Leading Indicators Fall, Dollar Rises

Good day. And a Happy Friday to one and all! This had been a pretty range-bound week, until yesterday, when the dollar bulls came out in force, and swung their mighty hammers once more. I don’t like to end a week like this, but with the prospect of a FOMC meeting next week, I don’t think I’ll have any other choice today. Ugh!

Yesterday, we saw leading indicators, which are just what they say they are. Leading indicators for the economy are three to six months out, and they fell more than expected. The forecast for May was a negative 0.5%. It was actually -0.6%, but the dollar rallied on this news. Go figure.

Of course when you do a daily newsletter like this, you can get all caught up in the day-to-day noise, and it can wear on you. It wears on me, and drives me absolutely up a wall, because we all know in our heart of hearts – the markets, the economists, the analysts, traders, and investors – that the dollar is going to weaken. It has done so since being removed from the Bretton Woods agreement. The dollar index chart for the dollar, since 1971, looks like the backside of a mountain, with the top being 1971, and the bottom – well, we haven’t reached the bottom yet. But its downward slope brings us to today.

If you have never had the chance to see me at an investment conference, you’re missing out on a slide that I use to illustrate that dollar index chart. It’s pretty scary, but that’s not the point. The point is, the dollar is destined to get weaker, but yet, traders, hedge funds, central banks, all keep playing this game that props it up. But once the prop is removed.

Today, we’ll see the color of the durable goods for May, which fell through the floor in April with a -4.4% performance. However, the experts believe durable goods will have recovered 0.4% in May. I don’t see this as a big market mover, but you never know, the prop doctors could be at work again today.

So, the currencies have all been taken to the woodshed this week, even my current favorites, the current account surplus crowd, have all seen red this week. As far as next week is concerned, I would suspect that the 25-BPS rate hike from the Fed is all priced into the markets at this point. What everyone’s trading on now is the suspicion that Big Ben will indicate that there’s another rate hike coming in August.

Sure, Big Ben, go ahead, and get everyone lathered up for another rate hike, and after another month of data that shows the economy is quickly slowing, pull the rug out from under the rate-hike campers. Or, go ahead and raise rates, and bring the economy to its knees.

I really thought that going into this summer we would be finished with all this SIRT (stupid interest rate talk), and the dollar would be on the run, having had the one vestige of support removed. But, noooooo! That just pushes my thoughts of a currency rally versus the dollar into the fall.

The only currency to add to its value versus the dollar this week is the Chinese renminbi, even with a sell off last night. In case you missed class earlier this week, there are thoughts in the markets that China will use renminbi strength to help fight inflation, which would mean the Chinese allow the renminbi to get stronger versus the dollar quicker than previously thought.

I don’t have anything else to talk about this morning; it’s really a “no news” kind of day, except if you want to talk about Mexico pre-paying $7 billion in debt to the World Bank and Inter-American Development Bank-Finance Ministry. It makes sense given the tons of cash flowing into Mexico from oil sales. I find it funny though that right smack dab in the middle of a very tight election, the government makes this announcement.

Currencies today: A$ .7325, kiwi .6065, C$ .8920, euro 1.2550, sterling 1.8230, Swiss .8020, ISK 75.70, rand 7.48, krone 6.3225, forint 224.71, zloty 3.2810, koruna 22.7425, yen 116.30, baht 38.47, sing 1.5975, INR 46.17, China 8.0002, pesos 11.47, dollar index 85.64, silver $10.16, and gold $579.90

That’s it for today. It’s the last weekend in June. Can you believe it? Next weekend is the lead-in to the 4th of July week. Unbelievable! Geez Louise, did the U.S. soccer team get some tough calls at the World Cup or what? Oh well, I think it’s time to get a latte’ and a scone. I’m beat! Have a great Friday and weekend!

Chuck Butler
June 23, 2006

The Daily Reckoning