Losing Credibility?

Good day. Well, I’m back. There were serious questions about whether that would happen given the storm we flew through and landed in last night! But, not to worry – it wasn’t half as scary as the time Chris Gaffney and I were flying to Las Vegas, and the plane’s wing almost flipped and touched the ground. There were some white knuckles on that trip!

So, Mexico was grand. The International Living folks are always so kind to invite me to speak to their members. I was able to, somewhat, keep up with the markets while in Mexico, and was quite pleased to see the “Slow Steady Drip” that I talked about last Wednesday before I left, had finally taken a strong positional direction. I did, however, worry aloud to Chris last Friday that we had gone too far, too fast, and wouldn’t be surprised to see a pull back.

That’s exactly what we got, yesterday – for a brief time at least! The currency market was moved by a story that Big Ben had slipped up during a dinner conversation and said, “investors were wrong in thinking he’s done lifting interest rates.” Hmmm. Is Big Ben a Fed Chairman that speaks out of both sides of his mouth? Last week, he tells Congress that a pause is his plans. Then, he goes out at dinner and says the opposite? Where’s the credibility? I’ll get back to the currency reaction in a second, but right now, I think the world is wondering about the new Fed Chairman’s credibility. This could end up being a big hit to the Fed Chairman. Bigger than the Helicopter statement!

OK. So, the dollar bulls rallied the greenback after that story hit the streets, and the euro backed off the 1.26 level, but a funny thing happened on the way to the forum: The euro came back strong overnight, as Eurozone manufacturing expanded at the fastest pace in more than five years! I’ve told you again and again about the Eurozone economic recovery, and even the IMF has recently upgraded their forecast for Eurozone GDP, this report reminded everyone that while the United States probably is going to raise rates one or two more times, the ECB is also going to raise rates – and probably three to four more times!

So, the song remains the same with regards to the rate gap. And, if that’s pushed to the side of the road and the trade balance is considered as the next item to judge which currency should be bought, well, we all know that it’s a hands-down to the euro!

That, my friends, is why the euro is kicking some sand in the dollar’s face right now. Yes, all that sand that the dollar kicked in the euro’s face last year is coming back to the dollar. It is like what the blind man said as he spit into the wind: “It’s all coming back to me now!”

This growth in European Manufacturing highlights another of my favorite topics lately: Global Growth. Ahhh, Grasshopper, the economies of the world are growing, and all at the same time! This can be witnessed by the GDP postings of China, Singapore, Japan, Thailand, S. Korea, and the European countries. It can also be witnessed by the fact that everyone has joined the Fed’s choir, and they are singing from the same song sheet, by raising rates. Or, they are at least talking about raising rates, which in Japan, is about the same as actually raising rates!

So, it’s fun to talk about economic growth, along with positive balance of payments. These currencies are experiencing growth versus the dollar, and one would certainly look for that to continue.

I see that in yesterday’s U.S. data, personal income and spending were printed for March, and for once, personal income out-lagged spending. Interesting. So, I can’t rant about U.S. consumers spending more than they make this time, but seriously, the spending portion of this data was still too darn high!

Did you see that the Canadian dollar/loonie hit 90 cents overnight? Wow! If you’re keeping score at home, that’s a 28-year high! That’s even before I started following currencies! Yes, if I subtract 28 from 2006, it takes us back to 1978! In 1978, I was running a margin department in a regional brokerage house, and currencies weren’t even on my radar screen!

The air is getting pretty thin for the loonie, as it scales new heights, but so far, it has been able to carry on! Of course, the prices of oil, gold, and other commodities sure don’t hurt!

The Aussie dollar is trading above the 76-cent level this morning, after a first-quarter business survey rose to its highest level since the first quarter of 2004. Observers attribute this rise as a result of improved consumer confidence. I doubt this will be enough to bring the Reserve Bank of Australia back to the rate-hike table – just yet.

Did you see the kind words that my friend John Mauldin had for me in his most recent weekly newsletter? John really talked about a lot of things that relate to the currency markets and the dollar. So, if you would like to read the entire article, I suggest you go to: www.2000wave.com. If you don’t already subscribe to John’s newsletter, you can do that while you visit that site!

Our little Christine just called. She’s ill, and won’t be coming in today. So, that means I’ve got to get to work sooner! So, here we go!

Currencies today: A$ .7610, kiwi .6375, C$ .9030, euro 1.2640, sterling 1.8330, Swiss .8080, ISK 73.90, rand 6.05, krone 6.16, forint 208.60, zloty 3.05, koruna 22.51, yen 113.60, baht 37.58, sing 1.5775, INR 44.88, China 8.0140, pesos 11.08, dollar index 85.78, silver $14.00, and gold $660.00

That’s it for today. How about that gold and silver? They just keep chugging along. Here today, gone tomorrow. I’ll be heading to Atlanta for the Atlanta Wealth Expo and Conference. So, I’ll be trading the Pfennig back and forth with Chris this week. I didn’t get home until really late last night, so I missed seeing my little buddy. We’ll have to catch up on stuff tonight! Have a great Tuesday!

Chuck Butler
May 2, 2006

The Daily Reckoning