Iceland Ups The Ante

Good day. Well, at least one central bank will have moved interest rates higher by the end of the day today. Iceland’s Sedlabanki moved interest rates in the country up by three-quarters of a point. That’s 75 BPS for those that prefer to see it that way! This was a larger move than the 50 BPS that was expected by economists.

Recall back a couple of months when Iceland’s Finance Minister proclaimed that he would not be afraid to move interest rates to 16% to fight inflation? Well, the Sedlabanki is certainly heading down that road! The krona has gained a bit on the news, but until the euro gets back in the rally saddle, the krona will not make any big moves stronger.

Speaking of the euro, the ECB is meeting right now as my fat fingers hack away at this keyboard. So is the Bank of England’s Monetary Policy Committee. Here’s what I see from the ECB: front and center, no rate hike. However, I think ECB President Trichet will say all the right things to keep the markets on the scent of an August rate hike. Should Trichet use the word ‘vigilant’ or just come right and say, “I’m going to raise rates in August, ” the euro would get back on the rally saddle, at least for today.

I think the ECB has seen quite enough of economic data that would make an August rate hike a watertight case. Take for instance the latest report that showed the services industries in the euro region expanding at the fastest pace in six years.

I say “at least today,” because tomorrow is a Jobs Jamboree Friday. And yesterday, I came across a report that while relatively new, has at times had a reasonable correlation to the Jobs Jamboree report on jobs created, give or take 20,000-30,000. The ADP employment report said the United States added 368,000 jobs in June. So, even with the “give or take,” a number above 300,000 would really put the “interest rates are going to the moon” campers in the United States back on the stage for an encore performance.

In other words, the dollar would rally to end the week. But, that’s not a given at this point, so we’ll just have to see the color of the Jobs Jamboree, and trade accordingly afterward. I’m of the opinion that the risk is to a downside number in jobs. Mark that down, because once again, I’ve found a nice big strong limb to climb out on.

However, one thing the euro has going for it right now is the rise in oil prices again. Our Corporate FX guru, Ashish, gave me a quick note the other day that showed when the price of oil moves higher it tends to lead the euro higher versus the dollar. The chart he gave me showed this correlation going on for the past six months. So, with oil already moving higher (yesterday it hit $75 a barrel), it should be a harbinger to rally time for the euro.

You know, it’s been a month of Sundays since the last time the Bank of Japan raised interest rates. But if memory serves me correctly, I recall the Japanese press circulating stories about a Bank of Japan interest rate move ahead of the actual event. And I’m really seeing the stories circulating right now. I really don’t think this time will be different. Look for a rate hike next week, July 14, 2006, from the Bank of Japan, which should really set off the fireworks for an Asian currency rally. Of course, that’s in my own humble opinion. I don’t want anyone sending me a nasty note in a month from now saying, “Chuck said this would happen!”

OK. I’m beginning to work on my speech for the Agora Wealth Symposium in Vancouver, which is the last week of July. And since I’ve been talking so much about the countries with current account surpluses, I figured I better base my talk on these countries, and why they should be viewed as having currencies that one should consider buying. In case you missed class the previous 100 times I’ve written about them (OK, I exaggerate a bit, but it’s my newsletter, I’m allowed to do that to make a point!), I’m talking about Norway, Sweden, Switzerland, and the Asian currencies. The Eurozone is also a quasi-member. It just recently went into deficit status, as my friend Chris Gaffney pointed out to me yesterday!

This Agora Wealth Symposium has a roster of speakers that will knock the socks off of attendees. The Wealth Symposium does cost to attend, but with the likes of Bill Bonner, Steve Forbes, Addison Wiggin, Mark Skousen, Dennis Gartman, Doug Casey, Rick Rule, Steve Sjuggerud and many, many more, I think it’s probably the best collection and worth the cost (I happen to be along for the ride)!

Yesterday, I reported that the Mexican election was over and that Calderon had won. Well that was a little premature, in that it was announced later that a recount would be held, based on the fact that 2.5 million uncounted votes had “shown up.” This is the kind of stuff Mexican elections have always been known for, and it is the reason I got so upset back in 2000 when the U.S. couldn’t count votes for two months!

Anyway, with 97.7% of the votes recounted, including the previously “lost votes,” Calderon still holds a slim margin. It could go any way at this point, so hold on to your sombreros!

The news from the Bank of England’s MPC just came across the screen, and as expected the MPC left rates unchanged. It has been 11 months since the MPC prematurely cut rates, and ever since then, they have had egg all over their collective faces. Inflation has bounced around the target rate, and there had been calls by one hawkish member of the MPC, David Walton, to raise rates. However, David Walton died last month, leaving no one on the MPC to carry the hawk flag. That’s not a good thing, because now, with oil prices continuing to go higher, inflation is going to rise above the target, and then the MPC will be behind the inflation eight ball.

Not a great thing for the pound sterling, but as long as the euro is heading to its previous highs, as I fully expect it to, it will take the sterling along for the ride….

Currencies today: A$ .7430, kiwi .6040, C$ .8990, euro 1.2740, sterling 1.8355, Swiss .8985, ISK 75.60, rand 7.20, krone 6.23, SEK 7.20, forint 221.51, zloty 3.18, koruna 22.40, yen 115.50, baht 38.20, sing 1.5830, INR 46.10, China 7.9945, pesos 11.10, dollar index 85.560, silver $11.38, and gold $623.70

That’s it for today. It sure has been an interesting World Cup, eh? I just wish some of – no wait, all of the dramatics could be removed (you know what I mean)! Still, a great game! The Big Boss, Frank Trotter, was back yesterday after a week in London. It’s always nice to see his smiling face! I understand that I missed the bikini’s 60th birthday yesterday. I’ll leave that one alone! We missed “Wired Wednesday” yesterday; I think Chris thought it was Monday again! Oh well, have a great Thursday, and onto tomorrow’s Jobs Jamboree!

Chuck Butler
July 6, 2006

The Daily Reckoning