached the end of their rate hike cycle. I suspected then that they would rue the day they did that… And judging by what the Riksbank’s Deputy Dawg…I mean, Governor…had to say last night, it looks like they could be coming around to Chuck’s way of thinking!

Here’s the skinny… Riksbank Deputy Governor Oeberg talked about how in his view, inflationary pressures exceed the Riksbank’s forecasts. Mr. Oeberg was the only member at the Riksbank’s last meeting to vote for a rate hike (bless his heart!), as he is keeping an eye on the wage negotiations that are going on right now. If the wage negotiations lead to higher pay, then I suspect the Riksbank will be back at the rate hike table in May.

Weekly initial jobless claims, which continue to stay above 300K per week, and the Philly Fed Index (manufacturing for that region) will highlight the data circuit today. But the piece of data that I’ll have my eye on is leading indicators, which again is one of the few pieces of forward looking data. Leading indicators have not been strong in a month of Sundays, which if we look around now and see the slowdown in the economy, the leading indicators told us this would happen!

Currencies today: A$ .8325, kiwi .7415, C$ .8895, euro 1.36, sterling 2.0010, Swiss .8320, ISK 65, rand 7.1050, krone 5.96, SEK 6.7825, forint 182, zloty 2.80, koruna 20.60, yen 117.80, baht 32.50, sing 1.51, HKD 7.8130, INR 42.13, China 7.7150, pesos 11, dollar index 81.62, Silver $13.87, and Gold… $686

That’s it for today…  A Big Congrats go out to my oldest son, Andrew, as he is now a full time high school teacher, and coach of swimming and water polo. Long time readers might recall me talking about his prolific career in swimming and water polo from years ago. And Congrats go out to a St. Louis area guy… White Sox pitcher Mark Buehrle, pitched a no-hitter last night! We closed the funding period for our Japanese REIT, and Gold MarketSafe CD’s last night. But not to fear, they will both be available again in May. So don’t procrastinate again. Get your application in, and funded. We’ll pay you a nice interest rate while we wait for the next funding period to end… But you’ll be in! Have a great Thursday!

Chuck Butler — April 19, 2007

Chuck Butler is the senior vice president of EverBank World Markets. He oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single-Currency and Index CDs .

Chuck is the author of The Daily Pfennig, which is reposted here at The Daily Reckoning. His respected analysis is frequently quoted in or referenced by: the Wall Street Journal, U.S. News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.