Coddling The Japanese?

Good day… Here we are, the last week of January. We began the year with a bang, and then the currencies weakened… But as I wrote in the latest Review & Focus that will get mailed at the end of this week, this trading pattern has taken place each of the last five years. The euro begins the year getting sold throughout January, and then eventually things turn around.

The only year that pattern didn’t hold true was 2005, and we’ve been over that a few times. But for those of you new to class… The dollar had two props holding it up in 2005 that have now been removed: 1. The HIA repatriation Act that gave corporations doing business overseas a reduced tax period to bring those dollars home; and 2. The Fed’s consecutive rate hikes. The HIA is completely out of the rear view mirror now, while the Fed’s rate hikes remains a distant but seen item. I still don’t think the Fed is out of the woods regarding inflation, especially if you tally up inflation the way John Williams of Shadow Statistics does!

But, will they do anything about it? I doubt it. These lower oil prices are like manna from heaven to Central Bankers. “It’s all good” is being heard in the hallways of Central Banks around the world! Doesn’t that scare you a bit? Complacency? I think about what Hy Minsky taught us years ago about what happens when complacency becomes the norm… But the markets don’t want to hear that stuff right now, and neither do the dollar bulls. They’ll be sorry some day.

OK… The currencies remained in the same tight ranges they’ve seen lately on Friday and overnight in Asia and Europe. The dollar bulls just have a tight grip on the hammer these days. I don’t know what will change the mood or pattern…at least for now. But, as I said the other day, this isn’t a crying opportunity… It’s more like a buying opportunity. But then, that’s just my opinion, and at this point, I’ll make the legal beagles and regulators happy by saying that I really don’t know if this is a buying opportunity, but it feels like one to me!

The data cupboard is bare today, so I expect the tight ranges to remain in place throughout the day. Tomorrow, we’ll see this month’s consumer confidence, which is forecast right now to have gained this month. I just don’t get it, this consumer confidence… But then, I often point out to people, stuff that they had no idea about. For instance, the other day, I gave an interview for a story, and explained how the data that’s reported every month is massaged and cooked to make us “feel good”… And then gave some examples, (I’ve given them here before, so I won’t repeat them now) and I wish I would have been with the interviewer in person to see their jaw drop! I could almost see it from the long “pause” that came after I finished.

Then from Wednesday through Friday, we’ll see a Ton O’ Data here in the United States and we’ll end the week with the old Jobs Jamboree. So, the “boys” in the government accounting offices will be sharpening their pencils a lot this week!

I had to laugh when I saw a story this morning that talked about U. S. Treasury Undersecretary, Tim Adams, and his warning to G-7 NOT to talk about the weakness of the Japanese yen. WHAT? Talk about loving one child more than another! We’re beating the Chinese daily, because their currency is weak versus the dollar, but coddling the Japanese for the same thing. WHAT IS UP WITH THAT? I don’t think we’re going to earn any chips with the Chinese, and I don’t think we’ll earn any with the Europeans either!

You see… The yen is very weak versus the dollar… But it is SUPER WEAK versus the euro, and that has Eurozone ministers up in arms! The Eurozone ministers meet next week, and I would love to be a fly on the wall at that meeting!

So… The United States doesn’t want to bother the Japanese about their weak currency, which is a major cause of the global imbalances, but will take the Chinese to the woodshed daily because of their currency’s weakness, which is also a major cause of the global imbalances… Hmmm.

The Thai baht has been swinging all over the place lately. Wild swings that have seen the currency gain whole baht in one day, and then lose two whole baht another day. A currency shortage created by the government’s currency controls has caused these wild swings. Then last night, the Thai Central Bank announced that they would be “cracking down” on foreign banks using offshore forwards to avoid restrictions on the currency. This news pushed the currency down over two whole baht.

The pound sterling is looking like it might be putting the Bank of England’s King and his offhand comment about inflation in the rear view mirror. Pound sterling has rallied a bit this morning after a report showed that retail sales did not back off this month, and instead rose to the highest level in two years! This currency really got smacked by King’s statement last week, which as I explained, was hawkish, except for the offhand comment about inflation. Talk about selective hearing!

In India, the rupee continues to gain versus the dollar, but the moves are small. However, you can’t argue with small moves as long as they are in the general direction that makes you money! The Chinese renminbi, and the Indian rupee fall into that category.

The Indian Central Bank has been quite vocal about inflation threats, and last night was no different as they talked about “underlying inflationary pressures remaining”. Interest rates here have ratcheted up in the past year, and I expect the Central Bank to raise rates again, as they mentioned the words, “preemptive measures.” That’s Central Bank parlance for “rates are going higher!”

Don’t know if you’ve noticed or not… But gas prices are creeping back up again. Oil bounced off that $50 figure, and so far the bounce has been super ball like. Oil is trading above $55 this morning. The OPEC oil production cuts that were agreed on actually go into place this week. That’s 500,000 barrels of oil per day beginning February first. So let’s go back to the paragraph above about how Central Banks are in love with the lower oil prices. If this “bounce” in oil prices continues, they’ll have their work cut out for them again, eh?

Currencies today: A$ .7735, kiwi .6060, C$ .8465, euro 1.2930, sterling 1.9580, Swiss .7975, ISK 68.85, rand 7.3250, krone 6.3210, SEK 7.0150, forint 198.50, zloty 3.0350, koruna 21.815, yen 121.80, baht 34.10 (this has just bounced big time again!), sing 1.54, HKD 7.8110, INR 44.20, China 7.7750, pesos 11.04, dollar index 85.28, Silver $13.30, and Gold… $643.70

That’s it for today… I just received my invitation to the Investment U. Conference, which has a change of venue this year, moving from Delray Beach to Phoenix. I don’t know… Phoenix is nice and warm… But there’s no ocean/beach like in Delray Beach! The Big Boss, Frank Trotter is the main man at this conference. I’m just a “side show”! HAHAHA… Side Show Chuck! Oh well… I’ll get my fix of ocean/beach and Spring Training one week later in Jupiter Florida! Have a great Monday and week!

Chuck Butler, January 29, 2007

The Daily Reckoning