Refraining From Name-Calling

Good day. Well, the Fed did raise rates as expected yesterday, and the United States refrained from naming China a “currency manipulator.” Both of these items have given some strength back to the dollar. The euro, which traded above 1.28 most of yesterday morning, has moved back to 1.2715, and the yen, which traded in the 110 handle most of the day, has moved back to the 111 handle.

Applying the brakes; that’s all that has happened. The currencies have applied the brakes in order to slow down for that speed bump! But before I get into all of those thoughts, let’s talk about the two items at the top of the letter.

First of all, the Fed did indeed raise rates another 25 BPS, but more importantly, Big Ben’s press conference afterward showed that he and his Fed Heads are not ready to stop there. Yes, after 16 consecutive rate hikes started by our friend (NOT!) Big Al, Big Ben is not ready to stop. I guess he doesn’t believe the inflation reports that the government prints each month either! HaHaHaHa!

Big Ben did say that the data would determine future rate moves. Which data – the awful showing of jobs creation last month or the strong GDP from the first quarter? The collapse of mortgage applications last week (-5.8%) or increase in productivity? Come on Big Ben throw us a bone here. Oh! Now that would be a “Fed First.” I just think we’re still nearing the end. And, Big Ben wants to play this “game” as long as he can, given what he’s seen happen to the dollar recently!

OK. As I expected, the Untied States refrained from naming China a “currency manipulator,” but warned that it was “extremely dissatisfied with the slow and disappointing pace of reform of the Chinese exchange rate regime.” Of course, this was disappointing to the currency participants and those of us that would love to see the renminbi float to its fair value, but what this report really did was give the Japanese a “get out of jail free” card.

As I explained the other day, with the United States and Europe (and IMF) coming down hard on China for currency manipulation, Japan had to take its hand off the intervention gearshift. They didn’t want any fingers pointing in their direction, but now that the United States backed off of China, it has put the fear back into traders that Japan could intervene and wipe out profits. Bawk, Bawk, Bawk. What’s that? Did I hear a chicken? Hmmm.

However, I think this fear will pass soon enough. You see Japan’s economy is growing, consumers are spending again, and corporate Japan is well situated to absorb a stronger yen. So, as opposed to three years ago when the Bank of Japan made a daily visit to the intervention arena, Japan is stronger, and ready for a stronger yen!

I found some data that was interesting to me, last night. One of the negative darts thrown at the Japanese yen the past few years has been the strong appetite of Japanese investors for foreign bonds. Therefore, these investors would be selling yen, and buying (in most cases dollars) the cross currency to purchase the foreign bond. However, recent data shows that Japanese investors have shown almost no appetite for foreign bonds in 2006, and surveys suggest this trend will continue. This obviously removes a negative dart that can be thrown at yen! Just another reason to keep thinking that the Asian currencies, led by Japanese yen, will continue positive moves versus the dollar.

Almost lost in the shuffle of yesterday’s events was the printing of the April U.S. mothly budget statement, which printed worse than expected at $118.9 billion! OK. I read somewhere recently that the budget office had issued a report calling for a reduction of the budget deficit this year due to strong tax receipts. What happened? April’s result was double the March figure of $57.7 billion! And, I don’t even want to get started talking about how the Iraq war expenses aren’t even a part of the budget numbers!

Today, we’ll see retail sales for April, and as I said earlier in the week, the BHI tells me that we should look for some real strong numbers! So, if that plays out, the dollar will continue to hold onto gains it made yesterday, today. However, tomorrow, we’re going to see the March trade deficit. Here is where the buck stops, with regard to dollar strength!

Yesterday, the dollar strength didn’t deter gold from moving higher. The shiny metal is now trading at $708, a 26-year high! You know, I say all the time that gold continues to move higher on demand, world instability, and inflation fears. At the $708 figure, gold has now moved 29% since January 9th, 2006, when Iran resumed nuclear research, and the tough rhetoric with the United States began.

The pound sterling has rebounded from that bout of profit taking we talked about. It is moving higher this morning after a report showed that manufacturing expanded at the fastest pace in 11 months during March. It has now been nine months since the Bank of England threw a cat among the pigeons with a rate cut. Now, I think rate-hike talk is back on the table for the Bank of England, and that should be sterling-friendly!

In Iceland this morning, April’s inflation report showed an increase to 7.6%. I think this means the Icelandic Central Bank will have to raise rates at least 75 BPS at their meeting next week, to keep the heat off the krona.

Currencies today: A$ .7720, kiwi .63, C$ .9055, euro 1.2720, sterling 1.8655, Swiss .8155, ISK 70.35, rand 6.07, krone 6.10, forint 204.97, zloty 3.00, koruna 22.20, yen 111.10, baht 37.80, sing 1.5660, INR 45.07, China 8.0039, pesos 10.84, dollar index 85.03, silver $14.58, and gold $711.87.

That’s it for today. Gold was even higher when I did the currency round up! Wow! I had a great afternoon at the ballpark, yesterday. Albert Pujols is amazing! Haven’t mentioned my favorite show “24” lately. It’s really getting interesting with only three hours left! Hey! There’s still time to secure a nice gift for Mother’s Day. It’s this Sunday! Have a great Thursday!

Chuck Butler
May 11, 2006

The Daily Reckoning