North Korea Does Its Missile Tests

Good day. There I was on a July morning (That’s a Pfennig traditional start to July). How was everyone’s Fourth of July? Mine was “rain shortened,” but I still managed to squeeze in some fireworks! Looks like the great levels of the currencies from Monday didn’t hold, so let’s go to the tape and see what happened, eh?

OK. I walked out this morning to get the newspaper, and the front page said that North Korea’s missile test failed. My first thought was – no wait, my second thought was that this news would support the dollar. Not that the failed test is dollar friendly, it’s simply the thought that any missile test is dollar friendly. And, there were six missiles fired into the Sea of Japan, with just one long-range missile failing.

When I arrived at the desk and turned on the trading screens, I could see the rally that the dollar had managed to drum up. And sure enough, the news on the screens said that the dollar had rallied on the news from North Korea.

Well, that was quite a run by the currencies late last week, and on Monday the euro and the yen were really putting on a show versus the dollar. I think they will continue that once the dust settles on these missile tests in North Korea. The ECB does meet tomorrow, and the markets would love to see a rate hike, but I doubt that the ECB will play along. However, they will throw the markets a bone, to keep them on the scent of a rate hike that will probably come after they return from vacation in late August.

Yes, ECB President Claude Trichet, is probably very euphoric about his country’s victory over Brazil in the World Cup, (as I am upset by Brazil’s loss!) as he very euphoric about the economy of the Eurozone. Business confidence is leading the way, and with inflation pressures building stronger every day, I think the markets know that a rate hike in August is a lock.

It certainly looks as though the Bank of Japan will finally get off the zero-interest-rate-policy (ZIRP) bus next week when they meet on July 14, 2006. What was once a whispering campaign for their July meeting has become a real shouting match. So, get ready for Japan’s entry into the new world of central banks raising rates all at the same time!

The Bank of England’s Monetary Policy Committee (MPC) meets tomorrow, too. And while I fully expect the MPC to raise rates again, I just don’t see them having enough proof that inflation is above their target to pull a rate hike off at this time. As long as the MPC remains hawkish with their statement, the market will have enough to chew on for now.

All these central-bank meetings, all this fun! There was something else that happened last week that the traders are just now figuring out: The new U.S. Treasury Secretary, Henry Paulson, gave his acceptance speech and never mentioned the U.S. strong-dollar policy. Not even a hint. This had become a real joke as successive U.S. Treasury secretaries for the last 11 years have mentioned the strong-dollar policy in their acceptance speeches. Hmmmm.

Does this mean that Paulson doesn’t believe in the strong-dollar policy? No. I think if the press really pinned him down he would say he believed in it. However, judging from the way the markets have traded since his acceptance speech left out any reference to the dollar (save for the North Korea’s missile tests last night), I would have to think that the cat is out of the bag on this one.

Recall when I first talked about John Snow leaving the U.S. Treasury secretary job that I thought that changing Treasury secretaries could be used to officially change the dollar policy. Well, I think it’s all coming together. And you know what I like to say about those things, I love it when a plan comes together!

The Mexican peso has done what I thought it would do, given the outcome of the presidential election. Recall that I was leery of a victory by Obrador, because his choice for finance minister was not looked upon by the markets as one that would continue the economic policies that have brightened Mexico’s economy. Instead the Conservative, Calderon won in a very tight election, and the markets rewarded the peso by moving it up over two percent versus the dollar.

Here in the United States, we’ve got a Jobs Jamboree Friday to end the week! Last month, you might recall the Jobs Jamboree did not quite live up to its name, as only 75,000 new jobs were created in May. Well, if we have another month like that back to back, you would see the dollar really take it on the chin, as the prospects for the Fed to keep raising rates would be watered down!

As I head to the big finish, I want to point out that since I’ve been talking about the current-account-surplus countries outperforming the current account deficit countries, I’ve added one of my current favorites to the currency roundup. Swedish krona will now be a part of the roundup, and you’ll find it under the symbol of SEK. There’s just too many krones, kronas, korunas, etc. So, I’ll list it as SEK.

Currencies today: A$ .7455, kiwi .6090, C$ .9040, euro 1.2780, sterling 1.8470, Swiss .8160, ISK 75.15, rand 7.12, krone 6.22, SEK 7.1750, forint 219.31, zloty 3.15, koruna 22.30, yen 114.80, baht 38.12, sing 1.5815, INR 46.07, China 7.9958, pesos 11.17, dollar index 85.28, silver $11.50, and gold $628.10

That’s it for today. With July here, it starts the travel time again for me with a day trip to Washington, D.C., next week. But in between some travel, I will have my summer vacation, which is always relaxing for me (except those times I have mechanical problems! Ugh!) Have a great Wednesday and rest of the week!

Chuck Butler
July 5, 2006