The Bank Of Japan Says Game On

Good day. Well, the big news overnight came from the Bank of Japan, where they did not disappoint us! For once, they brought the bat and the balls and said game on! (It’s too bad somebody forgot to tell Team USA that the game was on, as they were defeated by Canada, yesterday! UGH!)

OK. First of all, the currencies spent yesterday range bound, as no one really wants to take a position or direction with the Jobs Jamboree hanging over the markets head like the Sword of Damocles! Now that I’ve gotten that out of the way, let’s roll the tape and see what the Bank of Japan had to say!

After five years of fighting deflation and three different recessions during the past 15 years, the Bank of Japan (BOJ) signaled a huge change in their monetary policy. The BOJ feels, as I do, that the economy is strong enough to stand on its own, and therefore, the Bank of Japan has cut the cash they provided to lenders by 80%! The Bank also feels, as I do also, that the economy is ready for a rate hike.

One of the keys of the meeting is that the BOJ has set an inflation target of 0-2%, which to them probably sounds pretty easy to maintain. Well, I’ve got news for them: If the price of oil spikes up again, they will be hitting that target in no time, which simply brings the future rate hikes to the table sooner!

Recall what Stephen Roach was talking about yesterday in my Pfennig: “Financial markets are impatient beasts. As soon as the broad consensus of investors gets a whiff of a major change brewing in the underlying macro fundamentals, they begin to re-price securities accordingly.” And this move in Japan would be considered a “major change!”

The yen did gain about 3/4 yen after the meeting. It is not as much movement as I would have thought, but then, you know me, I don’t know how the yen is going to get to 100 if it doesn’t get to 115 first!

I have to talk about something now that I wish I didn’t have to. You see…I think we’re beginning to enter into a period of “risk aversion” with the currencies. Why? Well, I think it ties to what will supposedly happen on March 20th, 2006: The opening of Iran’s oil bourse. This has “major crisis” written all over it, and therefore, as we draw closer to the day, the “Emerging Markets” currencies are getting sold – and sold hard! Mexico, South Africa, Brazil, Iceland, China, India, and a host of other lesser-traded currencies have all seen major selling.

Now, what happens if Iran opens their oil bourse, and a war doesn’t break out? Well, then I see the dollar depreciating, but not right away. It will take time to see if their bourse really does attract the business that a lot of observers are saying it will. Of course, if it gets any where near the size that some people are saying it will, it would mean the end of the road for the dollar as a reserve currency.

However, I’m not in that camp; I see the whole thing hurting the dollar, but how much is the question. All I know is that if the bourse works, it can’t be good for the dollar! Which leads me back to the questions I’ve been asking the dollar bulls: With this event pending, how can you be buying dollars? Why isn’t gold going through the roof?

There are still questions as to whether the oil bourse will work, but still, just the threat of this happening should be enough to push the dollar way, way down! And then, there are also the conspiracy campers that believe the opening of this bourse will bring about a war with Iran. Geez, I sure hope that idea is far fetched!

OK, enough of that! Both the Reserve Banks of Australia and New Zealand left their benchmark/official cash rates on hold last night. Australia showed a very nice gain in employment in February, as more than twice the expected jobs created were booked. Australia retained their “tightening bias” with regards to rates. This latest jobs report tells them they did the right thing!

Over at the RBNZ, Governor Bollard had this to say about the interest rate policy: “As long as these inflation risks remain under control, we do not expect to raise interest rates again in this cycle. However, given the time that it will take to bring inflation back towards the mid-point of the target band, we do not expect to be in a position to ease policy this year.”

Bollard also said that he thought kiwi to be “unjustifiably high.” Do you remember after the last election in New Zealand, when my old friend, Don Brash, lost? This guy Bollard was going to maintain is position at the RBNZ. Yes, I said that Bollard wanted a weaker kiwi. Well, that’s what he’s got, and if he’s not careful, he’s going to get an even weaker kiwi! If there’s one thing that’s stuck with me over the years of following currencies, it’s this: When a central bank comes out over and over again and says they want a weaker currency, eventually the markets give them what they asked for and, unfortunately, more!

St. Louis Fed President Poole – you know, the non-voting Fed member that keeps spouting off about this, that and the other thing, and the markets follow him around like an old E.F. Hutton Commercial – was at it again, yesterday. Here is something he said that caught my attention: “Poole Says Housing To Stabilize Because Inflation Will Be Low.” Wait a minute here! Didn’t he just say the day before that the Fed would err on the side of slowing things down rather than risk inflation? Which side of your mouth is the next statement going to come from Mr. St. Louis Fed President?

OK, back to reality. The January trade deficit will be printed today, and it is expected to top December’s awful showing of $65.7 billion. Yes, the experts have it pegged at $66.5 billion, but I’ll bet you a dollar to a Krispy Kreme that the markets hardly notice it, unless it comes in much wider on either side of the forecast. That’s because the lemmings have all decided to follow the “Deficits Don’t Matter” mutterings of the dollar bulls, and the government officials.

In my opinion, one day these lemmings will be sorry that they went down that road.

Currencies today: A$ .7370, kiwi .6515, C$ .8670, euro 1.1935, sterling 1.74, Swiss .7625, ISK 69.10, rand 6.26, krone 6.72, forint 216.18, zloty 3.2450, koruna 24.02, yen 117.20, baht 39.02, sing 1.6250, China 8.0490, pesos 10.68, dollar index 90.43, silver $9.8750, and gold $546.90

That’s it for today. Another long day at the office has me “dragging the line,” as Tommy James used to sing. Our Metals Select is off the ground and running. We’re still working on a “MarketSafe Energy CD.” We have a lot to do and only so many hours in a day! But, hey, this is an exciting time for us, so you won’t hear me complaining! Have a great Thursday.

Chuck Butler
March 8, 2006