Let The Rate Hikes Begin!

Good day. Geez, Louise, when is this heat wave going to break? Thank goodness someone invented air conditioning! The central bank meetings got off on the right foot last night with the Reserve Bank of Australia (RBA) pulling the dust covers off their rate hike machine, while keeping the heat on for future rate hikes.

RBA Governor Ian Macfarlane raised rates 25 BPS (I think it should have been 50 BPS), and left the door open to yet another rate hike before the end of the year with statements like this: “Underlying inflation in the period ahead is likely to exceed previous forecasts. Economic activity remains strong and inflation pressures have increased.”

Not bad for a guy that’s retiring this month! I’ve always been a fan of Ian Macfarlane, as he never fell into the trap that the Reserve Bank of New Zealand’s governor fell int trying to direct the currency. So, anyway, the Aussie dollar rallied on not only the rate move, but also the hawkish words coming from Macfarlane. Oh, and in case you’re wondering about his replacement, no worries. It will be his right-hand man for some time now, Glenn Stevens, who I believe will carry on the fight against inflation wisely!

Tomorrow, the Bank of England’s monetary policy committee and the ECB both meet, with nothing but raising interest rates on their collective minds! As I kept saying before I left for Vancouver, the Bank of England’s MPC was badly in need of a meeting so they could raise rates to combat inflation. And, the ECB is going to have to weigh their options of either a 25- or 50-BPS rate hike. I thought after last month’s policy statement by ECB President Trichet that 50 BPS was not out of the realm of possibilities, but now, we’re seeing the Spanish ECB minister, Ordonez, balking at any size rate hike! So, 25 BPS it will be!

Yesterday, the euro rose above the 1.28 level on the news that German unemployment had fallen in July. The unemployment rate fell to 10.6% from 10.8%, while it was widely expected to remain flat. In addition, Euro-zone unemployment also fell by more than market expectations in July to 7.8% versus 7.9% expected. I know these numbers sound very high, but then, the Europeans do not. I repeat: do not use “Birth/Death ghost model numbers” to inflate the labor picture – like we do here in the United States.

I talked to a lot of people last week, and while most, if not all, agreed that the dollar is in trouble, there were some concerns about the pace of the depreciation. In other words, people were growing tired of waiting for the next big leg down in the dollar. Well, my mother always told me that good things come to those who wait. Unfortunately, we’re going to have to wait a bit longer, as it looks as though the “dog days of summer” have set into the currencies.

Long ago, I learned that most of my trading partners around the world would be gone on “holiday” in the month of August. So, I started going then, too! Shoot, Rudy, what’s good for the goose is good for the Pfennig writer. This is the reason the month of August is usually about as dead as a doornail when it comes to big moves. Everybody is away on “holiday.”

However, this year, we’ve got a lot on the currencies’ plates: The war in Iraq; the war in the Middle East; Oil prices going through the roof; central banks around the world going to DEFCON 5 on fighting inflation; global growth. But, I still believe we’ve entered those hazy, lazy, crazy days of summer. Come on sing along, it will put you in a good mood the rest of the day!

Did you see the quote from new U.S. Treasury Secretary Henry Paulson, yesterday? Oh, this is sooooo classic! Out of one side of Paulson’s mouth came the “a strong dollar is in the best interest of the U.S.” statement. And out of the other side of his mouth came the “The Chinese need to allow the renminbi to become more flexible” statement. Classic!

In case there’s any confusion here, by saying he wants the Chinese to allow the renminbi to become more flexible, he’s saying that he wants it to get stronger – mainly versus the dollar, which would mean a weaker dollar. Now, we know that Paulson is just another John Snow.

Don’t look now, but the emerging markets are looking a bit healthier. Could the “Risk Aversion” be coming to an end? Just look around at the recent strong performances of South African rands, and the Icelandic krona. Mexican pesos are still feeling the pain of lower interest rates and a sloppy election. South African rands have come back with a vengeance, gaining 3.50% in the past month, while the Icelandic krona has gained back 5.40% in the past month. It certainly looks like the “Risk Aversion” play has come to an end, but I don’t know that for a fact. We’ll just have to keep an eye out on the emerging markets. Now, if we could just get that Indian rupee on the move in the right direction, eh?

Hey! How about that personal income outperforming spending in July? Man, it has been a month of Sundays since that has looked so good! And the ISM manufacturing didn’t look that bad either rising to 54.7 from 53.8. So, not all’s going to you-know-where in a hand basket in the U.S. economy…yet!

Currencies today: A$ .7660, kiwi .6190, C$ .8865, euro 1.2805, sterling 1.8760, Swiss .8140, ISK 71.40, rand 6.9230, krone 6.1550, SEK 7.1850, forint 213.50, zloty 3.0750, yen 114.60, baht 37.90, sing 1.58, INR 46.70, China 7.9713, pesos 11.02, dollar index 85.14, silver $11.82, and gold $649.10

That’s it for today. Had a very nice interview yesterday with a reporter from Consumer Reports. She was a Pfennig reader! They’re everywhere. They’re everywhere! Good news from the Big Boss, yesterday. Frank tells me that he’ll take the return trip to Puerto Vallarta! Whew! That’s one less trip for me! OK. Wired Wednesday is on its way. So…have a great Wednesday, and try to stay cool!

Chuck Butler
August 2, 2006

The Daily Reckoning