G-7 Hands the Baton to the IMF

Good day. Well, our first full day of trading after the G-7 announcement, and traders didn’t disappoint us. As one would expect, after the G-7 said it was “critical” that the Asian currencies appreciated against the dollar, the Japanese yen led the Asian contingent higher. The euro did its bit to gain versus the dollar too, as it briefly traded over the 1.24 level, yesterday afternoon.

Yesterday, I was all seashells and balloons over the G-7 communiqué that called for Asian currency appreciation versus the dollar. I completely dropped the ball on the other part of the G-7 communiqué’! My bad! Here’s the skinny: G-7 has gotten out of the business of trying to manage the global imbalances and currencies. Instead, they have handed the baton off to the IMF. From now on, it will be the IMF that has the “con,” and judging from the things I’ve heard in the past from the IMF, this is going to be a real “war of words.”

I believe the IMF will do a far better job (how could it be any worse?) than the G-7 finance ministers. The IMF likes to get in “there” and act like they know what they’re doing, which is far better than sitting back on your G-7 throne and asking for currency flexibility! The transfer of power reflects the fact that the world’s major currency strains are not confined to G-7 currencies, but instead relate to China and the rest of Asia. Obviously, the jury is still out on this and will for some time to come, but I would certainly look for further gains in the Asian currencies as a result.

U.S. Treasury Secretary Snow gave us this tidbit yesterday, when talking about the global imbalances: “The United States, by itself, cannot and should not be expected to resolve the problem, but we, like other major participants in the global economy have an important role to play.”

I laughed out loud, when I saw this. But, I think our corporate FX guy, Ashish, said it best when he said, “Sure, we can create it by ourselves, but expect to dole it out when it comes to fixing it.”

Good news from Germany this morning as German business confidence got back in black, and I’m not talking about AC/DC here. No, I’m talking about how the business confidence result had lacked the last couple of months, but April’s result climbed to a 15-year high. Economic growth is the push behind this result, and that economic growth, along with higher inflation in the Eurozone’s largest economy, is going to lead the ECB back to the rate-hike table. In fact, I’m tempting to go another rate hike in the cycle these days. Recall that last fall I told you the ECB would hike rates beginning in December, and follow that up with rate hikes in March, June, and September, thus bringing their base rate to 3%.

Well, now I’m thinking that another December hike will be in the cards, given the price pressures of oil right now. So, I’m going out on the limb (a big strong one, don’t worry) and saying that the ECB will go one more and hike again in December.

This thought will eventually enter into the minds of traders (ones that don’t read the Pfennig) and will help lead the euro back to the 1.30 range, later this year!

In the United States today, we’ll see the national consumer confidence report for April, along with existing home sales for March. Both are forecasted to be disappointing for the strong economy flag wavers. Consumer confidence is one of those data reports that I just shake my head at. I have no idea why confidence is as strong as it is, given all that’s going on around us, but as I’ve said in the past, the surveyors don’t ask me!

Existing Home Sales have bounced around since hitting a high last June, but if you put a trend line on the monthly numbers, you’ll see that it’s sloping downward. Last June’s existing home sales were 7.27 million. The forecast for March is 6.67 million. If that holds true, one would have to say for sure, that the housing sector is slowing -big time!

As I told you yesterday, the Bank of Canada will meet today to discuss, among other things, interest rates. I fully expect them to raise rates 25 BPS. Of course, the statement afterward is probably more important to the loonie’s fortunes than the actual rate hike! However, in keeping with the spirit of this weekend’s NFL draft, the Bank of Canada is “now on the clock.”

We’ll also see central bank meetings this week by Norway’s Norges Bank (tomorrow), The Reserve Bank of New Zealand (Thursday) and Sweden’s Riksbank. The markets aren’t expecting any rate moves from any of these, but that doesn’t stop the central banks from moving rates if they feel like it! Of these three, Sweden’s Riksbank has my vote as the central bank most likely to make a move.

In a follow up from yesterday’s story about the Russian finance minister that dis’ed the dollar as the “absolute reserve currency,” there’s a story going around this morning that BNP Paribas is expecting central banks to sell dollar reserves. “Even a small reallocation amongst Central Banks could have a very negative impact on the dollar,” said Ian Stannard, a currency strategist at BNP Paribas.

Well, it’s been about a month now since I told you I was doing some research on the Indian rupee. Over the years, we’ve received a ton of interest in this currency, and rightly so – given their economic growth and amount of foreign investment in the country. We’re offering Indian rupee CD’s now. The minimum is $20,000. It’s on the EverBank Web site, so check it out if you’re interested.

Currencies today: A$ .7452, kiwi .6290, C$ .8790, euro 1.2395, sterling 1.7860, Swiss .7885, ISK 74.21, rand 6.05, krone 6.33, forint 212.35, zloty 3.12, koruna 22.92 yen 114.50, baht 37.55, sing 1.5870, INR 45.03, China 8.01, pesos 11.0750, dollar index 87.63, silver $12.50, and gold $627.75

That’s it for today. EverBank’s Metals Select program is really gathering some wind in its sails. It’s very exciting to watch it grow from an idea. All is back to normal at the Butler house – that is, until I leave on Thursday! Our nice weather here is supposed to change today. It was good while it lasted! Have a great Tuesday!

Chuck Butler
April 25, 2006

The Daily Reckoning