Japanese Finance Ministry Fires A Warning Shot

Good day…I’m back! And all in one piece! Too many airports and standing in lines for my taste. But that’s in the rear view mirror now, and it’s time to write the Pfennig. I didn’t get the opportunity to congratulate my beloved Cardinals on reaching the World Series… That’s fantastic!

Not much in the way of currency movement going on, although at the very least there is a bias to buy dollars. Why? Well…excuse number 999, traders are thinking that the Fed may surprise tomorrow at their FOMC meeting, or at the very least sound “hawkish” toward another rate hike. In the past week, I’ve given four presentations, and in each of them I said that I did not believe the Fed was “finished” with their rate hike cycle. But either way, they are near the end…and in the past, the markets always looked ahead into the future and traded accordingly. I don’t understand why they are not doing so now…maybe, I’m just too impatient!

So as I said, the Fed meets tomorrow. It will be a “wired Wednesday” for us, and the markets waiting for the decision, and more importantly the statement following the announcement of the decision. Today, the U.S. data cupboard is pretty bare…so, I don’t expect any “real direction” in the currencies today. A very tight range may be in store for us, but then again, you never know.

Japanese Finance Minister, Omi, fired a warning shot to the markets last night to stop taking liberties with the yen. Omi told the markets that the Finance Ministry “will keep closely monitoring currency moves and take appropriate actions if needed.” In other words, Omi will instruct the Bank of Japan to intervene in the currency markets, buying yen, and stopping the bleeding.

You know, I’m not the only one out there banging the drum for a stronger yen. The Economist, called it the “most undervalued” currency. Yesterday, Capital and Crisis author, Chris Mayer wrote a very nice article calling Japanese yen the cheapest currency, and highlighting a story I brought to you last week regarding Russia’s announcement that they would reallocate their currency reserves and buy yen.

I promise that I’ll give up the ship on yen one of these days…but I’m not even close to one of those days!

Speaking of undervalued currencies…that old Chinese renminbi sure hasn’t made a beeline to currency strength, eh? The Chinese have the purse strings pulled so tight on the renminbi that removing their grip will be difficult…but slowly, and I mean slowly, much like how Big Lee Smith used to trudge into a game from the bullpen with that look of, I’m so tired.

The political pressure on the renminbi by U.S. lawmakers has taken a break with the elections looming on the calendar – just two weeks away now. I truly believe that once these elections are over, there will be some unfinished business that the lawmakers such and Schumer and Graham will want to take up again – specifically the planned tariffs on Chinese goods coming into the United States.

The Riksbank, Sweden’s Central Bank, will most likely raise rates at their meeting this week, which will once again narrow the spread for the United States, and the European Union. I would look for this move to get the krona back on the rally tracks…but then it all depends on what the traders in the United States take out of the FOMC statement.

As I look across the board, I don’t see one currency that will not be affected (one way or the other) by the FOMC statement. Not the rate decision, but the statement following… So let’s just close up shop until tomorrow afternoon’s FOMC! Nah…can’t do that! But I have to tell you that this is what I would prefer to do sometimes.

The precious metals of gold and silver just can’t buy a bid these days. I was reading yesterday that the Diwali Festival in India usually stirs up the price of Gold, but has failed to shine a light on Gold this year. It’s not because of a lack of their buying either! The president of the Bombay Bullion Association estimated that in the month of October (to date) gold imports have risen by 123% to 156 tonnes, versus the 70 tonnes imported the month before the festival began.

Somebody left me a story from the Bloomie and placed it on my desk so that I would see it first thing this morning. The story highlights the fact that UBS (Union Bank of Switzerland) and Merrill Lynch were “confounded” by the dollar’s strength against the euro and yen. UBS believes that global growth has been the culprit, and “once financial markets shift towards pricing in slower global growth, the dollar will start to weaken again.”

I know how they feel! All the weak fundamentals paint has been rolled onto the walls, and we’re just waiting for it to dry!

As you all know, I left the San Francisco Money Show, and went on to Panama. I have to tell you that if you have a chance to go there, it’s worth the hassle. The people are so friendly! I got a chance to see how the Panama Canal works, and since they use the dollar as their currency (really Balboas, but they are tied to dollars so either one is accepted) there was no foreign exchange necessary!

Currencies today: A$ .7575, kiwi .6625, C$ .8840, euro 1.2545, sterling 1.87, Swiss .7880, ISK 68.60, rand 7.7830, krone 6.6825, SEK 7.3450, forint 209.10, zloty 3.09, koruna 22.6350, yen 119.50, baht 37.20, sing 1.5750, HKD 7.7820, INR 45.37, China 7.9023, pesos 10.86, dollar index 86.87, Silver $11.60, and Gold… $579.25

That’s it for today…Seems like I’ve been away for a long time, when it was only a week. It’s good to be back! I’ll get to see the World Markets team all in their places with their bright shiny faces! Cardinals and Tigers for the next three games at Busch Stadium…and not one ticket to any of the three games do I have in my hands! Poor me. Oh well…I can watch them at home, and be warm!

Chuck Butler
October 24, 2006

The Daily Reckoning