Is Somebody Finally Paying Attention?

Good day. How was your weekend? Mine sure seemed to go really fast! We celebrated my darling daughter Dawn’s birthday, and my beloved Cardinals finally won in Chicago! So, it was fun, just too fast!

Right out of the starter’s block this morning, I see that the euro has moved very close to 1.29 again. The thought going around in the overnight markets of Asia and Europe was that U.S. economic growth has been hurt badly by the Fed’s 17 rate hikes, and the dollar was been sold accordingly. It’s interesting that every once and a while these guys get these “thoughts” and trade something according to their “thoughts.” Tomorrow it could be something else. Fickle traders. I’ve talked about them in the past, but these days they seem to be more fickle than ever!

But these thoughts and fickle trading are just short-term noise. The overall underlying trend still exists, and that trend is a weak-dollar trend.

Friday, we saw one of the reasons the traders in Asia and Europe were thinking that the economy is going south. The University of Michigan survey on consumer sentiment fell to 78.7, which is much lower than the market forecasted 83.6. It is also well down from July’s final 84.7 print. So, maybe, just maybe, somebody is paying attention! The fall in sentiment caused the dollar to get sold, which pretty much offset the positive spin the dollar received the day before from the Philly Fed Index (recall, I told you Friday that it had surprised on the upside)

As I left the desk on Friday, I had really thought that we wouldn’t see any big moves in the currencies until after Labor Day, when everyone was back at their desks fresh from their summer vacations and we had seen the color of the Jobs Jamboree. So, maybe today, or this week, the euro does finally get back and trade above 1.30. But in my opinion, I don’t think that will happen until, as I said, after Labor Day.

This week, the euro will have to go through the gauntlet of both the IFO and ZEW surveys on business sentiment, along with industrial production, and finally ending the week with CPI data. I just don’t see the euro going to the moon this week, with all that data weighing it down. And the dollar doesn’t have much on the data docket this week, except home sales (existing and new) and durable goods for July. So, if the euro does dip on any of this data this week, it could represent good buying levels.

But like I said above, the euro is rallying this morning, which will let the other currencies get off the porch and rally, too. One currency that we’ve been watching take the ball and run this year is the British pound sterling. The currency has gained 10% versus the dollar this year! So, listen to me now and hear me later; this gain was fueled by the euro’s ability to get off the porch and chase the dollar down!

Last week, the People’s Bank of China announced that they were raising their internal rates 27 BPS. I just love it when a central bank does something different like raising rate 27 BPS. Not 25 BPS, but 27 BPS! However, if China is really serious about using interest rate hikes to cool down their economy, they are going to have to reach deeper into their bag-o-tricks than 27 BPS!

There are reports from China that the Peoples Bank of China will allow greater flexibility in the renminbi, which is something I’ve harped on for three years. If they want to fight inflation and help cool down their economy, they should allow the renminbi to appreciate versus the dollar. There’s nothing like a strong currency to fight inflation!

The renminbi appreciated nicely last night, and has once again moved to a new high versus the dollar since the peg was dropped last July.

As I always tell you, what’s good for the renminbi spills over to the other Asian currencies. And, the Thai Baht continues to be the Asian currency with the most movement to it. The Thai central bank has approved of the strong baht, because they see it as a way to combat inflation (see discussion on China above).

I was talking to an old friend and customer on Friday that loves it when I talk about the Canadian dollar/loonie. The loonie has really held fast and strong in the 89-cent area. So, I’m quite pleased with that, but I’m still concerned that it can’t move ahead of this current level. Hey! It’s strong and steady, Eddie. So, why fuss?

So, time to get to the big finish and begin trading. Just like my weekend, this morning is going by fast!

Currencies today: A$ .7630, kiwi .6410, C$ .8945, euro 1.2895, sterling 1.8945, Swiss .8160, ISK 69.80, rand 7.02, krone 6.23, SEK 7.1450, forint 216.80, zloty 3.0375, koruna 21.84, yen 115.70, baht 37.45, sing 1.57, INR 46.46, China 7.9656, pesos 10.81, dollar index 84.65, silver $12.31, and gold $622.

That’s it for today. Our MarketSafe Resource/Commodity CD closes out its funding tomorrow. But do not despair! We’ll open another round of funding for a September issuance. The CD has been a real popular item. School starts tomorrow for my little buddy. He’s going to the fifth grade! Nothing else to talk about his morning, so have a great Monday and week!

Chuck Butler
August 21, 2006

The Daily Reckoning