Mexico Election Too Close To Call

Good day. I hope everyone had a great weekend, I know I did! We get to spend a little time on the desk today and then head out to more barbeques. The currencies held onto their gains from Friday and look to strengthen even further with interest rate announcements from Europe and England due out later this week followed by rate decisions by Canada and Japan next week. It should be a relatively quiet trading day in New York, as the equity and bond markets will be closing early and staffing on the currency desks is relatively light.

The biggest event over the weekend occurred in Mexico, where the presidential elections have been declared “too close to call.” The challenging party’s candidate, Andres Manuel Lopez Obrador, declared himself the winner, but an official announcement has been delayed. A victory by Obrador may cause a slight decline in the peso, while victory for Felipe Calderon of President Vicente Fox’s National Action Party would cause a rally.  Unfortunately, it looks like it may take weeks to finally declare a victor and possibly even longer before things settle back down. With a history of rigged elections, the longer an official announcement is delayed, the more volatile this currency will be. We still feel there are better places to put your speculative dollar and would stay away from the peso for now.

Japan’s Tankan report of business sentiment showed Japan’s largest companies plan to increase investment at the fastest pace in 16 years. This report will add pressure for the central bank in Japan to raise interest rates for the first time in almost six years. The Japanese economy continues to impress us with broad economic strength and improving fundamentals. While I realize it has been a long wait for investors, I think your patience will finally pay off later this year as we expect the Yen to be one of the largest movers in the third and fourth quarters.

And Chuck isn’t the only one predicting further dollar weakness this year. The most accurate currency analysts on Wall Street last quarter are telling customers to anticipate more losses for the dollar over the remainder of 2006. “The dollar will continue its slide,” said Alex Patelis, head of currency strategy in London at Merrill Lynch & Co. Merrill, Citigroup Inc. and Mizuho Corp. Bank, among the most bearish on the dollar during the second quarter, say the currency will continue to fall. Rate increases by central banks will hurt the dollar by making it harder for the United States to attract capital, Merrill predicts.  Sounds familiar, doesn’t it? While we all know Chuck marches to the beat of his own drummer, it is always nice to read how many of the so-called ‘experts’ agree with his thinking.

While reading over Merrill’s strategy report, the following jumped off the page at me:  “We’re more positive on Icelandic Krona in the medium term.” You will recall Merrill’s report released in February shortly after Fitch’s downgrade helped to drive the krona down over 25%. The currency has since come back slightly, but is still the world’s worst performer versus the U.S. dollar. This currency slide is what Merrill now believes will help the Icelandic economy, because the economy is so small, it is quick to react to changes and there’s more propensity for the trade balance to turn around. The current account deficit is running at approximately 16% of GDP, but a falling currency will likely turn this around. History supports this theory.

In 2001, the krona slid 18 percent versus the U.S. dollar after reporting a current account deficit of 10% of GDP in 2000. Iceland posted a surplus of 1.5 percent of GDP in 2002, and the currency began a slow and steady appreciation, surging 63 percent in the four years through 2005. We remain cautious about the prospects here, but you are certainly paid a great deal for your speculation.

The Australian dollar strengthened to the highest in almost three weeks as gains in the price of metals fueled demand. Copper and gold prices surged back up during the past few days and the currency has reacted favorably. Higher prices of raw materials often spur buying of the Australian dollar because they account for about 60 percent of the nation’s exports. Australia is the world’s second largest producer of gold and is also a large miner of copper and iron ore. Positive economic numbers released over the past week also helped the Australian dollar recover. We continue to like investments in both the Australian and Canadian dollars as plays on the commodity rally which is expected to continue.

Currencies today: A$ .7433, kiwi .6077, C$ .8995, euro 1.2802, sterling 1.8448, Swiss .8166, ISK 75.43, rand 7.095, krone 6.2297, forint 220.13, zloty 3.158, koruna 22.22, yen 114.75, baht 38.08, sing 1.5844, INR 46.066, China 8.002, pesos 11.234, dollar index 85.20, silver $11.28, and gold $623.20

That’s it for today. I hope everyone gets a chance to enjoy the July 4th holiday with friends and family. Chuck sent me the following note on Thursday night and I felt it was the perfect ending for today’s Pfennig:

“I love the 4th of July, because it was one of my dad’s favorite holidays (Christmas, Father’s Day, and the 4th). He always would buy grocery bags of fireworks, and mind you, we were pretty much poor people, and the whole neighborhood would stop by the Butler’s house to see Charlie’s fireworks! So, the 4th reminds me of my dad, and how much of a patriot he was.


Chris Gaffney
July 3, 2006