Playing the "Keep My Currency Weak" Game

Good day… Well… I’m late; I’m late. I did something this morning that I rarely do… I hit the alarm and went back to sleep! Now, I’m late! So… To keep with the normal timing/delivery of the Pfennig this may be short and sweet… I guess it depends if I get on a roll or not!

The Bank of Japan pulled the disappointment plates out of the cabinet last night, and served the markets dinner on them, when they decided to keep rates unchanged. I had talked about this as half of the observers thinking they would hike, and the other half thinking they wouldn’t. The “they wouldn’t folks” won. So, you don’t have to send me an email saying “I told you so”… I was well aware of the fact that the Bank of Japan was known to serve meals on the disappointment plates. I think I just let hopeful thinking get in the way of clear thought!

So the Bank of Japan (BOJ) knuckleheads are going to keep playing the “keep my currency weak” game. I’ve got some names for them going through my head right now, but like Peter, Paul & Mary sang… If I put down the words, the radio won’t play them, so I’ll have to lay them between the lines!

Unfortunately, the markets don’t appear to be too satisfied having to eat off the disappointment plates, and they have taken yen even lower to the 121 handle. OK fellas, that’s a little harsh, don’t you think? “Ward… You were a little hard on the Beaver last night.” But that’s what the BOJ gets… They want to play the “keep my currency weak” game? Well… The markets have decided to play with them! I’m serious here… This could open Pandora’s Box of Very Weak Currencies.

OK… Enough on Japan. But seriously… It is a case of “you asked for it, now you’ve got it.”

On to China… The renminbi continues to strengthen versus the dollar, and is now trading within spittin’ distance of the 7.50 level I told you about last spring. I told you then that it looked like (to me) that renminbi would trade to 7.50 within a year. So, it has stepped up the pace of strengthening! Good Show! I think this is a concerted effort by the Chinese to relieve the pressure on them to allow greater flexibility in the renminbi. The U.S. officials can’t rip on the Chinese if they see them picking up the pace on renminbi strengthening now can they! Well… I guess they can… But it’s not likely, eh?

British pound sterling continues to outperform the euro, as last week’s surprise rate hike and this week’s printing of a decade-high inflation really has put a bee in the pound sterling’s bonnet! I just put the finishing touches on the February edition of the Review & Focus, and in it I discuss this newfound glory for sterling. There are now thoughts that with this 3% reading in inflation that the Bank of England might come right back to the rate hike table next month. Man! Talk about a double barrel shot across the dollar’s bow! I really do think that the Bank of England has a hankerin’ to move rates as high as 5.75% this year. That’s an additional 50 BPS needed to reach that level.

This is “all good” for the pound sterling. I wonder when traders will have enough gumption to move the currency to “two”. I hope it will be as the Beatles said… It won’t be long, yeah!

The Aussie dollar continues to take a peek through the curtains at the 80-cent level, but then backs away from the window. If commodities can put a tourniquet on their bleeding, I would think the Aussie dollar would be able to walk through the 80-cent door. Or… A Reserve Bank of Australia (RBA) The RBA doesn’t meet though until Feb 6-7… So this obviously gives us plenty of time to make a decision on buying Aussie dollars doesn’t it?

The data in the United States yesterday was a mixed bag of nuts and bolts. First off, PPI was strange, coming in higher than expected at 0.9%. The dollar rallied a bit… Then we had the TIC’s (net foreign security purchases), which once again were weaker than the previous month’s total. Net long-term portfolio inflows into the United States fell more than expected from $85 billion (revised up from $82 billion) in October to $68.4 billion in November and were below the average monthly foreign financing requirement (current account deficit and net foreign direct investment), which ticked up to an unsustainable $100 billion in the third quarter. The downtrend in portfolio inflows into the United States suggests the current rally in the U.S. dollar is unlikely to be sustained.

What really caught my attention in the data was the fact that U.S. stocks remain unattractive to foreign investors. Foreign investors reduced their net purchases of equities to just $1.7 billion (from $23.2 billion in October). So… despite the gains in the S&P since November, it appears that foreigners weren’t buying. Only U.S. investors are buying equities. There’s a message there… But then I’m not a stock jockey, so I won’t go into uncharted waters.

We finished off the day with the industrial production and capacity utilization duo. Some improvement in both pieces of data was seen… Albeit barely noticeable… So, the dollar didn’t get any love from the data yesterday…

Today, we have December CPI (consumer inflation), housing starts, and the Philly Fed Index, which has really been volatile lately. CPI, as the government reports it, is a ridiculous exercise in smoke and mirrors… But we have to play along.

Currencies today: A$ .7880, kiwi .6945, C$ .85, euro 1.2930, sterling 1.9695, Swiss .7990, ISK 70.08, rand 7.16, krone 6.4650, SEK 7.04, forint 195.30, zloty 3, koruna 21.55, yen 121.25, baht 35.25, sing 1.5375, HKD 7.8087, INR 44.33, China 7.7710, pesos 10.92, dollar index 85, Silver $12.91, and Gold… $634.41

That’s it for today… Longer than I imagined when I began… And not too much later than usual! Our little Christine reports for baby delivery this morning, hopefully we’ll get the news of boy or girl this afternoon! My little buddy, Alex has been under the weather this week with strep throat. I had that once, and thought it was the worst! So, I hope he gets better soon! Have a great Thursday!

Chuck Butler, January 18, 2007

The Daily Reckoning