Continuing A Trend...

Good day… Not a good outcome at the ballpark yesterday… But a great day at the ballpark for me! You know that old saying about a bad day of fishing… Well you can always apply that to me when I go to the ballpark for a day game!

OK… The currencies range traded again yesterday, with the dollar receiving some love early in the day, only to see that reversed when it was learned that the Ukraine was raising the Euro component of their reserves. Now… Don’t get me wrong, this is not going to cause much of a ripple in the currency markets as far as the size of the transactions going into euros… But what it does is simply keep this trend that began last year on the burner… Of course, the trend I’m talking about is Central Banks rebalancing their reserves, and reducing dollars.

What Central Banks around the world have been doing, is the same thing investors should be doing… Diversifying their investment portfolios / reserves, and reducing dollars! Corporations should be doing this too… I just finished a real interesting piece of research by Deutsche Bank regarding Corporations using currencies to help overcome the huge black holes in their pension funding…

The first part of the report sounds like it comes right out of every presentation I’ve ever given on currencies… This is from Deutsche Bank… “We feel that foreign exchange should be viewed as an asset class similar to bonds and equities. It has exhibited long-term systematic returns or “beta” which are comparable, if not better, than both bonds and equities since 1980. It also has greater liquidity than both.”

OK… Back to currency performance… The British pound sterling continues to be well bid… Monday it was stronger than expected inflation, and yesterday it was stronger than expected Retail Sales! Good Show! I don’t know if readers recall me chastising the Bank of England (BOE) a year ago, after the BOE cut rates…. But if you do, you’ll agree with me now that the move was certainly premature, especially given the fact that economic growth and inflation continue to rise. Simply a case of hear me now, and believe me later!

New Zealand dollars / kiwi really kicked it into gear yesterday after Retail Sales printed strong than expected at .5% in July… Which prompted Reserve Bank of New Zealand Gov. Bollard to talk about how the Central Bank may need to raise rates one more time… As I’ve explained on quite a few occasions in the past… New Zealand might not be raising rates there anymore, but the central bank worked hard to get rates this high to combat inflation, and when you get reports like this one, it just tells the markets that interest rates in New Zealand aren’t going to be reduced any time in the near future. And with the Central Bank Gov. hinting of more rate hikes, the currency is going to get lots of attention… Lots…

While I’m talking about Retail Sales… The U.S. prints Retail Sales for August this morning… I said the other day that the BHI (Butler Household Index) had indicated to me that this report will be very disappointing… And that shouldn’t be dollar friendly… But who knows? If the currency traders get all lathered up and buy dollars after a new record Trade Deficit is printed, you just never know, eh?

A very disappointing Retail Sales though, will put another memo on Big Ben Bernanke’s desk reminding him that the economy is grinding to a halt…

Tomorrow, we’ll end the week with Eurozone CPI, and U.S. CPI… Two Big Kahunas reporting consumer inflation… Of course, we can’t compare apples to apples, due to the inflation rigging that the U.S. performs… So… I think Eurozone CPI will indicate that inflation is still over the ECB’s ceiling target of 2%, which will keep the rate hike pot on the burner… And that the U.S. watered down CPI will indicate that the Fed needs not continue to raise rates, which at the end of the day should produce a nice rally in the currencies…

The Russian Central Bank Deputy was assassinated last night… Andrei Kozlov had headed the bank reforms in Russia, fighting corruption and regulating a very shaky financial system…

Getting back to the line drawn in the sand to see which side of the fight you are on regarding Commodities… The California Public Employees Retirement System said that they see significant growth in natural resources, and is exploring investment opportunities… Well… I guess we know which side of the line they are standing on, eh? (the right side, as far as I’m concerned!)

Currencies today: A$ .7570, kiwi .6650, C$ .8960, euro 1.2725, sterling 1.8870, Swiss .8035, ISK 69.70, rand 7.3930, krone 6.5410, SEK 7.2725, forint 214.65, zloty 3.11, koruna 22.36, yen 117.50, baht 37.33, sing 1.5780, INR 46.14, China 7.9460, pesos 10.99, dollar index 85.70, Silver $11.38, and Gold… $594.40

That’s it for today… Found out this morning that a local TV station will telecast my beloved Missouri Tigers’ game Saturday night… YAHOO! See… It doesn’t take much get me going, eh? The sun is supposed to come back out today, haven’t seen it all week! Just don’t know how people get along when the sun isn’t out most of the time! Oh well, to each their own, eh? Our coffee machine is on the fritz this morning, I’ll have to go get some next door… Have a great Thursday!

Chuck Butler
September 14, 2006

The Daily Reckoning