Keeping Up With the Joneses!

Good day. Well, here I am in the saddle ready to type my big fat fingers off and I have no trading screens! Ugh! So, now I’ve got to deal with that, instead of writing today’s Pfennig! Be back in a minute…OK! I’m back. I’ll bet you didn’t even miss me!

Dealing with this stuff gives me a rash! Oh well, I carry on.

Yesterday, the currency markets were void of any real movement again – just as I thought they would be, given the fact that the data cupboard was empty and there were no scheduled Fed Head speeches. Overnight, oil touched $69. This rising oil price is creating havoc among central banks around the world – well, central banks of countries that import oil, that is.

The European Union cut its growth forecast this morning, because of rising oil prices. But, that cut hasn’t hurt the euro to this point. The European Union also posted a lower-than-expected CPI (inflation) report for March in Germany, which will only turn out to be a Norman Greenbaum (one hit wonder), as the rising oil price will take care of that in April! Nonetheless, Germany’s CPI fell from 2.1 to 1.8%. Recall that the European Central Bank’s inflation target is 2%, so this will be good news for the ECB, today.

OK. Recall a month ago, when all the media and so-called experts were talking about the falling price of oil and how it would cure all that ails – I said hogwash! It was a temporary blip, and now look at what’s going on! I just can’t wait to go the gas station tonight! Not! Anyway, that temporary fall in the price of oil in Feb and March is being pointed at as the reason the U.S. trade deficit is expected to narrow. Yeah, narrow, to a measly $67 billion! I was screaming the $67 billion as I was typing it like Sam Kinnison used to scream.

And just like Germany, a drop in CPI is going to pan out to be a Norman Greenbaum. So, to will this “narrowing” of the trade deficit in the United States. Besides, think about this for a minute. The trade deficit being so out of whack isn’t just because of the price of oil! As I reported yesterday, China’s trade surplus is still soaring, and they don’t export oil to us! So, if the dollar gets any “positive play” from this so-called narrowing, it should be short lived!

Later today, we’ll see the color of the budget deficit for March. The Twin Deficits on display!

Yesterday, we had China showing off their trade surplus. So, to keep up with the Joneses, Japan put their current account surplus on display last night. Japan posted a 6.2% increase in February, which puts their surplus at (in dollar terms) $18.7 billion. If you are filling in a scorecard at home, Japan’s Surplus hasn’t been that large in 13 years! I just don’t see how the markets can continue to ignore the positive story in Japan!

While I’m talking about China and Japan, our old buddy (Not!) Big Al Greenspan, now has the freedom to really speak his mind (I know, I could really have a field day with that one, but I’ll leave it be this time!), and last night decided his topic would be Asian currencies. I’m going to give this to you straight from the horse’s mouth:

“It would be very difficult to get agreement between a number of countries that have different domestic goals for adjustments to find a single adjustment that all could agree on. The equilibrium is better reached ay allowing a number of these countries that show a much higher growth rate than developed countries to allow their currencies to firm.”

OK. Now you know one of the reasons I had a problem with Big Al. Even now, he gives you his thoughts in “Greenspeak.” Basically, as I read this over and over again, I think he’s talking about China and Japan – especially China. He wants their currency to rise versus the dollar.

And…I’ll say this once more (OK, you know me, I’ll harp on this forever!), if you don’t think the U.S. administration doesn’t want a weaker dollar, then why are they always harping on China to allow their currency to get stronger versus the dollar? Yes, I know Big Al isn’t a part of the administration any longer, but he was there for 18 years. It’s been pounded in his head for years!

An old Mark Twain Bank friend sent along a note to me after his recent visit to Thailand. He said the activity there is bustling, and foreign investment is very strong. To that, he believes the central bank will want to get into the intervention game to keep the baht from getting too strong versus the dollar. It makes sense. Let’s just hope they don’t go about like the Japanese, and spend trillions keeping their currency weak! Of course, Thailand doesn’t have the war chest like Japan, so that won’t happen. But, you get the gist of my thought.

The “other European currencies” of Sweden, Norway, Denmark, and Switzerland have all seen some renewed interest by investors these days, but that’s really just a diversification or alternate to buying euros. In other words, institutions or individual investors already own euros, but want to own more in Europe, so they opt for the “other European currencies.” As I told you last week, the euro is the Big Dog, and the others are just little pups on the porch. When the euro decides to run after the dollar, the little dogs will follow, but it won’t be the other way around!

Speaking of Sweden, I see that their inflation rate ticked above the central bank’s expectations. Get this: Sweden’s inflation rate is just 1.2%, with no funny math like we use here in the United States! I’m sure the Riksbank (Sweden’s central bank) will use rising oil prices as their reason to hike interest rates again. So, look for that!

Currencies today: A$ .7325, kiwi .6155, C$ .8735, euro 1.2150, sterling 1.7555, Swiss .7725, ISK 75.80, rand 6.1110, krone 6.4450, forint 218.22, zloty 3.23, koruna 23.5220, yen 118, baht 38.12, sing 1.6110, China 8.0120, pesos 11.04, dollar index 89.31, silver $12.75, and gold $597.12.

That’s it for today. The data cupboard gets restocked today, so get prepared for lots-o-data the rest of the week. I forgot to mention my two “new friends” that bought me lunch on Monday: David and Bob. Now, I hear that Bob knows Chris Gaffney (who doesn’t know Chris Gaffney is what I’m asking!) Small world, eh? Anyway, have a great Wired Wednesday!

Chuck Butler
April 12, 2006

The Daily Reckoning