London Traders Buy Dollars

Good day… And a Terrific Tuesday to you! I hope your three-day Holiday Weekend plans went well, and you had a grand time… The weather people told us all week that Saturday and Sunday would be sunny and 80, and that Monday we could expect rain. We got rain Saturday and Sunday, while Monday was the “pick” day… Figures, eh? We put men on the moon using slide rulers, and can’t forecast the weather.

OK… Friday was a “get out of town” day for many, and the currencies were left “for another day”, which is to say… We traded within a very tight range. Yesterday, I checked what was going on, as the United States and the United Kingdom were both on Holiday. Talk about thin markets! Anyway, I checked and it looked as though the dollar was drifting lower most of the day, only to see a reversal this morning as London returned. I don’t know what’s on their minds, buying dollars… But that’s what’s happening as I write.

One currency bucking the bias to buy dollars right now is the New Zealand dollar/kiwi (NZD), which had taken a backseat to the Aussie dollar (AUD) in recent times. New Zealand has seen some better data lately that has helped kiwi to higher levels. The recent business survey was mixed, but had more “good things” than bad things. This has left some traders believing the Reserve Bank of New Zealand (RBNZ) will have to delay their first rate cut in years.

To me, I think there are too many questions hanging over New Zealand like the Sword of Damocles to outweigh the high yield offered by kiwi. The RBNZ next meets on June 5th… That will be a very important meeting, and I personally would hold off with any kiwi purchases until you know more from the June 5th meeting.

The euro (EUR) hit 1.5820 overnight in Asian trading, but has seen that move erased during the London trading session… As I said above, I don’t know what the Londoners know that the Asians don’t with regard to euros… But, they certainly have a bias to buy dollars this morning!

Inflation in the Eurozone is really making things difficult for European Central Bank (ECB) President, Trichet. Oil prices have been the main culprit here, but that’s what Trichet was forecasting as he led the ECB to raising rates, while the United States was slowing down. Those weren’t popular rate hikes, except with me, and anyone else that loves to see a central bank provide price stability.

However, now the ECB and Trichet are to the cheese that binds. The Eurozone economic growth is slowing down, and inflation is still rising… What to do, what to do? I’ll tell you what I would do if I were in Trichet’s shoes… I would turn the money supply spigot to “Off” and hike rates again! Want to nip inflation at the heels? Or do you want to take a huge bite at inflation? Doing just one of those things, nips inflation at the heels… Doing both, takes a huge bite out of inflation, and that’s what is needed here!

Brazil is experiencing some of the same problems as Australia… And it would behoove Brazilian officials to talk to Australian officials for some help in dealing with a rising current account deficit, while the trade surplus increases. Yes, this is a strange bird… But when you have a strong domestic economy, and a rising currency, you see imports grow, which eats at the trade surplus, but when you take in investments the current account takes on water.

OK… We’re not talking billions here… $1.5 billion is the Brazilian current account deficit, but, as I said, they’ll want to nip this in the bud before they start having problems with the current account like New Zealand has!

Speaking of current account problems… The U.S. has a colossal problem there… And its biggest drag comes from the trade deficit. There are a couple of things to think about regarding the trade deficit in the United States. First and foremost is that with the weak dollar it has “narrowed”… However, oil has not allowed the weak dollar to really work on the trade deficit, as oil’s part of the deficit soars. Which brings me to another reason why I believe the dollar will continue to weaken in 2008.

And that is… Drum roll please… Protectionism… As I’ve explained many times in the past, the currency markets do not like any form of protectionism, and a country that puts protectionism in place usually sees the currency suffer. So, think about this for a minute… We have an election process going on in the United States that will come to a head in November, which is six months away. During that six months there will be candidates taking shots at OPEC and China (the two main “outside” culprits of the trade deficit… But we would never go after the U.S. consumer and tell him to save instead of spend now would we?). So, anyway… I see the candidates taking shots at these two “outside” culprits of the trade deficit, which will bring about thoughts of protectionism.

My friend, David Galland, has an excellent newsletter (he actually has a hand in many newsletters!) and on Saturday, he sent me a note with some great figures on oil for U.S. consumers. Let’s look at what David had to say…

“As we head into the Memorial Day weekend, Tom Kloza, chief oil analyst at the Oil Price Information Service, toted up the cost: ‘It looks as though we’ll pay about $1.5 billion to $1.6 billion each day during the four-day Memorial Day weekend, and that adds up to $6 billion to $6.4 billion in U.S. motor fuel expense,’ he said. ‘That compares with about $2 billion for the total Memorial Day weekend six years ago.’

“With consumers paying about $1 billion more each day for gasoline than they did six years ago, Kloza said, ‘You really wonder how much the U.S. consumer can take.’ And he added that the ‘more insidious increases are in the diesel segment… A back-of-the-envelope extrapolation would put diesel and heating-oil costs at about $807 million per day currently vs. about $217 million six years ago.”

“Net result: ‘We are seeing numerous bankruptcies among small and mid-sized trucking firms with more to come,’ Kloza forecast grimly.”

You can sign up for David’s daily letter here.

OK… This week the data cupboard will yield lots of home data, with the S&P Case/Shiller Home Prices data, and New Home Sales data today. Tomorrow we get Durable Goods. Thursday will see Personal Consumption, and on Friday, we’ll see two of my faves… Personal Income and Spending.

It’s a short week, and that’s fine with me! I’ve said it before and I’ll say it again… I love three-day weekends!

Before we head to the Big Finish… I want to tell you about Addison Wiggin’s new book. Addison has revised his Best Seller, Demise of the Dollar. Yours Truly wrote the foreword to the book, so that alone is worth the going price! Here’s a link you can click to find out more about the book and how to order one.

Currencies today 5/27/08: A$ .9620, kiwi .79, C$ 1.0103, euro 1.5765, sterling 1.9775, Swiss .9750, ISK 72.35, rand 7.78, krone 5, SEK 5.8975, forint 154.75, zloty 2.1575, koruna 15.96, yen 103.70, baht 32.25, sing 1.3620, HKD 7.8040, INR 42.92, China 6.9475, pesos 10.39, BRL 1.6590, dollar index 72.15, Oil $133.20, Silver $18.16, and Gold… $924.06

That’s it for today… Well… Shame on me… I got so excited about the so-forecast sunny weekend and our party plans, that I totally missed talking about the “real reason” we celebrate Memorial Day. Memorial Day should be a time of solemn reflection on some of the most sacred of human ideals: Faith, family, duty, commitment, heroism and honor. We are so profoundly indebted to all those soldiers, Marines, sailors and airmen who have given their lives defending us.

OK… Hopefully, I am forgiven by those that thought I had “missed it”… I have to tell you that it’s been almost one year now since being told I had cancer… I get pretty wound up over getting together with friends/family, so you can see how I could have “missed it”. Anyway, that’s water under the bridge, eh? I hope your Memorial Day was fabulous! Time to go… So, hit the send button, Chuck… And have a Terrific Tuesday! The “send” button has been hit!

Chuck Butler
May 27, 2008

The Daily Reckoning