Going Through The Same Old Wash

Good day. Well, I kept looking at the news articles this weekend and found nothing, absolutely nothing – say it again! There just wasn’t any material for me to talk about this morning. So, I guess, I’ll wind this up and go back to sleep!

Nah! I can’t do that! With the price everyone pays for the Pfennig, I can’t leave them high and dry! Ha! No, seriously though, there seems to be nothing but the same old wash to go through this morning. UGH!

The Japanese yen continues to inch higher versus the dollar on the same thoughts that generated the mini rally last week, and that is – drum roll please – that the Bank of Japan is ready to shift their interest-rate policy. It could come as quickly as the March meeting! It’s difficult for me to get all lathered up about this, because I’ve seen this movie before. In fact, it’s a long-running movie that has been in and out of the theaters for about a dozen years now! However, if ever the time was right for the Bank of Japan to signal a change, it is now!

I’ve given you all the data that backs up that last statement, and there’s just no reason to continue this zero-rate policy, but if any Central Bank is capable of remaining on the block and not raising rates, it’s the Bank of Japan! So, hold on…March is going to be a wild month, with all the Central Bank meetings!

The other big thing scheduled for March is the Iranian oil bourse, where they will buy and sell oil denominated in euros only. Now, I’ve never said that the start-up of this bourse was carved in stone. What I’ve said is that it is scheduled to open in March, and if it does what it was set up to do, it won’t be a good thing for the dollar. Now, again, I’m not saying that it will cause the collapse of the dollar; I’m just saying it won’t be good. How bad will it be for the dollar? I can’t say – maybe just a pimple. There’s just no way to know until the bourse gets started.

The euro has really been bouncing back and forth around the 1.19 handle. As I’ve said before, I expect the ECB to hike rates when they meet this week (on Thursday), and give the euro some support. But with the Fed still in an interest-rate-hike mood, they have the hammer. However, when the mood fades for the Fed, the ECB will still be raising rates, and I would look for the hammer to get handed over to the euro again.

Once the euro is swinging the hammer again, sterling, Swiss francs, forints, krona – you name the currency in Europe; it will be hanging on the euro’s coat tails.

I told you on Friday that the Chinese renminbi had put in its best performance, versus the dollar, in a while. This is ahead of the visit by U.S. Treasury Undersecretary Tim Adams. Well, Adams came, and met with Chinese officials, and the only words spoken by either side, came from the Chinese who said their currency policy was “suitable for China’s current situation.” The renminbi did move higher again versus the dollar last night, which keeps it on course for my call of renminbi 7.50 by next year.

If Japan does raise rates next week, the move could go a long way toward larger moves by the renminbi. For those of you who have been reading the Pfennig for a while, you will recall that the renminbi’s basket allows more room for movement versus the Asian currencies, which means that if they move higher, it could push the renminbi at a faster pace.

Well, New Zealand’s trade deficit was back in the news this weekend. The New Zealand annual trade deficit widened to a record level in January. The gap was NZ$ 7.1 billion, which is $4.7 billion in greenbacks. Now, I’m with you, if you think this number doesn’t sound very bad when compared to the trade deficit here in the Untied States. However, this is a much smaller country, and the hit to their currency is going to be much more evident. As I’ve been saying for years now, when a trade deficit gets out of whack, the currency has to come under pressure to allow a correction in the deficit.

Historically, it has worked everywhere, over and over again.

Gold sure had a nice rebound on Friday – up over $10 per ounce! It gave back some of those gains in the Asian session overnight, and has really come under some selling pressure in London, after the price of oil slipped again. In case you missed class the day I tied these two together, here goes:  High-priced oil will result in higher inflation, and gold is used as a hedge versus higher inflation. It’s just something to watch for.

However, it’s not the only thing that will move the price of gold. So, I’m not changing my thoughts any about higher gold prices, just because oil has backed off. These are just short-term moves or “noise,” as I like to call them!

Those falling oil prices take away from the Canadian dollar/loonie, too! Did you know? That oil and gold comprise 35% of Canada’s exports, and about 10% of its economy? Well, now you do!

Data wise, here in the United States this week, we will see quite a few reports, but none that will give the currencies any direction. If all of them are strong or weak, it could end up snowballing a direction. Tomorrow, we’ll see a revision to the fourth quarter GDP, which previously posted at 1.1%. The revision is supposed to take that to 1.6%. Oooh! The chills up my spine…Not!

As I said earlier, the ECB will meet on Thursday, so that should get the ball rolling with the rate hikes. The Fed doesn’t meet until the end of the month, when I’ll be in Jupiter, Florida, with my family taking in Cardinals’ spring training games!

Currencies today: A$ .7390, kiwi .66, C$ .8715, euro 1.1865, sterling 1.7410, Swiss .7585, ISK 66.25, rand 6.14, krone 6.7750, forint 213.05, zloty 3.1825, koruna 23.92, yen 116.10, baht 39.20, sing 1.6225, China 8.0407, pesos 10.4750, dollar index 90.68, silver $9.71, and gold $556.20

That’s it for today. The Winter Olympics are over. It was a good show for the United States team. Our Mardi Gras celebration over the weekend was grand. It was a little chilly, but grand! My little buddy won both his flag football games, so the weekend was chock-full of good stuff! Well, Mary O. is here, which means this is late getting out! So, have a great Monday and week!

Chuck Butler
February 27, 2006

The Daily Reckoning