FOMC Confirms Big Ben's Hint

Good day. And a Happy Friday to one and all! Here in the St. Louis area, we’re still “pickin’ up the pieces” from the storms Wednesday night. Lots of people still without electricity. As I said yesterday, we were a few of the lucky ones at the Butler house, as our power was on throughout. Lots of people came to visit us yesterday to get out of the heat.

The dollar can’t seem to find a shady place to get out of the heat since Big Ben hinted at a pause on Wednesday. The heat is on. Just as I always thought it would be once the final prop was removed from the dollar. The final prop is still lingering, but the markets are kicking at it, and the damage is already beginning to show. I said yesterday that the day’s trading pattern was important to see if the selling of the dollar was sustained or if the Spin Doctors proved it to be another false dawn.

Well, one day down, and the selling of the dollar has been sustained. The euro is looking perky at 1.2665, and sterling is kicking into gear at 1.8550! Pound sterling has received an additional boost this morning after seeing the color of the report showing the U.K. economy growing at the fastest pace in two years. Yesterday, I told you about their strong retail sales and now this. Can you say rate hike? I knew you could!

I have to say that I’m really pleased with this movement after over two weeks of currencies being driven by geo-political events. That’s not to say that the geopolitical events are over and won’t come back. I’m simply saying that as Dieter used to say on Sprockets: “I’ve grown tired of your babble. We dance now.” And that’s what the currencies are doing. Dancing.

It’s the one-year anniversary of the Chinese change in currency policy and removal of the peg to the dollar. There was no new development overnight, so all those calling for the Chinese to do something again to commemorate the anniversary will have to pick another day! HAHAHA! The renminbi did climb to the highest level versus the dollar since the drop of the peg last night, and while it’s not a “one way trade,” the renminbi certainly looks like it will continue to move to the 7.50 level that I called for six months ago! And, this is important. I don’t know if renminbi is really going to 7.50, nobody does. It just looks as though that’s a good level for the currency to me.

As I said yesterday, the thought that Big Ben “hinted at a pause” had the high-yielders on the “getting some love” end. I highlighted the Aussie dollar and the kiwi, but it didn’t stop there. Shoot, Rudy, even Iceland and the South African rands got into the “receiving some love” act! As I’ve said over and over again, all it takes for most currencies is to have the euro getting off the porch and chasing down the dollar. The euro is the offset currency to the dollar, and while Japan is still the second largest economy in the world, the euro has caught up and probably even surpassed the liquidity of the yen/dollar. So, the point I’m making here is simple: You can point to this, that and the other thing as to why a non-euro currency is moving stronger versus the dollar, but it’s the movement of the euro that got the ball rolling!

Now that I’ve shined the light so glowingly on the euro, one of my presentations next week is about currencies you should look at other than the euro and the yen. I just thought that if an investor already had their fill of euro and yen, they might want to look at the “current account surplus” countries of Norway, Sweden, Switzerland, Singapore, and a probationary Thailand (I say that Thailand is on probation, because they recently went into deficit status).

OK. I saw yesterday where Big Ben said that the housing slowdown was “orderly.” Well, I don’t have to tell you that two big-named homebuilders, D.R. Horton Inc. and M.D.C. Holdings Inc., reported that quarterly net income fell 21% and 25%. Ouch! This is just another strong sign that the best days for the U.S. housing market are behind us.

Getting back to Big Ben’s commentary on Wednesday – when he hinted at a pause in rate hikes, I guess he felt as though he had better come clean ahead of the minutes of the last FOMC meeting. Those minutes were printed yesterday, and they stated: “inflation was seen by most participants as likely to edge down.” They also noted “significant uncertainty” over future monetary policy and members did not want policy “foreordained.”

So, now we all know that not only did he say it to Congress, but it’s down on paper in the minutes! I’m still of the belief that the Fed will raise rates one more time in August. But then, it’s time to take a pause for the cause.

Don’t know if you saw the nice story about buying currencies, which was done by Matt Swibel in Forbes on July 24, 2006, but one of the pieces that the editor didn’t cut out was a note that I (yours truly) liked the Swiss franc. Well, you know me, I like it as an alternative to the euro. But with all the “stuff” going on in the world, and now ground troops going into Lebanon, the flight to Swiss francs can’t be denied. And, I wouldn’t be surprised to see francs outperform euros on a short-term basis. Eventually, the franc will get back in line behind the euro.

OK, it’s been a big week on the EverBank trading desk. I announced two new index CD’s that I think are great additions to the family: The Orient Opportunity, and the Euro Trax. I don’t think we received a lot of traction from that announcement, but I know it will take a while before they grow on you!

Then, I announced our new MarketSafe DJ AIG Commodity/Resource CD. This MarketSafe CD is just what you asked for: three-year term. Tied to the DJ AIG Commodity Index – commodities, with a great breakdown of components.

And we’ve been shorthanded this week, sometimes more than necessary! So, we’ve been swamped! But I love it! Bring it on!

Currencies today: A$ .7525, kiwi .6230, C$ .8835, euro 1.2680, sterling 1.8588, Swiss .8080, ISK 73.70, rand 7.00, krone 6.25, SEK 7.29, forint 217.48, zloty 3.12, koruna 22.40, yen 116, baht 37.95, sing 1.58, INR 46.78, China 7.9820, pesos 10.87, dollar index 85.93, silver $11.10, and gold $629

That’s it for today. Off to (hopefully) cooler Canada on Sunday. I’ll be in Vancouver all week. I’ve got bad new for Canadian retailers: my wife isn’t accompanying me on this trip! Long-time readers will recall the bump to Canadian retail sales after her visit last year! HAHAHA! Chris Gaffney will have the Pfennig con next week, although I’m sure I’ll send him a note or two from the Agora Wealth Symposium! I can’t wait to meet the Mogambo Guru (Richard Daughty)! Have a great Friday and weekend!

Chuck Butler
July 21, 2006

The Daily Reckoning