Running Into Resistance

Good day. Yesterday, we saw another wild trading day in the currencies. The FOMC minutes caused all the commotion, not only in currencies, but stocks, too! Yes, the FOMC minutes were dovish. Be careful here, because this could be a trap. Just because the minutes sounded dovish, doesn’t rule out the chances of another rate hike in May.

Well, the euro put in a nice performance versus the dollar yesterday, climbing all the way to 1.2370 in the late afternoon. The funny thing was that just a few minutes before hitting that figure, I told the desk that there was rumored strong resistance at 1.2370. Right about that time, 1.2370 was hit. You should have seen the euro back off that level in a New York minute! It had indeed run into resistance.

As I always tell you when a currency makes the first run at a line in the sand (resistance), it will fail to break through. But, that won’t be the only attempt at 1.2370, and once the euro breaks through…look out! Don’t forget that if a currency makes several attempts to break through, that spells sell off for the currency. In this case, I expect the euro to break through with no problems.

I say that because of all the other movements versus the dollar by the Big Boys: the Japanese yen, Chinese renminbi, U.K. pound sterling and Canadian loonies. It’s all starting to come together for the currencies – and pretty quickly too, I might add. This is a bit concerning to me, given the fact that when an asset runs up too fast, it usually makes a visit to lower levels soon after to “fill in the gaps.” We’ll have to see if the markets believe this is too fast. If they turn the other cheek, then watch out, dollar!

Overnight, the Chinese renminbi had its biggest advance versus the dollar since the peg was dropped (last July). It’s funny how that happens the night before Chinese President Hu visits Washington D.C. Yeah, funny. Last night’s move puts the renminbi’s total gain versus the dollar since the peg was dropped, at 1.2%. Add that to the 2.1% revaluation when the peg was dropped, and the total gain has been 3.3%. No great shakes, but it’s better than a sharp stick in the eye! Ouch!

However, 3.3% is not going to cut it in Washington D.C., as these people believe that all the cures their ails resides in a stronger renminbi versus the dollar. They have no idea, but as long as they stomp and whine about how the renminbi needs to get stronger versus the dollar, the more it should signal to investors that they want the dollar weaker. Sooner or later, the traders will get off the SIRT they’ve been smoking and realize this!

Monday, I highlighted Thai baht, telling everyone that baht was a player. But, it’s not the only player in Asia. The baht just happens to be one of the few players in Asia that pay interest, but on that list of non-interest paying currencies is Singapore dollars. Yesterday, I told you that China had posted a +10% GDP in the first quarter. Well, tiny Singapore is proud of their +9% GDP, too! Manufacturing is up 16% in the first three months of 2006, proving that Singapore’s boost in GDP is not made of fluff and defense spending!

This brings me to a thought that I shared with Frank Trotter the other day: global growth is showing up everywhere. Interest rate hikes are popping up all over, and there is just a general good feeling about how all these countries are growing. The roll call is long, but here are some of the Asian countries cooking with gas these days, that we deal in: China, Japan, Thailand, Singapore, India, and Hong Kong. 

In Europe, growth is on the rebound, too! I’ve chronicled the growth in the Eurozone, but have not talked about the rest of Europe. Norway, Sweden, Switzerland, and Denmark, have all posted their own contribution to global growth. Things are really looking up with regard to the currencies.

No longer do I have to defend the Eurozone economy and say it doesn’t matter, because the euro is the offset to the dollar and things are worse in the United States. Now, I can say economic recovery is in full bloom in the Eurozone, the ECB is on a rate hike cycle, and they are running a trade surplus! These are all reasons to buy the euro.

On Monday, I told you that I thought India’s central bank would raise interest rates at their Tuesday meeting, because of higher oil prices putting inflation pressures on the economy. Well, yesterday India’s central bank decided to keep rates unchanged, saying that they believed their proactive monetary policy stance has contained inflation and inflation expectations. However, they added that inflation may end up higher than now, and they may need to monitor and respond appropriately.

I guess I’m OK with that decision. However, I would much rather see them tear a page out of the reserve banks of Australia’s and New Zealand’s manuals on fighting inflation, and raise rates when oil prices are rising instead of waiting for them to put pressure on the economy. On the good-news front, S&P has just raised India’s rating outlook to “positive.”

Are oil prices rising or what? OK, where are all those young dudes that carried the news that oil prices were going back to $40? I sure hope they stop rising soon, but I knew in my heart of hearts that the increased demand from India and China, where we never had to share oil before, was going to bring the price of oil back to $70 – and it has! Of course, I would have rather been wrong about it and only paying $1.50 for a gallon of gas!

And, I’m not trying to sound like a broken record, or scratched CD for the young crowd, but gold and silver rallied again yesterday and overnight. There was some tough rhetoric going back and forth between the United States and Iran, yesterday. It helped to push gold higher, oil higher and my blood pressure higher! Yesterday, President Bush said, “all options are on the table to keep Iran from developing nuclear weapons.” Please, will everyone calm down?

My trader friend at RBC just sent me a chart on the commodities index, and if you are a chartist, you probably are concerned with the pattern. I have to say, the commodities have really been blown out of the water here in the past two weeks. So, a correction is not out of the realm of possibilities!

Now that I’ve said that, I’ll tell you that the commodity currencies of Australia and Canada, with New Zealand tagging along, have all hit pay dirt, again. Australia hit the 0.7440 level. Canada hit the 0.8785 level, and New Zealand hit the 0.6350 level. That’s just awesome performance.

Today, we’ll see the trumped up CPI for March. Long-time readers know that I totally dismiss this piece of data due to the way it is put together. It totally underrates the inflation level in this country, but we get the March report today, and I don’t expect any currency movement from it – that is…unless they decided to come clean with the report! HAHAHAHA!

Currencies today: A$ .7440, kiwi .6350, C$ .8785, euro 1.2355, sterling 1.7855, Swiss .7865, ISK 77.56, rand 5.9710, krone 6.3370, forint 214.22, zloty 3.16, koruna 23.10, yen 116.85, baht 37.65, sing 1.5970, INR 45.10, China 8.0137, pesos 10.92, dollar index 88, silver $14.26, and gold $626.15

That’s it for today. Well, I nailed that housing-starts forecast, yesterday! I said the number would be weaker than forecasted, and that it was. Sure looks to me as though the benefit the economy got from housing the past four years is about to end. Wait, what am I doing here? This part of the Pfennig is supposed to be reserved for little slices of news and fun! Anyway, our hockey team, the St. Louis Blues, put an end to a real bummer of a season. It’s the first time they’ve missed the playoffs in over two decades! Ugh! It’s “Wired Wednesday,” so we’ve got that going for us, eh? Have a great Wednesday!

Chuck Butler
April 19, 2006

The Daily Reckoning