Playing Games

Good day… Day two in Las Vegas went well, except for all the walking that’s needed to get around! My presentation was well received, I believe, and I do it one more time this afternoon. Tomorrow, I sit on a Forex panel, which usually proves to be quite interesting!

The currencies enjoyed a day of rallying versus the dollar yesterday, after the CPI and TIC data caused slippage in the dollar. However, there was no follow through in the overnight sessions, which surprised me a bit. I expected the overnight sessions to follow through on the gains for the currencies but Nooooooo! Shoot Rudy, they didn’t even take profits either! Come on guys, wake up! Do something!

One would have expected the dollar to remain in the dumps this morning as the April U.S. housing starts were to be printed, and most, including me, would have thought that the report would expose more rot on housing’s vine.

But what did I see? A housing report that gained 2.5% in April?! What a crock of bunk! I would like to see where those houses are being started! But, before you get too lathered up by this report, you had better take a look at the building permits. Building permits slumped 8.9% to a 1.429 million pace, the fewest since June 1997. I think this will make the euphoria over housing starts short lived!

We’re also looking for the color of the latest industrial production, which last month fell a negative 0.2%. I expect this month’s production to reverse that negative number, thus leaving the two-month data at a big fat zero! This won’t be of any help to the dollar, unless we see rogue number like housing starts.

The base metals were all sold yesterday, halting their recent upward moves. The selling in copper led the sector downward all day. This caused the Canadian dollar/loonie (CAD) to fall off its 11-month high horse… But not to worry, Alfred, the sell off in base metals wasn’t the beginning of any weak trend for them – simply a technical correction… At least that’s how I see it!

And why wouldn’t I see it that way? China and India are still growing like weeds in spring, and until they stop growing, they will continue to need raw materials, which brings us full circle back to base metals moving higher, and fueling currencies like Australia and Canada.

The Aussie dollar (AUD) also saw some weakness due to the base metals sell off, but again this should be short lived.

Fed watcher, Bloomberg’s John Berry, argues today that if core inflation continues to decline (it was 2.3% year-on-year in April, down from September’s 2.9% YOY peak) the Fed could still cut rates if growth fails to rebound. John Berry watches the Fed moves like a hawk, and pretty much has them nailed on most actions they take before they take them. So his admitting that the Fed could still cut rates, is quite telling, and plays well with my thought that the Fed will make it’s first cut in August.

OK… Once again the Chinese are playing around with us, and quite frankly I’m getting a rash from all these games. Oh the games people play now, every night and every day now… Here’s the skinny… China’s premier, Wu, is going to be meeting with U.S. Treasury Secretary Paulson in a few days… So just like the dozen times before when a U.S. Treasury Secretary and Chinese official’s scheduled meeting would get close – China announces that they pledge to loosen the purse strings wrapped around the renminbi (CNY) and allow for great flexibility.

But when? And How? Tell us please, Mr. Wu! These are important items that would be nice to know when you make such a statement! But Noooooo! Same old, Same Old, games.

We had a ton of people come to our booth yesterday and inquire about Icelandic krona CD’s. They had read about Iceland’s high yields, and wanted to know more. I have to lay it on the line with them, and talk about how small the country is, and its economy, and its currency liquidity, which makes the krona (ISK) subject to speculation, which could cause wild swings. And oh, by the way, it dipped below the 63 handle this morning to now hold a 62 handle, which means Mr. Gaffney will now share the lampshade with me!

Recall, I told you how I had said a year ago that I would wear a lampshade when pound sterling (GBP) got to 2… And it did in April… Mr. Gaffney decided to jump in on that silliness and say he would wear one when krona got to 62!

Anyway, I’m sorry, I went off on a tangent there, but I’m back now to continue telling you that the reason the krona continues to move higher versus the dollar is the fact that it is one of the fave investing currencies for the carry trade, and until that carry trade begins to do a major unwinding, krona will be underpinned by the whole deal. But to me, that makes this currency an even bigger target for speculation. So, as I told everyone yesterday… BE CAREFUL, and watch Japanese interest rates for an indication as to when it might become more expensive to keep those carry trades on.

OK… Time to get going, as the process of getting this out while I’m on the road is a lengthy one, and requires patience, which I have little of, as what I have is used up with the dolt mentality of the markets!

Currencies today: A$ .83, kiwi .7360, C$ .9095, euro 1.3585, sterling 1.9835, Swiss .8215, ISK 62.93, rand 6.9070, krone 6.0170, SEK 6.7740, forint 183.20, zloty 2.79, koruna 20.76, yen 120.50, baht 33.40, sing 1.52, HKD 7.8150, INR 40.75, China 7.6850, pesos 10.70, Silver $13.24, and Gold… $671.50

That’s it for today… I had a few emails yesterday asking me where the dollar index was in the currency round up. Just a reminder: When I’m on the road, I don’t have access to that data, like I do with my currency screens when I’m back in the saddle. I ran into a fellow here that had me come to speak to a group in LA a couple years back, and he asked me to come speak again. So… Another trip! Looks like I’ll be heading out to LA at the end of this month too, so, I’ve got all that going for me, eh? Have a great Wednesday!

Chuck Butler — May, 16 2007

The Daily Reckoning