Still Stressing "Vigilance!"

Good day. And a Happy Friday to one and all! A Jobs Jamboree Friday, the first day of September, and the Friday before a holiday weekend all rolled into one! Can’t get much better than that! Vermont was cold! Yech! I could actually see my breath the other night, and it was still August! Glad to be home, at least for a few days before I head off to Montreal at the end of next week. The liquidity in the markets will dry up once London heads to the pubs later this morning, and the New York “boys” head to the Hamptons!

The currencies have backed off their weeklong move against the dollar overnight. Eurozone manufacturing cooled its heels in August, which has led to some of the move downward. But quite frankly, what we’re really seeing is simply traders squaring up their books before the long U.S. holiday. I believe the move the currencies made versus the dollar before this position-squaring began last night is just a precursor to what we’ll see as we move along into September and then, the remainder of the year.

The ECB meeting yesterday did not yield any rate change, but that was widely expected. What we did see were two things that should keep the spotlight on the euro. First, ECB President Trichet stressed “strong vigilance” at the press conference, which opened the gates to the next rate hike coming in October. Second, the ECB raised the mid-point of their growth forecasts to 2.5% from 2.1% for this year. So, even with the rate hikes, the ECB sees growth in the economy, which will also keep the heat on the ECB to raise rates – probably two more times this year!

OK. Today is a Jobs Jamboree Friday. I see from the Bloomie that the “experts” are calling for a job creation in August to be around 125,000. The thing I saw that caught my attention was a headline that said the 125,000 would be the “most in five months.” If 125,000 is the most in five months, it pretty much tells you just how dreadful the past five months of job creation has been. I don’t know. Something tells me that the actual number will be disappointing. And if it is, those “squared” positions will have to be adjusted, as it would be very damaging to the dollar. And vice-versa if the number surprises on the upside.

Chris did a good job this week telling you about the rise in the New Zealand dollar/kiwi. Chris also was nice enough to leave me a note on his thoughts:

“The reason given for this rapid increase is reports showing higher inflation which should deter the central bank from cutting interest rates. But I have to think a lot of this move has come from a return of the carry trade. I think it is obvious that investors are again borrowing yen. It has been trading in a range from 116 to 117, while most other currencies have been rallying. As you remember, one of the biggest benefactors of the carry trade was the New Zealand dollar. Japanese investors and foreign hedge funds took the proceeds of the yen and purchased kiwi denominated assets.

“So, while the move we have seen from the kiwi over the past month is great, I think we need to be cautious on flocking back to kiwi. Remember just how quickly kiwi fell once the carry trade started to be reversed.”

Yes. I do recall that. And since I’ve been so vocal about how yen will become more expensive to borrow in the future after the Bank of Japan raises rates to a normal level, this needs to be monitored. There are probably more gains to be made in kiwi, but the wild ride to 70% gains that we saw from 2002 to 2004, will not repeat itself. At least that’s my opinion.

The Chinese renminbi has performed quite nicely this week, putting in the best week versus the dollar, since the peg was dropped last year. I told you last week that Chinese officials had called for the ability to allow the renminbi to have larger moves versus the dollar. It looks like they are getting their way! The good thing about this trend is that the other Asian currencies can get on board, and move stronger, too. Currencies like Thai baht, and Singapore dollars have been champing at the bit to make a move stronger versus the dollar, but have had a governor placed on them as they wait for the renminbi to play catch up!

British pound sterling continues to look quite perky versus the dollar. The currency has gained 10.5% so far this year versus the dollar, and I don’t see any “quit” in it yet. An economy that has surprised everyone (except some…not naming any names, except someone that called the Bank of England out last year for cutting interest rates. I wonder who that is. Could it be…nah). Anyway, all the fun aside, the Bank of England has much more rate-hike work to do, and will probably move along with the ECB in October and December, thus keeping the pound well bid going into the end of the year.

I just checked on the Iceland krona. The currency that got hit with a huge sell off that started in February and went through May. It was hit again in June. And, I see it continues to try to make up that lost ground. Since June 29th, the krona has gained 11%! Of course, it had lost 20% prior to that time. So, ‘wild ride’ would certainly be a correct phrase for this currency. The thing to think about here is that krona was also used as a “buy” currency in the “carry trade.” With interest rates over 10% in Icelandic assets, and the strong move, I have to believe this is fueling this currency’s move, too. So, as always with krona, be careful out there!

Currencies today: A$ .7645, kiwi .6550, C$ .9045, euro 1.2825, sterling 1.9050, Swiss .8120, ISK 68.77, rand 7.2275, krone 6.3175, SEK 7.26, forint 216.65, zloty 3.10, koruna 22.05, yen 117.20, baht 37.50, sing 1.5710, INR 46.52, China 7.9532, pesos 10.91, dollar index 85.05, silver $12.84, and gold $625.10

That’s it for today. The weatherman isn’t giving us a “thumbs up” on the holiday weekend weather here in St. Louis, so hopefully he’s completely wrong, and I won’t go into any side comments about weather forecasts! Well, I must be running late, as our accountant-supreme Mary Owens just came in. I want to get everyone out of here today to start the holiday weekend right, so have a great Friday and Labor Day Weekend!

Chuck Butler
September 1, 2006

The Daily Reckoning