Oil Casts a Dark Shadow

Good day… Another day of watching a tight trading range in the currencies. We did see some early movement, but for the most part it was a day of tight range trading – except for the Canadian dollar/loonie. Here’s the skinny.

The loonie had perked up yesterday morning after a report that said a broad coalition that’s opposed to the new tax on the Royalty Income Trusts had joined forces to defeat the tax. That news really stirred the pot, as most observers believed this whole taxation of the Income Trusts was a dead issue. This opens up a brand new can of worms… But in the end… I’m skeptical that the “Flaherty tax” will be defeated.

However, the loonie’s day in the sun had a dark shadow cast upon it, when the Saudi’s announced that the proposed OPEC production cuts were “unnecessary.” The price of oil plummeted and took the gains that the loonie had gathered and erased them. As I’ve said ever since the rot on the vine began to show because of the Income Trusts taxation, it will take at least $70 oil, and $700 gold to get the loonie on the rally tracks again. I immediately thought of the “Soup Nazi” on Seinfeld… And thought of the Saudi’s saying… “No cuts for you!”

I got some time to think on the way home last night (didn’t have any time during the day as I was swamped, and short handed on the desk!). I know it’s a strange thing to think about as you drive home, (of course, it’s better than driving with your eyes closed!) but I was thinking about the poor showing of U.K. inflation that printed yesterday. Recall that U.K. inflation hit a decade high of 3%. I know that the Bank of England (BOE) did see an estimate of this report before hiking rates last week… But I doubt that the BOE is prepared to stop at 5.25%!

At one time the BOE was ahead of inflation, and then they got complacent and the distance between rate hikes widened. Now look… The BOE is now chasing inflation, which means rates will go higher. Shoot Rudy, we may even see the BOE come back to the rate hike table again in February, when the European Central Bank (ECB) hikes rates. Whew! Talk about a double whammy on the dollar… The Fed holds rates unchanged, and the BOE And ECB both raise rates!

So… It’s not all bad for pound sterling, eh? Higher interest rates than the United States. Can you say “2”… Or maybe even “2.10”? OK… I’m not saying that I know anything more than anyone else about the direction of sterling… But with rising rates that overtake the Fed Funds rate, one would think that sterling would be a currency of choice for investors… And then, with today’s strange dolt mentality in the markets, it may not!

The Bank of Japan (BOJ) meets tomorrow, and every time I say that I believe they will raise rates at the meeting, I get a few emails telling me how wrong I am on this. Trust me, I fully understand how these low interest rates have become the “coke” for the BOJ, and the government, as low rates bring about a weak yen, which allows them to compete with China for exports.  But come on! Raising rates 25 BPS, only takes them to 0.5%, does that dilute their “coke”? Not yet! At least not in my opinion.

In New Zealand last night, the higher interest rate campers received a blow when New Zealand’s CPI surprised observers by falling to 0.2% for the quarter, and moving the annual inflation in New Zealand to 2.6%. This puts inflation within the 2-3% range, the Reserve Bank of New Zealand (RBNZ) is mandated to maintain. This report gives the RBNZ an opportunity to skip a rate hike at next week’s meeting. This will weigh on kiwi, as many observers, including me, believed a rate hike would take place at next week’s meeting.

New Zealand still has the highest interest rates in the industrialized world, and is the offset currency (along with Iceland) to the yen in the carry trade… But it sure would have been nice to see another rate hike there!

Today, we’ll see December PPI in the United States. I find this to be funny. Follow along with me here… In times past when PPI or CPI was printed, the media would focus on the “X” food and energy numbers. Why? Because they would make us “feel good”… And me? Well, I only concerned myself with the overall numbers, because, it’s not like we don’t use food and energy in our daily lives, right? Yes, I know, they like to tells us they remove food and energy because they are volatile. HAHAHAHAHA! So are our lives!

Anyway… Now that the price of oil is falling, guess what part of PPI that prints today will “look better”? You got it… The overall number that includes food and energy! So, who wants to guess which part of the report the media decides to report on today?

OK… Enough of that! We’ll also see a couple of my faves today. First off, are the November TIC’s, which are the Net Foreign Security Purchases. As I told you yesterday, this report is important, as it is a report card on how well we’ve done at attracting foreign investment that will finance our deficit.

In addition, industrial production and capacity utilization will print today. I don’t see any of these three giving the dollar any reason to rally today… But then there’s the wild card this afternoon when the Fed’s Beige Book is released. You never know what goodies will be a part of the Beige Book!

Currencies today: A$ .7863, kiwi .6917, C$ .8517, euro 1.2920, sterling 1.9665, Swiss .80, ISK 70.38, rand 7.24, krone 6.4450, SEK 7.02, forint 196.67, zloty 3, koruna 21.58, yen 120.40, baht 35.77, sing 1.5375, HKD 7.8030, INR 44.19, China 7.7752, pesos 10.9675, dollar index 85, Silver $12.58, and Gold… $623.41

That’s it for today… I forgot to talk about the “Missouri Miracle” yesterday… The finding of not only one young boy that had been missing for four days, but another that had been missing for four years! That story is incredible! When I was a young boy, I would leave on my bike after breakfast, and not come home until dinnertime. I was allowed to be a kid. Unfortunately, that’s not how it is any longer… Anyway… This story had two happy endings! Have a great Wednesday!

Chuck Butler, January 17, 2007

The Daily Reckoning