The Bank of Canada Disappoints!

Good day. Well, it’s another ho-hum day in the currencies, except the loonie, which got taken to the woodshed when the Bank of Canada (BOC) did leave rates unchanged as most of the market participants had thought they would.

But not me! Recall, yesterday, I said I was looking for a big strong limb to climb out on, because I thought the BOC would do the right thing and keep the rate hikes coming. But Noooooo! BOC Governor Dodge not only let me down on this decision, he let the loonie down, too. Just yesterday morning there was a housing report that printed, and I said to the desk-mates that I sure hoped the BOC had taken a peek at the report before they made their final decision.

Housing starts rose in June to 232,200, above the consensus call for a 220,000 print. This goes against the recent falling trend in Canadian housing, and should have been a bullish number for the loonie. However, the BOC decided otherwise. And this is what really gives me a rash about this decision. The BOC acknowledged that the economy grew at a faster-than-expected pace in the first half, and that core inflation rose to 2% “slightly sooner than expected.”

If you make this kind of statement, shouldn’t you be raising interest rates? With oil prices soaring again, shouldn’t you be raising interest rates? The BOC is behind the Fed in the rate cycle, and while I believe the Fed is nearing an end, the BOC should be racking up the rate hikes. Now, if inflation does kick up a notch or two, the BOC will have to come back to the rate hike table, and start the fight all over again. I’m not happy with the BOC and Governor Dodge on this one.

The loonie, or Belle of the ball, is bound to suffer in the short term because of this decision. However, I’m not changing horses in the middle of the stream on commodities and commodity currencies. I still believe commodities are in a bull market, and the commodity currencies, like the loonie and Aussie dollar, will benefit from higher commodity prices.

Whew! That was long winded! Another currency that didn’t fare well yesterday was the Indian rupee. But that was terrorist driven, as bombs exploded on trains in the financial sector.

Today, we’ll see May’s U.S. trade deficit, which if you recall last month, the media got all lathered up because the deficit didn’t widen as much as forecast. It’s still on pace to break $800 billion this year, but don’t let that get in the way of a warm and fuzzy story from the media! Anyway, May’s trade deficit is forecast to widen again to $65 billion, which would be the third largest on record.

Again, let me say that this trade deficit isn’t just about the price of oil. All you have to do is look at the trade deficits with Japan and China. The last time I checked, these two countries don’t export oil to us! And here’s something that is a kissin’ cousin to the trade deficit: Yesterday, the Fed reported that U.S. consumer credit rose 2.4% in May, and that revolving debt, like credit cards, had jumped by 10%!

Now, I fully understand that some people use credit cards to buy everything to build up reward points and then pay them off at the end of the month. Shoot, Rudy, I’m even on board with that one, but I see this jump in credit cards as an indication that the ATM in the house has stopped shooting out cash, and now consumers are using those credit cards to get their daily “fix” of cash to spend. Just my view from the cheap seats, folks. But I wouldn’t be surprised one iota to see at some time in the future credit being blamed for a lot of problems. And then I’ll say, “See, I told you so!”

The Bank of Japan (BOJ) begins their two-day meeting tonight, with the announcement of a rate decision due tomorrow night, which I’ll first see when I turn on the screens Friday morning! As I’ve been writing for some time now, I fully expect the BOJ to end their zero interest rate policy with a rate hike. Now, afterward, I fully expect the BOJ to talk about how the markets shouldn’t expect further rate hikes, and all that baloney, to keep the yen from getting too strong.

However, recall last December when the ECB first raised rates and all the ministers were singing from the same song sheet, telling us that we shouldn’t expect further rate hikes, blah, blah, blah, blah, blah! I said at the time that they were simply trying to keep a lid on the euro moves. And that has come true, given the fact that they have raised rates two more times since December and have all but put the frosting on the next move on August 3, 2006.

As I said yesterday, I think Japanese officials are doing their best to get the yen weaker ahead of the meeting so that after the rate hike is announced, the yen move will be a wash. Well, I hate to say it, but here we go again. Japanese Finance Minister Tanigaki said this last night: “deflation is not yet over, there is no need for the BOJ to rush in ending the zero interest policy, and inflation is not a concern for Japan.” Oh well, he’ll have to learn soon enough that the BOJ is in a new rate-hike cycle!

Speaking of central banks and their rate cycles, Sweden’s Riksbank has been on the rate hike cycle too. It’s making the Swedish krona look much healthier! I fully expect the Riksbank to raise rates again when it meets next month, so that it can keep pace with the ECB and keep the krona strong versus the euro. The by-product of this is a strong krona versus the dollar, which so far this year has seen the krona gain over 10% versus the dollar!

I see where the U.S. Budget Office is blowing its horn over increased tax receipts and the lowering of the budget deficit. That’s great! Love to see it! I would also love to see the costs of the Iraq war accounted for somewhere. Oh, and let’s not forget that there are probably a dozen spending bills finding their way to the president’s desk!

On Friday, we’ll end the week with retail sales for June. The BHI tells me that we should expect a stronger retail sales number in June. For new readers, the BHI is simply my gauge for retail sales. Long ago, I noticed that if I took count of the shopping bags that entered the Butler household during a month, it gave me an indication of what the national number would look like. The BHI, or Butler household index, has almost always been a great indicator.

Currencies today: A$ .7540, kiwi .6175, C$ .8815, euro 1.2740, sterling 1.8410, Swiss .8130, ISK 74.25, rand 7.13, krone 6.25, SEK 7.20, forint 218, zloty 3.1750, koruna 22.39, yen 114.90, baht 37.85, sing 1.58, INR 46.23, China 7.9917, pesos 11, dollar index 85.64, silver $11.77, and gold $646.85

That’s it for today. Another loss for the National League at the All-Star Game last night. When I was a young man, the National League won all the time! I’ll be heading to Washington, D.C., tomorrow for a quick trip. So, Chris will have the con with the Pfennig on Friday. Then, I’ll have one week back home before a full week on the road to Vancouver for the Agora Wealth Symposium. I talked about this Agora people last week, but since then, I’ve learned that one of my all time favorites, the Mogambo Guru, is going to be there! Chuck and the Mogambo? Imagine the newsletter that would result from that kind of union! HAHAHAHA! Have a great Wired Wednesday!

Chuck Butler
July 12, 2006

The Daily Reckoning