Looking for Credibility…

Good day. Well, the dollar is receiving some love overnight, as traders focus on two Fed Head speeches that will take place today. Traders are thinking that the Fed Heads (Kohn and Big Ben) will stoke the fire of inflation pressures once again…I have to take issue with that thought…

Basically, the Fed has paused with regard to their rate hike cycle, to see the full effects of their two years worth of rate hikes. I don’t think they’ve still seen the full effects, although the economic data coming in certainly tells a tale of big slowdown. So, unless they are willing to pull the dust covers off the rate hike machine again at their next meeting, the Fed Heads had better not stick their necks out talking about inflation, because that will stir the markets to believe a rate hike is coming. Fed Head Hoenig told reporters last night “inflation is still high.” But he’s not the big dog on the porch – that’s Big Ben. Credibility…I’m looking for credibility in Fed Heads. I sure wish the rest of the markets were with me on this one.

The euro received a one-two punch this morning. First, the traders and their Fed Head thoughts, and then The Royal Bank of Scotland issued their own Services Index for the Eurozone, and it showed a fall to a 10-month low. I found this to be strange, as the services industry has been the strongest in the Eurozone economy. Hmmm…something seems fishy here. Oh, well, it is what it is!

I’m still thinking that it is quite possible for the ECB to aggressively hike rates and deliver a 50 BPS rate hike rather than their usual 25 BPS. And then have ECB President Trichet come out with both barrels blazin’ and talk about vigilance and all those other things that go along with fighting for truth, justice and the American way. No, wait, that was Superman. Trichet just needs to keep fighting inflation!

Before someone sends me a note telling me that the Eurozone inflation has fallen below the ECB’s ceiling target of 2% – I’m quite aware of that – what I’m talking about here is the ECB’s Maastricht Treaty mandate to provide price stability. The ECB knows all too well, how quickly inflation can gear up again when oil prices turn around. So, I admire them for this stance, because 1.9% inflation is still too much for my taste!

And if it’s too much for my taste at 1.9%…imagine the sour taste in my mouth when I think about inflation in this country! YECH! I still believe if all the beans were counted, and no changes to the way inflation is calculated were in place, U.S. inflation would be above 7%…that would mean that “real yields” were negative. Oooh, where do I sign up for some of that?

I seem to be stepping up on the soapbox quite a bit today…I’ll step down now to tell you that Australia posted a narrower than expected Trade Deficit in August. Yes, Australia posted a trade deficit that is the second lowest in five years. Exports are kicking some tail and taking names later, which is an indication to me that China is still not slowing down as many pundits/ Chicken Littles are writing about and telling you is happening.

The Reserve Bank of Australia  (RBA) met last night and left rates unchanged, as everyone expected. However, another month of soaring exports, and I would look for the RBA to raise rates once more before the end of the year. Should this scenario play out, I would think the Aussie dollar to be well bid, and heading to 80 cents. However, I don’t know and neither does anyone else, so don’t let them tell you they do, if the scenario will play out. It just looks like it should, given my view from the cheap seats!

Oil prices are leading precious and base metals lower, playing a game of limbo. How low can you go? None of these seem to have found a “bottom” yet, so expect more selling. But I’m still on the side of the line in the sand that has those that believe the bull markets for commodities is not over…

With oil selling off, the Canadian dollar / loonie is feeling the heat too. But not as much heat as the Mexican peso is feeling… The peso has really fallen in the past two days, and it’s all due to the Commodities selling off, especially oil…

In the U.S. today, we’ll see the Services side of the ISM report for September, and Factory Orders for August. Both are expected to show some wear and tear, which I would not think to be dollar-friendly…but for the most part the markets will focus on Big Ben’s speech today.

Tomorrow we will see only the Weekly Initial Jobless Claims, while rate hike announcements will be coming from the ECB, and hopefully from the Bank of England’s Monetary Policy Committee. So…in my opinion, it doesn’t make sense to buy dollars today, and have to sell them tomorrow. But, that’s the nature of the Hedge Funds and large institutions that flip in and out of assets to squeak out a profit here and there… These guys CAN squeeze blood from a turnip!

This trading stuff is not what I talk about when I go out on the road…it’s all about diversifying your portfolio with currencies and metals to reach an efficient portfolio. But since I write a daily newsletter, trading ends up being talked about all the time. I just don’t like the daily give and take these guys create…

Before I go to the Big Finish…did you see the latest issue of Kiplinger’s? It’s called Kiplinger’s Best. Well, Kilplinger’s called the EverBank FreeNet Checking Account the BEST CHECKING ACCOUNT! That’s awesome! And reinforces the part of my presentations when I call our checking account the best checking account in the country!

Currencies today: A$ .7430, kiwi .6695, C$ .8880, euro 1.2680, sterling 1.8810, Swiss .7975, ISK 69.08, rand 7.7935, krone 6.63, SEK 7.3475, forint 217.70, zloty 3.11, koruna 22.3275, yen 118.10, baht 37.58, sing 1.5865, HKD 7.7920, INR 45.73, China 7.9041, pesos 11.06, dollar index 86.05, Silver $10.81, and Gold… $578.35

That’s it for today. Summer did return to us here, as I requested a week ago! YAHOO! Today is 10/4 so should I say it? 10-4 Good Buddy! This here’s the Rubber Duck, let those Truckers Roll! HAHAHAHAHA! I have no idea why I thought of that except that it’s 10-4! It doesn’t take much to get me going does it? Today is Wired Wednesday so I’ve got that going for me, eh? So, have a great Wednesday…I hope yours is wired too!

Chuck Butler
October 4, 2006

The Daily Reckoning