Koizumi Rattles His Saber!

Good day. Well, the World Cup is over. Italy is the champion. But seriously, are penalty kicks any way to decide a World Championship? I don’t think so! It’s Baseball’s All-Star Week, that’s always a fun time. I hope your weekend was grand. Now onto the task at hand!

The Jobs Jamboree did indeed disappoint yet again on Friday. June’s tally of jobs created came in at a very disappointing 121,000, which if you recall last week’s discussion, was supposed to be anywhere between +350,000 to +175,000, depending on who you follow. Ouch! I’m not going to slap myself on the back, but the call that the risk was to the downside was bang on, eh? There was just too much hype over that ADP jobs report to get me to bite.

The dollar got sold immediately after the number was reported, and the euro ran up to 1.2860, before backing off on profit taking. The euro and the yen have not taken a piece of news from Japan very well, and have backed off even more overnight. Japanese Prime Minister Koizumi announced that he is studying the legitimacy of striking bases in North Korea.

This announcement has had the same negative reaction by the currencies as the actual missile tests last Tuesday. The dollar benefited from the missile tests, and it will benefit from the Koizumi statements until someone comes to the realization that this is nothing more than saber rattling.

The dollar failed to hold those gains last week, as the dust settled on the missile tests, and it will fail to hold these gains too! Big Ben Bernanke told us just two weeks ago that further rate hikes will be data dependent. Well, let’s see, since then we’ve had disappointing data reports on personal income, ISM manufacturing, factory orders, ISM services, and the Jobs Jamboree. The red side of the ledger is filling up fast, and this week, we’ll see the trade deficit data.

What I’m saying here is that if Big Ben is true to his word, then the Fed is finished raising rates. The data doesn’t support it. As I’ve said over and over again, the last 100 BPS of rate hikes haven’t even gotten a chance to work through the economy yet. However, I do believe the previous 100 BPS has, and that’s why everything in the economy is looking sluggish.

So, what you need to do is simply recall the two times in the past when the media thought Big Ben said a “pause” was nearing, and look at what happened to the dollar then. If you do, you’ll get the picture on what happens when the actual “pause” or “stop sign” has been reached! The second prop for the dollar will have been removed. And then, it’s back to the fundamentals other than interest rates.

OK. This week, we finally will see the Bank of Japan come off their ZIRP, (zero interest rate policy). This should be a big deal to actually see it happen instead of all the guessing and what not that went on in the past. I won’t go into all that talk about the end of the carry trade and the yen short covering like I have so many times in the past, but you know where I stand on that. It will catapult the yen and the Asian currencies higher versus the dollar!

Speaking of Asian currencies, China announced last night that their trade surplus widened in June to a record $14.5 Billion. That’s Billion with a capital B! Wow! And I thought their previous record of $13 billion posted in May was unbelievable! The “boys” in Washington, D.C., aren’t going to like the color of that report. China is on pace to top last year’s trade surplus of $102 billion. And again, this won’t make the “boys” on the Hill happy.

I look at this news differently though. I look at it as another piece of proof in the pudding that China’s economy isn’t slowing, like we keep hearing about. Recall that last week they posted a strong +10% GDP. And can you believe it’s been almost a year already since China dropped the Peg to the dollar? I wonder if they are planning any anniversary announcement?

Back to Europe. My current account surplus currencies are all performing nicely so far in 2006 – Norway, Sweden, Switzerland and the euro, which is presently on probation for going into deficit status this year. The thing about the euro is that it is the offset currency to the dollar. So, even if they did slip into deficit standing, the euro still is the lead dog, due to the offset status.

You know, after last Thursday’s ECB meeting when the Eurozone interest rate was moved higher, ECB President Trichet, held a press conference, although most of the media didn’t pay much attention to it or him. He said something very interesting. Let’s go to the tape, eh?

Most important is the fact that the ECB will hold a “press conference” after the meeting on August 3, 2006. This was not previously planned. The ECB normally holds a press conference after a rate announcement, so add that to the fact that I researched and told you about on Friday the word ‘vigilant’ was used in the meeting prior to the rate hike meeting. And this time Trichet used the term ‘strong vigilance needed.’ I don’t know how much clearer the ECB and Trichet can be on the future of interest rates!

The dollar may have the benefit of the Koizumi saber rattling this morning, but slowly and surely – wait who’s Shirley? Anyway, slowly the euro and yen are gaining ground versus the dollar, which is just what the leaders of these countries would prefer to see anyway. This gaining ground versus the dollar will really get a shot in the arm when the Fed “pauses.”

The Mexican Peso has really received some fanfare, and positive trading since the election was put to bed. However, I think one should be very careful here; this could be what they call a dead cat bounce. OK, no PETA people. No cats were hurt. It’s just a markets saying!

One more thing. Last month, I told you that it certainly looked like a great level to buy Gold in our MarketSafe Gold CD. That certainly is holding true with Gold up almost $50 from then. I wanted to say it again though: Gold still looks to me to be at a cheap level, and there’s still time to get a MarketSafe Gold CD before the funding ends!

Currencies today: A$ .75, kiwi .6130, C$ .8910, euro 1.2770, sterling 1.8425, Swiss .8140, ISK 75.50, rand 7.14, krone 6.2450, SEK 7.1820, forint 220.10, zloty 3.17, koruna 22.31, yen 113.75, baht 37.83, sing 1.5730, INR 46.15, China 7.99, pesos 10.96, dollar index 85.24, silver $11.04, and gold $622.75

That’s it for today. Hey! Did you see that nice section on the Forbes.com site on Friday regarding currencies? It had a slide show of the currencies I gave them data and my opinion on. And, it had a feature on our currency CD’s, with a tiny mention of yours truly. Tre’ cool! I’ll let you know if it is going to appear in print anywhere. OK. Time to hit the “send” button. Have a great Monday and All-Star Week!

Chuck Butler
July 10, 2006

The Daily Reckoning