German Growth & Investor Confidence Soars!

Good day… Well… I made it back… Lots O’ Drivin’ yesterday, as I went from Orlando to Jacksonville for meetings. We were supposed to have received a snow storm last night, but right now it’s just rain, which I’m told will turn to snow later this morning… So, I guess, for once it paid off for me to come to work so early!

I’ll get to the Orlando World Money Show at the end, but first we’ll talk about the currencies, which continue to remain in a tight range. I was talking to some currency “traders” at the Show, and we were all in agreement that this tight range will probably remain in place until we are all certain about the direction of the interest rates here in the U.S. (or) Some sort of change comes about in Asia… I’ll put my money on the former rather than the latter due to my growing impatience with Asia!

The euro has rebounded a bit this morning after yesterday’s dollar strength, on news that 1. Economic growth in Germany has picked up further, and 2. German Investor Confidence, as measured by the Think Tank ZEW, rose for the third consecutive month! Here’s the skinny on both….

1. German 4th QTR economic growth add .9% pushing the annual rate to 2.9%… This was stronger than expected. In addition, France also posted stronger than expected 4th QTR economic growth… These are arrows for the European Central Bank (ECB) to add to their quiver… Rate hike arrows, my friends….

2. German Investor Confidence reached a 6-year high as it certainly looks as though the ill-effects of the VAT (tax) that was added at the beginning of the year has been cured with strong economic growth! This all puts the ECB at ease, with their previous rate hikes, and tells them their work is not finished in any stretch of the imagination!

Well… Chris was kind enough to fill in for me yesterday morning, and he told you that G-7 left yen hanging out to dry, by not issuing a communiqué… Yen immediately went to 122, but has since recovered a bit… Yesterday, those same Finance Ministers of G-7, that failed to produce a communiqué, calling for yen strength, issued a report warning against making “one-way bets” against yen… Strange, eh? I mean don’t issue the report, but then come out later with a “warning?”

Our good friend, Dr. Steve Sjuggerud, issued a report yesterday, titled “The Makings of the Fashionable Trade of 2007” Guess what currency he’s talking about? You’ve guessed it… Japanese yen! Steve thinks that yen has been beaten down enough… Here’s what the good Dr. had to say…. “In an ideal DailyWealth investment, we look for three qualities: 1) cheap 2) hated and 3) just starting an uptrend.”

Using that criteria, he said that, “the Japanese yen is about to go into a multiyear bull market.”

Hmmm… Makes sense to me! I’ve been saying for so long now that the yen is the most undervalued currency and was due for a correction…

The Swedish Central Bank (Riksbank) meets this week to discuss interest rates… I fully expect them to raise rates at this meeting, which should provide some wind in the krona’s sails… I continue to like Sweden along with Norway, as alternative investments or additions to the euro… Current Account surpluses, and growing economies… You can’t get much better than that! Unless of course you’re counting China and their astronomical economic growth already in place!

In the U.K. this morning, the pound sterling is seeing some selling after a report showed inflation had unexpectedly slowed in January… You know, I’m really getting mixed up these days… Let me explain…

In the “old days” a currency would be rewarded when inflation in the country was held in check… Providing Price Stability… These days, I sit and think about, all the things that I forgot to say… To you… No Wait! I have no idea where that Jackson Browne song came from! Anyway… These days, because of the expectations of a Central Bank reacting to inflation with rate hikes, Traders have taken “inflation affects on currencies” to a different level… So, a switching of gears has to take place… I guess this old dog will have to learn a new trick!

Basically, I see it differently… I think that if a Central Bank is ahead of the inflation, and nips it in the bud, like, the ECB has done… Then when inflation ticks up, its OK to bid up the currency, because the Central Bank has a head start on fighting that up-tick in inflation. However, if the Central Bank allows inflation to build for sometime before reacting to it, like the Fed did, then the currency should be taken to the woodshed with every up-tick in inflation… And I mean real inflation, not this “junk” CPI report prints!

Market participants haven’t gotten lazy have they? I mean, research, and fact finding and thorough thought… That’s what used to take place… Now, they just favor a currency because interest rates are going higher, no matter how far behind the inflation eight ball the currency’s Central Bank has fallen? Shame on you market participants…

OK… I’ll get off my soap box now…

Down in the South Pacific… Australia dollars took one step forward and two steps back… Here’s the skinny… 4th QTR economic growth in Australia expanded by .8%, to push the annual growth to 3.3%… So… All in, good news, eh? Well… That good news was watered down by a Reserve Bank of Australia (RBA) statement that failed to sound as hawkish as previous statements… The changes made to the statement were subtle… But we all know how closely these words are watched these days…. And subtle changes are taken as wholesale changes.

I don’t know what the RBA can do about correcting this perception by the markets that they have gone “soft”… But, a nice strong hawkish statement by the RBA Gov. might do the trick!

The euro has gotten some wind in its sails since I wrote about it above… The Investor Confidence and stronger than expected GDP in Germany has really done the trick!

Currencies Today: A$ .7750, kiwi .6865, C$ .8530, euro 1.3020, sterling 1.9435, Swiss .8020, ISK 67.97, rand 7.2450, krone 6.2250, SEK 7.0325, forint 195, zloty 3, koruna 21.7150, yen 121.20, baht 33.66, sing 1.54, HKD 7.8147, INR 44.17, China 7.7660, pesos 11, dollar index 84.89, Silver $13.86, and Gold…. $666.60

That’s it for today… Well… The Orlando World Money Show was good… It’s always nice to meet customers, and readers of the Pfennig. I even had a very nice couple ask to have their picture taken with me! Years ago, we were the only people talking about foreign exchange at these shows… Now-a-days there are quite a few… But there’s a BIG difference between us and the new comers… We emphasize diversification, and investment into a currency… They emphasize, trading on pips… In other words, day trading, leverage, and something they don’t talk about… Margin calls! To each his own… Some people love to trade like that… But most want to diversify their portfolio, with a currency INVESTMENT! Have a great Tuesday!

Chuck Butler — February 13, 2007

The Daily Reckoning