Jawboning Currencies...

Good day… And a Happy Valentine’s Day to one and all! I trust you have secured your “something special” for that Valentine of yours… If not, there’s still time, but you had better hurry!

Overnight, the euro has added to yesterday’s gains, but we’re still in a tight range… But I’m not sweeping the euro mini-rally under the rug here. A rally is a rally, and a wise man once said that it’s not a profit until you take it! Yesterday, we had the good German GDP, and investor confidence numbers. Those have been followed by some strong, hawkish words by European Central Bank (ECB) member Liebscher, who reminded the markets that the ECB is concerned about accelerating inflation.

These words reminded traders that the ECB will raise rates in March to combat those inflation pressures, and that will be one more notch in the euro’s belt with regards to closing the yield gap versus the dollar. I think the ECB members should do more of this type of jawboning, thus giving the euro strength. Japan has mastered this art of jawboning their currency… Unfortunately, the Japanese jawbone it weaker! UGH!

This jawboning your currency works, and members of the Bank of England (BOE) found that out this morning as they too came out with both guns blazing, aimed at inflation. BOE Governor King reminded the markets that the BOE members believe that inflation will remain above the bank’s target of 2%. I think that the fall in inflation I reported to you yesterday is temporary, and so does the BOE!

In Canada yesterday, the loonie finally received some good news/data! The Canadian trade surplus grew by C$5 billion in December. You’ve just got to love that positive balance of payments, eh? One interesting tidbit from the report was that Canada’s trade surplus was the smallest since 2003.

Speaking of trade data… The United States posted their December trade deficit, and it has once again jumped over the $60 billion level, to $61.2 billion, from a deficit of $58 billion in November. Recall, retail sales for December were strong with the Christmas shopping season in bloom, and this is the result of that buying by consumers… Probably with money they didn’t really have, or from withdrawals from the ATM, AKA the House! But I’m not going down that road today. It’s freezing outside, and I’m just trying to stay warm. I’m not trying get hot and boiling mad talking about consumer debt!

I would suspect that this increase in the trade deficit will cause a revision of fourth quarter GDP… Probably from 3.7% to 3.5%.

Nothing in that trade deficit was dollar friendly, and the dollar retreated on the day… Which led to a mini-rally in gold.

Today, we see the color of January’s U.S. retail sales. The Butler Household Index (BHI) tells me we should see a disappointing number for January, but then, the BHI hasn’t been bang on recently, as it has in the past. So, we’ll have to see if it can be reliable again! HAHAHAHA! Seriously though… retail sales will probably be fair… Or disappointing, but I doubt they surprise on the up side like they did in December. If a disappointing number is printed, I would look for more dollar selling, and maybe even a jump to 1.31 for the euro.

Tomorrow, we get the net TIC Flows, which used to be called the Net Foreign Security Purchases. TIC stands for Treasury International Capital, and the Net TIC measures monthly inflows. This is an important number in the data food chain, in that it tells us just how good of a job we are doing at attracting enough foreign investment to cover our current account deficit.

The trend in this data has been downward, and December’s forecast doesn’t change that downward trend, as it is forecast to hit $70 billion. When I do the math on the back of a cocktail napkin, I show that we need about $75 billion each month in foreign purchases to finance the deficit. Uh-Oh… Looks like the “you know what” is about to hit the fan.

Like I tell my audiences all the time… When you have a lack of funding, there are two things that can correct the situation: 1.) Raise interest rates very high, to attract more investment. Unfortunately, raising interest rates like that would bring the economy to its knees… Or 2.) Debase the currency, so that the cost to purchase the securities would be cheaper. Given the choice between the two, the government will always choose what’s behind door number two! Debase the currency, which is basically, to allow it to depreciate, weaken, fall, and all those other ways of describing the same thing that has gone on with the dollar since being bounced from the Bretton Woods Agreement in 1971.

Aussie dollars bounced a bit overnight on the recovery in raw material prices. This currency has been really stuck in a tight range lately, but I still believe it is an 80-cent currency!

I got a kick out a headline story that came across the screen this morning. It went like this… “Former Treasury Secretary Snow Saw U.S. Can’t Force China on renminbi Gains”. No Duh! This guy Snow is a genius! He had these very intelligent words for us, “I don’t think we can force China to do anything.” Again… No Duh!

This is what I’ve been saying for a couple of years now! But did Snow listen then? NO! I wonder when this “revelation” came over him!

Currencies today: A$ .7820, kiwi .6910, C$ .8560, euro 1.3085, sterling 1.9560, Swiss .8040, ISK 67.45, rand 7.22, krone 6.1750, SEK 6.99, forint 193.75, zloty 2.99, koruna 21.61, yen 121, baht 33.25, sing 1.5360, HKD 7.8120, INR 44.11, China 7.76, pesos 10.945, dollar index 84.46, Silver $13.94, and Gold… $668.20

That’s it for today… I’m running a bit later this morning, as I had to stop at the grocery store for provisions on my way in. We saw quite a winter storm yesterday here that has now moved to the Northeast. I wonder how all those roses/flowers will get delivered today for Valentine’s Day with the roads a mess. Oh well, not my worry! Time to get this out the door… So have a great Wednesday and Valentine’s Day!

Chuck Butler — February 14, 2007

The Daily Reckoning