Japanese Yen Rebounds!

Good day. It was a long first day back for sure! I’m glad to put yesterday behind me. I came home to a ton of e-mail messages, voice messages, and a big trading day. Whew! The currencies are glad to put yesterday behind them, too. The dollar rallied early on, but the rest of the day was about as exciting as counting flowers on the wall.

Yes, after the initial sell off in the euro, which resulted in a factory orders decline for December, the rest of the day for the currencies was b-o-r-i-n-h! Good thing, too. I was swamped! Overnight, we’ve seen some healing from the currencies, as the euro has traded back above the 1.20 figure. However, the real mover overnight has been Japanese yen, which has seen the 117 handle.

Japanese yen traders and investors are taking on positions ahead of the Bank of Japan meeting that will take place later this week. This meeting is expected to reveal a change in the zero-interest-rate policy, or at least words that would signal that the policy is about to become toast! This will be the first meeting since the governors’ report showing consumer prices posted its first back-to-back monthly gain since 1998! 

The Chinese renminbi, Thai baht, Singapore dollar, South Korean won, and shoot, Rudy, even the Indonesian rupiah have all been gaining versus the dollar, lately. So, I was struggling with the fact that the yen was not joining in on the move. Maybe now it can kick some tail and take names later, eh? That would certainly be nice! Oh, and no, Indonesian rupiah and South Korean won, are not liquid trading currencies. So, no dice, if you were thinking of buying some for your mantle!

There’s a story going around this morning that the South African Central Bank has come clean and admitted that they have been selling rand for dollars. On January 23, 2006, I wrote about the rand and said that it had gained 12% versus the dollars since reaching its low back in mid November 2005. Well, it looks like the South African government didn’t like that and has put pressure on the central bank to weaken the currency.

Folks, this is why I always say that South African rands scare the bejeebers out of me. The South African government has always been perceived as corrupt, and they do things to make certain groups happy, which undermines a sound fiscal and monetary policy. These are some of the things that currency traders look at when determining a currency’s value. Most of the time the markets we be more than happy to oblige a government or central bank that indicates they want a weaker currency.

With the South African rand though, the markets will have a tough time punishing the currency too hard, given the price of gold these days. So, patience with rand is a virtue for sure!

The Reserve Bank of Australia (RBA) meets tonight. No change in rates is expected. Recall that yesterday I said that I thought rates in Australia would be higher in the second half of this year. The Australian dollar could sure use some tough talk from the RBA tonight, as the currency has really backed off lately.

Did you see or hear about the speech that ECB President Trichet gave last week? He was very hawkish, and his words had a March rate hike written all over them! A couple of weeks ago I wrote – and then repeated the call in both of last week’s presentations – that I expect rate hikes from the ECB in March, June, and September, bringing their internal rate to 3% by year end.

These rate hikes will go a long way toward providing strength to the euro this year, as the United States ends their rate hikes. As I’ve said previously, I expect the Fed and Bernanke to raise rates in March, so they can prove that Big Ben is no softy when it comes to inflation. Then, the focus will switch to May’s meeting. Right now, all I’m saying about that meeting is that I won’t be surprised if the Fed hikes rates one more time…bringing the Fed Funds rate to 5%. I also won’t be surprised if they don’t!

Either way, the markets will know that it’s either the end, or close to it. This means the next move is a cut.

As every day goes by, we get closer to the start of the Iranian Oil Bourse, which is scheduled to debut in March. Iran, which is the Middle East’s second largest oil producer, has announced that their Oil Bourse will only accept euros for payment of the oil. I don’t know how that will play out, but on the surface it certainly looks as though it would be good for the euro and bad for the dollar.

Canada’s new Conservative government was put in place, yesterday. Now, the Bank of Canada (BOC) can focus on the task at hand: adding to the official interest rates! I’m expecting the BOC to come back to the rate-hike table three more times this year, with the next rate hike on the docket for March. While interest rates in Canada will lag those in the United States…here, they will merely act as an underpin. The loonie gets support from many other factors. Energy and commodity prices are examples, along with tons of mergers and acquisitions.

I did see the Bank of Canada’s Governor Dodge speaking out against the global imbalances. Dodge said, “The global economy may stall or suffer recessions unless global imbalances such as the record U.S. Current Account Deficit are corrected.” I’ve always liked BOC Governor Dodge, and here’s one more reason why I like what he has to say.

In response to a question regarding the protectionism measures being introduced by U.S. lawmakers versus China, Dodge had this to say, “Any global slowdown could be exacerbated if countries resort to trade protectionism to fix the imbalances.” Right arm!

Currencies today: A$ .7440, kiwi .6830, C$ .8725, euro 1.1990, sterling 1.7475, Swiss .77, ISK 62.75, rand 6.11, krone 6.72, forint 209.05, zloty 3.1875, koruna 23.7360, yen 117.90, baht 39.50, sing 1.6280, China 8.0566, pesos 10.4575, dollar index 90.12, silver $9.6950, and gold $567.35

That’s it for today. Winter has returned to the Midwest, so we’ve got that going for us, eh? Last night’s episode of “24” was great. It’s now “tax-time” as everyone works hard to complete his or her tax returns. I’ll take a shot at mine this weekend. There is no data today, so have a great Tuesday!                 

Chuck Butler
February 7, 2006

The Daily Reckoning