Leader Of The Pack

Good day. You know, we found it pretty interesting here on the desk yesterday that here in the Midwest we’ve been fighting a heat wave for weeks, but now that it’s hit the East Coast – well, now that’s major news! HAHAHA.

Not much movement in the way of currencies yesterday, although overnight the euro has lost about a half cent to the dollar. I was telling Chris Gaffney yesterday that I believed the rate hike that will be announced by the ECB in about an hour was already priced into the euro. I mean, shoot, Rudy, ECB President Trichet and the other ECB ministers have been so transparent about this rate hike that the markets had the green light to push the euro higher!

But now, any further movement from the euro on this particular rate hike will have to come from a surprise 50-BPS hike (not likely according to the markets, but something that should be considered by the ECB according to Chuck!). It’s all up to Trichet going forward. If he doesn’t come off as a mega-hawk in the press conference following the rate-hike announcement, then the euro will struggle to get any love today.

Now, tomorrow is a different story. Tomorrow is a Jobs Jamboree Friday, and if the labor picture continues to disappoint, I think the markets will take that as a sign of a Fed rate pause. That sign would certainly lead to euro strength, in my opinion!

The Bank of England’s monetary policy committee (MPC) is also meeting today, and I fully expect a rate hike from them. The pound sterling has been quite a story this past month, as the markets anticipate a rate hike from the MPC.

Two currencies that I’ve gone out on the limb for, Norway and Sweden, haven’t disappointed with their performances. They are the two leaders of the pack for European currency performance versus the dollar this year. Leader of the pack…Vroom, Vroom! I said in our special edition of the Review & Focus, to celebrate our 20th year of World Markets, that the currencies with positive balances of payments would be the best performer this year. And look what we have here: Currencies with surpluses performing well! Imagine that!

Hey! Yesterday, I saw a blip come across the screen that the People’s Bank of China said they would increase the renminbi’s flexibility. Of course, you know me, my first response to that was: “They forgot to tell us a timeline of when that would happen” And guess what? The renminbi lost ground to the dollar overnight! I find this almost comical, in that the statement came from bank officials, not Schumer or Graham, but did not push the renminbi higher versus the dollar. Because I know you are asking…Ahhh, grasshopper… we’ve all been on this ride before. Until there is a timeline given for this flexibility, there’s nothing to get excited about. There’s nothing here. Move along.

Well, the Reserve Bank of Australia (RBA) must be feeling proud of their rate hike the other night, especially after yesterday’s report on Retail Sales for June. Nominal retail sales rebounded in June with a 1.0% rise. Real retail sales improved 0.6% in the quarter, while prices increased 1.1%. Take this news along with the fact that the Aussie labor market is strong, tax cuts are feeding through, consumer demand is growing consistently and inflation is on the rise. The RBA will make a few more trips to the rate-hike table. They’ve got their work cut out for them, but as long as they remain in control, driving all night with their hands wet on the wheel, the Aussie dollar would seem to have it all going for it. Shine on, Aussie dollar!

The Japanese yen lost some ground overnight after some more jawboning by a Japanese official threw cold water on the prospects of future rate hikes. What a bunch of baloney! You would think the markets were smarter than that to believe such bunk!

This just in: The Bank of England’s MPC did in fact raise rates this morning – 25 BPS. Pound sterling is flying right now, as a lot of traders had sold sterling ahead of the meeting thinking the MPC would remain on hold. Obviously not Pfennig readers, eh? Sterling is soaring on the news!

Now, we wait for the ECB. It won’t be too long of a wait though, but most likely after I have hit the “send” button. I had to laugh this morning when I saw that Spain’s GDP grew at a 3.6% clip year-on-year. Why was that funny? Recall yesterday’s Pfennig when I told you that Spain’s ECB minister was crying a river about higher interest rates, because his country couldn’t withstand them. A boy crying wolf…

Oh well. We carry on despite having to work with such turkeys!

Have you been watching the continuing recovery of the precious metals? Silver is back above $12 and gold is back to $650. Not that I knew anything anyone else didn’t know. But I just didn’t see that sell off in these two metals to be the end of the bull market.

Currencies today: A$ .7620, kiwi .6215, C$ .89, euro 1.2780, sterling 1.8870, Swiss .8120, ISK 70.50, rand 6.91, krone 6.16, SEK 7.1975, forint 213.58, zloty 3.0690, koruna 22.25, yen 114.90, baht 37.85, sing 1.5790, INR 46.55, China 7.9768, pesos 10.96, dollar index 85.35, silver $12.12, gold $650

That’s it for today. It looks like it could rain any minute, maybe that will be then end of the heat wave for us, but it won’t be big news till it’s the end in New York City! Jobs Jamboree tomorrow, and then I head west on my summer vacation with the whole family. I love my summer vacation for the time with the family, the relaxation, and no cell phone reception! It’s great to see your kids without a cell phone stuck to their ears! And, that means no one can call me either! Have a great Thursday!

Chuck Butler
August 3, 2006

The Daily Reckoning