G-7 And A Wet Fish...

Good day… Well… The excitement that some thought would come from the G-7 meeting over the weekend just didn’t materialize… In fact, the G-7 communiqué’ was akin to shaking hands with someone that has one of those wet fish-like handshakes…. YECH! So… Unfortunately, the currencies were sold in the Asian session, and carried over to the European session. Here’s the skinny on the wet fish, Uh, I mean G-7…

The G-7 Communiqué’ talked about things like “greater exchange rate flexibility being desirable… But left it at that… They dropped some wording that was in previous Communiqué’s that called for a “necessary appreciation” in the renminbi… So… Like I said last week, the IMF is toothless, and should be put to bed, and the G-7 is outdated… They had a lay-up right in front of them, to come out beat the drum about the need for Asian currency strength, and they double dribbled!

OK… So the dollar skipped by that trap… I just have to wonder how many traps the dollar can skip through before one catches the greenback… But right now, the short positions in dollars haven’t been increasing… So, it’s not now. It will be interesting to see if the short positions get closed out after this wet fish / G-7 meeting.

There was a piece of information that did come out of the G-7 meeting… And that was the People’s Bank of China’s Gov. Zhou, said the .3% daily band for dollar / renminbi trading would soon be widened… Of course, as usual, he didn’t tell us when!

On Friday, we saw the color of the U.S. August CPI, and as expected it was muted… Well, once they were finished massaging the numbers, Consumer Inflation only showed at .2% increase, which was bang on the expectations… Funny how that works, eh? Take some data massage the numbers, cook the books, and the end result is the same as the forecast! Baby I’m amazed at way that happens! HAHAHAHAHAHA! NOT!

Does this report tell us anything about the Fed’s intentions at their next meeting on September 20th? I don’t think it tells us much… Because, while the Fed liked to point to higher Consumer Inflation as reported by CPI as a reason for rate hikes, they also use the PCE (Personal Consumption), the ECI (Employment Cost Index), and other data… But in any case, one would have thought that muted inflation as measured by this farce piece of data, would have brought about some dollar weakness… But it didn’t… And I just sit and hake my head in disgust…

Eurozone inflation showed a slowing of Consumer inflation too… But the ECB was out in force letting the markets know that they still see inflation pressures… ECB council member, Axel Weber said… “now’s not the time to relax”…

OK… Today, we’ll see the color of the Current Account Deficit for the 2nd QTR, and it is expected to increase over the first QTR’s $208.7 Billion total… Yes, folks, we’re on pace to book over $800 Billion Current Account Deficit in 2006…

Another piece of data that’s always interesting that prints today is the Net Foreign Security Purchases (NFSP). This NFPS will be July’s results, which are expected to remain around $70 Billion, which is right around the number needed to finance the Current Account Deficit… I find it pretty cool that these two pieces of data will print on the same day… So traders and investors don’t have to think back a few days and compute whether or not there were enough NFSP’s to cover the Deficit… It will be all right there for even a young child to compute…

The data cupboard will be emptied this week with data printing every day, and as I said above will also have a FOMC meeting on the 20th, which happens to be Wednesday! So get ready for some back and forth trading… Although I doubt that we’ll really break this tight trading range we’ve been stuck in for a couple of weeks.

Now… If the Fed would keep the dust covers on the rate hike machine, then… We could see some dollar weakness that moves us out of the range… But, I’m on the fence with this meeting… I still believe that we’ve not see the full effect of the rate hikes that were made for over 2 years, and a pause is probably the best move at this time… But since when does the Fed (recall Greenspan) and I agree on what’s best for the economy?

The Swedish krona really caught some wind in its spinnaker overnight as the ruling Prime Minister, Persson, was defeated by the opposition that promised a chicken in every pot, no, wait, he promised tax cuts, and better employment… Well, the opposition, Fredrik Reinfeldt, now has to figure out how to deliver those promises! But, like I said, the currency traders liked the move, and the krona is getting some love…

Last week, I told you about a report by Deutsche Bank on currencies, and how they might help Corporations make up the huge deficits they have in the funding of their pensions… A very interesting and thoughtful report… Here’s a line from the report that I really liked! “One of the most potentially rewarding routes to achieve higher returns with lower volatility is to include more assets that can offer higher returns and diversification. It therefore comes as no surprise that investments, other than bonds and equities, have proven to be an area of great focus in recent years.”

OK… I’m running late, as it took a bit longer than usual for my laptop to update by email box this morning… I’ll head to the Big Finish by saying that years ago I had the opportunity to sit and listen to the famous economist, Hy Minsky… And he used to talk about how when complacency becomes the norm, watch out! And that’s exactly what I think is going to happen with the dollar at some point…

Currencies today: A$ .7525, kiwi .6640, C$ .8925, euro 1.2660, sterling 1.8745, Swiss .7965, ISK 70.28, rand 7.32, krone 6.54, SEK 7.2575, forint 214.38, zloty 3.1040, koruna 22.47, yen 118.20, baht 37.30, sing 1.5890, HKD 7.7840, INR 46.13, China 7.9465, dollar index 86.08, Silver $11.01, and Gold… $582.90

That’s it for today… Whew! My beloved Missouri Tigers squeaked by this past weekend, and my Cardinals moved closer to a division pennant, while the Rams took one on the chin! I head down to Columbia in two weeks to see my Tigers, hopefully they will still be unbeaten then. OK… Gotta get trading… Have a great Monday and week!

Chuck Butler
September 18, 2006

The Daily Reckoning