Currencies Remain Hot

Good day…The currency markets continued to hold on to their recent strength yesterday with no real movement, until events last night caused the yen to finally jump on the rally train. With no real data being released yesterday in the United States, the currency markets took a much-needed breather and set up for the rate decisions we will see later this week. As Chuck wrote yesterday, these occasional flat days are good for the market as the currencies recent moves have been almost too much too fast.

Today we will get a look at just how bad the U.S. economy slowed during the 3rd quarter. Nonfarm productivity, unit labor costs, and factory orders are all expected to show the economy is slowing and inflationary pressures are easing. The biggest negative number will be factory orders for October, which are expected to be down 4.2% after last months 2.1% increase. But with manufacturing making up just ten percent of the overall U.S. economy, this negative number will have a subdued impact on the markets.

The ISM non-manufacturing survey will be more closely watched, as it measures the growth in the service sector, which represents 90 percent of the U.S. economy. The ISM survey is expected to show that growth in services slowed during the month of November as construction weakness spreads. This number is just another reflection of the housing industry slowdown, as a tremendous number of non-manufacturing jobs depend on the construction of new homes.

As Chuck mentioned yesterday, the ECB will likely be raising rates later this week and the ECB president Trichet is busy preparing the markets for the rate announcement. Trichet called a 2004 jump in the euro ‘brutal’ yesterday, but called the euro’s latest surge less painful. With the euro at a record high versus the yen, and a two-year high versus the U.S. dollar, Trichet is having to ignore calls from French politicians to stem its climb. The ECB will continue to ignore these politicians and will continue to raise rates beginning with an increase this week. I think the fall in the U.S. dollar versus the euro will be overshadowed by the strength of the euro versus the Japanese yen; calls for currency intervention will likely focus on Asia versus the euro instead of the U.S. dollar.

The yen finally saw some strength overnight as Bank of Japan policy maker Mizuno said that the nation won’t slip back into deflation and that wages will rise, signaling the bank will raise interest rates. Mizuno said the BOJ must have “confidence that the economy will develop” as projected. We expect the BOJ will begin to hike interest rates quite aggressively next year, and that should continue to have a positive impact on the yen.

The currencies ‘down under’ continue to rise as the New Zealand dollar traded above the very important 0.69 cents for the first time in ten months. Reserve Bank Governor Alan Bollard will be reviewing interest rates on Thursday the seventh, and is expected to keep the benchmark rate unchanged while refusing to rule out another increase. While we may see the 0.70 handle again, I don’t expect the currency to reach back to its record levels of March 2005 when it traded up to 0.7466 cents. If you hold N.Z. dollars, we feel it is a good time to take advantage of these high levels to exit and move the funds into some of the better values offered in Asia or even the Australian dollar.

Australia’s central bank meets today and will probably keep its benchmark rate unchanged after last month raising it to the highest level in almost six years. Central bank governor Glenn Stevens has raised interest rates three times this year to stem inflation, and hasn’t yet cut his forecast for consumer price increases next year. With parts of the economy slowing and the drought impacting the agricultural exports, interest rates will likely remain unchanged for the foreseeable future. We still feel the Australian dollar is one of the best currencies combining a solid economy with good interest rates.

Finally, the Chinese Renminbi had its highest close on speculation the central bank will let the Renminbi gain before U.S. Treasury Secretary Henry Paulson visits next week. U.S. companies gave Paulson his marching orders yesterday at a meeting with the National Association of Manufacturers. Paulson and Federal Reserve Chairman Bernanke will meet with officials in Beijing on December 14 and 15th. With the recent change in congress, the Chinese will likely feel more pressure to let the currency appreciate in order to avoid the protectionist measures being discussed by U.S. lawmakers.

Currencies today: A$ .7869, kiwi .6867, C$ .8760, euro 1.3325, sterling 1.9761, Swiss .8385, ISK 67.98, rand 7.1450, krone 6.1018, SEK 6.7936, forint 191.75, zloty 2.8618, koruna 21.03, yen 114.64, baht 35.61, sing 1.5391, HKD 7.7701, INR 44.52, China 7.8218, pesos 10.91, dollar index 82.46, Silver $14.05, and Gold… $645.00

That’s it for today…I’m taking my son to watch the St. Louis Blues retire the #16 jersey of Brett Hull tonight. My son grew up watching ‘Golden Brett’s’ one timers. He and his buddies would spend hours in our basement, playing hockey, taking turns being Adam Oates or Brendan Shannahan, setting up Brett Hull for a game winner. It should be a great night; now if the Blues could just use some of the magic from tonight to win a few games. Hope everyone has a great Tuesday!

Chuck Butler
December 5, 2006

The Daily Reckoning