Good day. Well, the CPI data came and went yesterday. Yes, it came in a bit stronger than expected, and the dollar immediately was bought. But then a funny thing happened on the way to the forum: The dollar began to get sold, because someone with an ounce of brain decided that all the interest rate hikes were going to squash economic growth like a bug. That will influence foreign investors more than high interest rates.

The dollar selling however, was nothing more than range trading, as the euro rose as high as 1.2645, but then settled in at 1.2625. Today is another big data day, and it kicks off around 8:00 a.m. (CST) with the Net Foreign Security Purchases (NFPS), and then, we’ll see that quickly followed by industrial production, capacity utilization, and the Philly Fed Index. I’ll come back to the data in minute, but first I’ve got to tell you about some news from Japan where the former “Mr. Yen” was talking.

Yes, back in 1997 through 1999, Japan had a Finance Minister named Sakakibara. He became known as “Mr. Yen,” due to his ability to steer the direction of yen with his comments. I used to write about this guy all the time back then. And now, nine years later, he’s back in the Pfennig! Last night, Mr. Yen was talking about his favorite currency. He made these statements:

“I’m still a yen bull. I’m quite bullish on the Japanese economy. It has structurally recovered. The focus may shift to trade imbalance and the U.S. economy by the end of the year, and yen may reach a more than one-decade high against the dollar this year.”

It sounds like Mr. Yen, has been reading the Pfennig, eh? Mr. Yen and me – has a great ring to it wouldn’t you say?

I also wanted to give you some thoughts about the Fed beige book that was printed yesterday. So, here goes: The twelve Federal Reserve districts reported that the economy continued to grow, albeit at slower pace than earlier in the year. Consumer spending and manufacturing activity was still expanding, but the pace of growth appeared to be decelerating. So, overall, the report confirmed what the economic indicators have been showing with the economy gearing down in the second quarter after a very strong first quarter.

So, the previous 16 rate hikes by the Fed have probably begun to work into the fabric of the economy. Does that beige book sound anything like Big Ben did last Monday, when he came out of the starters blocks spewing brimstone and fire and waging war against inflation? No! But then, I’m sure Big Ben has taken a liking to drama! Oh, I still think the Fed will raise rates in two weeks, but I’ve got to say that the markets have got to see the light.

OK. The data today: Front and center we have the NFPS. As I’ve explained in the past, this data is important in that it shows us if the capital inflows to the Untied States are enough to support the current account deficit. Now, the current account deficit consists of the trade balance and foreign direct investment. So, to make this easy, let’s just use the trade balance, which we know came in the other day at $63.4 billion for April. It just so happens that we’ll see April’s NFPS today. So, if the NFPS comes in where the experts have forecast it to print, it will confirm that we haven’t attracted enough investment from abroad to finance the deficit.

So, what does that mean for the currencies? Ahhh, grasshopper. When the United States cannot attract enough foreign investment to finance the deficit, then the clearing mechanism, which in this case is the dollar, needs to weaken. Sort of like a Blue Light Special. Things go on sale at cheaper prices. Same thing…Attn: dollar asset shoppers. We have a Blue Light Special in the dollar aisle.

Industrial production is one of those wild card pieces of data, in that it can experience wild swings due to one off items. But, if that doesn’t happen today, we’ll see industrial production come in very weak at 0.2% in May.

My favorite piece of data capacity utilization will print today for May, and I’ve got to say that even though the moves have been baby steps, capacity utilization has moved higher each month to reach a five-year high of 81.9%. If the economy is really going to slowdown in the second half of this year, as the Fed fears, then we’ll see it first here.

OK! Enough with the data! Onto the Goldilocks economy: Australia. I’ve been writing about the difficult times the commodity currencies have been experiencing with this recent correction in the actual commodities, but I’m thinking that the correction is about to come to an end, and we can get back to commodities rallying and taking the commodity currencies like Australia along for the ride!

I don’t have any hardened rule, or fact…or even inside information that would lead me to that conclusion. Instead, I have decades of experience in watching markets perform. You see these corrections and they lead people with little or no experience to believe that we’ve entered into a “new trend.” But what they don’t know is that to enter into a “new trend,” they should have seen a change in the fundamentals.

In this case, there has been no change in the fundamentals. China remains the key. Recall yesterday I told you that China’s manufacturing had soared in May? Well, no change in fundamentals!

The Swiss National Bank (SNB) followed the ECB’s move last week with a rate hike of their own, yesterday: 25 BPS. If they keep that up, they might finally get rates to 1%! Even though the SNB rate hike is not Big News, it does keep with the theme of central banks around the world stepping up to fight global inflation with rate hikes. Now, if we could only get the Bank of Japan to get off the couch and put down the remote long enough to come to the rate hike table!

Speaking of the ECB, you all know that I’ve called for ECB rate hikes since last fall to be made in December 2005, and then in March, June, September, and December of 2006. That should leave rates in the Eurozone around 3.25%. Unfortunately, I don’t think that’s going to be high enough given the double dose of inflation and money supply growth going on in the Eurozone. A couple of weeks ago, I explained how Germany’s central bank, the Bundesbank, used to use inflation and money supply as a two-tiered gauge for interest-rate decisions. And I believe the ECB does the same thing. So, with money-supply growth running almost twice the ECB’s target rate of 4.5%, the ECB might have to move faster on rates, and move them higher in August.

Currencies today: A$ .7390, kiwi .6240, C$ .8980, euro 1.2620, sterling 1.8490, Swiss .8120, ISK 75.25, rand 6.82, krone 6.22, forint 212.51, zloty 3.19, koruna 22.45, yen 114.80, baht 38.35, sing 1.59, INR 45.97, China 7.9990, pesos 11.40, dollar index 85.98, silver $10.22, and gold $573.70

That’s it for today. NFPS is a Biggie today. So, stay tuned. Well, it’s time for a public service announcement. This Sunday is Father’s Day! Did you forget? Well, that’s why I’m reminding you now! Father’s Day was always a big deal at my house when I was young. And I try to keep with my Dad’s idea of family all around me on Father’s Day. More tomorrow! Have a great Thursday!

Chuck Butler
June 15, 2006

The Daily Reckoning