The Big Dog Has Left The Porch

Good day…Well…A good day to be in currencies. And a bad day at Bedrock for stocks. But, shoot Rudy, stocks have been on a moon shot for so long now, that the currencies deserve a day in the sun without the sun block provided by stocks! What a dolt I was yesterday when I told you that the data began on Monday, when the data screen told me in bold letters that there were “NO SCHEDULED EVENTS TODAY.” But, you know me, I wouldn’t let that get in the way of a good data story!

Yesterday I talked about the thin volumes of last week providing the fuel for this currency rally, and that we could see some profit taking as the “boys” returned to their collective desks from their long weekend in the Hamptons. Well…we did see some profit taking right out of the starters blocks – but no carry through. And that got me thinking that maybe the thin volumes of last week did provide the fuel for the rally; but traders obviously agreed with the moves based on the thought that the U.S. economy was in store for a either a significant slowdown or recession.

This morning I turn on the screens, and the currencies are even stronger than they were yesterday! The thoughts of sugarplums and fairies for the U.S. economy are fading away…and with that fading away we will see a return of the deficit and funding fears, along with a narrowing of interest rate differentials.

Of course, if the dolts would have listened to me before now, they wouldn’t have wasted all that money buying dollars, when in the end, they all knew in their heart of hearts that eventually we would be back to the underlying weak dollar trend! So (in my best Governator voice) they listened to me then, but heard me now!

The currency rally now has more girth to it; unlike the thin volumes of last week…and that’s something I can get behind and support. It was a long hard row to hoe for the euro…but now that the 1.30 figure is in its rear view mirror, watch out! However, I don’t figure the moves from here on out to be as significant as those seen on Thursday and Friday of last week. But, the days of range trading two euros either side of 1.27 are over! YAHOO!

The pound sterling continues to take no prisoners with its assault on the dollar. Eight consecutive positive days of trading for sterling has it trading at a two-year high! Today, sterling is rallying again on the news that the Chancellor of the Exchequer, Gordon Brown, has said that U.K. growth will exceed the government’s forecast this year. (That’s a high-falootin’ title isn’t it? When really, he’s their version of Bernanke).

It’s about time the U.K. government got around to my way of thinking on the economy! But then, they couldn’t get too lathered up about the economy until the euro broke out of the trading range that had been in existence since May. You see, if the U.K. government got all lathered up about their economy, it would lead traders to believe that that meant higher interest rates, and a more attractive pound sterling…but the United Kingdom couldn’t risk having pound sterling going out on the limb of rallying currencies all by itself! The pound sterling still stands on its own, but the United Kingdom is still a member of the European Union…and a very large part of their trade goes to the Eurozone. If sterling is out on the rallying currencies limb by itself, trade goes to the dogs.

But now that the euro (the Big Dog) has left the porch to chase down the dollar, all the other dogs can join the chase too… and some may be faster than the Big Dog, but there’s no chase without him. I’ve talked about this for years now; so only new readers are hearing this analogy.

Did you hear that our Treasury Sec. Paulson has now drafted Chief Fed Head, Big Ben Bernanke to assist him with his China negotiations? That just cracks me up. What in the world is Big Ben going to add to the discussions? Instructions on how to print money? Anyway…one dingy, ringy…two dingy, ringy…Hello? May I speak to the President, George Bush please? Hold on…George Bush here, to whom am I speaking? Yes, George, this is President Hu, from China. I just wanted to phone you and tell you that we are willing to work with the United States to make our relations stable, sustainable and healthy. I will continue to seek more balance in our trade relations. OK?…Well, I must say, President Hu, that I’m quite pleased to hear this. Thank you for the call.

Think I made this up? Well…some of it…but the phone call to Bush from Hu did happen last night. Did you notice anything about what Hu promised? Again….there is no time frame for this to happen, and no explanation on how the Chinese will go about reaching these goals. You don’t think that Hu was shaking in his boots when he heard that Big Ben was coming to see him do you? HAHAHAHAHAHAHAHA! Right, and my first wife was a young Elizabeth Taylor…yeah, that’s the ticket!

Good things come to those who wait. Patience is a virtue. Ahhh…things that come to mind as we return to April 2005 levels in the currencies. Anyone that got into currencies for all the wrong reasons (thinking of a quick buck profit) have all left town with the circus. If I’ve said this one time in my life as a currency trader, I’ve said it a few hundred times…currency moves are long sweeping moves, not short term investments. And those of us who bought currencies to protect us from a falling dollar…to diversify our investment portfolios…and add a hedge to reduce the overall risk of our investment portfolio…well…we did it for the right reasons!

OK…enough of that! It’s not like something couldn’t happen today or tomorrow that would reverse this move! But if all things remain equal, the return to fundamentals will dictate the moves from here on out.

If only we could get the Asian currencies like Japanese yen and Chinese renminbi to jump on the rally tracks too! My bursitis is acting up from me beating the drum so long now for the Asian currencies…and while some of them like Thailand and Singapore have performed nicely versus the dollar, the Big dogs of Asia just can’t seem to get off the mat. On Friday, Japanese yen had gone into the 115 handle, and almost immediately the verbal intervention from Japanese officials began.

A move by the Chinese would certainly be welcomed, but I don’t see that happening anytime soon. Recall that I’ve said that I thought that renminbi would get to 7.50 by next summer…but I think the markets want something more…another 2-3% revaluation would really stir things up. So if you’re an Asian currency holder, you might want to put a 2-3% revaluation on your Christmas list!

The data does begin to print today, with Durable Goods and Consumer Confidence. At this point, Consumer Confidence had better be strong, or the dollar will see more selling. Existing Home Sales will also be on the docket for today – I don’t see this data as dollar friendly…so get prepared!

Currencies today: A$ .78, kiwi .6740, C$ .8845, euro 1.3150, sterling 1.9450, Swiss .8285, ISK 69.85, rand 7.1780, krone 6.30, SEK 6.8950, forint 196.90, zloty 2.92, koruna 21.35, yen 116.30, baht 36.33, sing 1.55, HKD 7.7745, INR 44.69, China 7.8440, pesos 11.08, dollar index 83.45, Silver $13.45, and Gold… $637.90

That’s it for today…Baseball’s Hall of Fame ballots go out today…and I know I could stir up a bee’s nest with this next statement…but I sure hope the writers don’t penalize Mark McGwire for his lack of testimony last year, and vote him in based on his 12 All-Star Games and 583 home runs…50 of which he hit his rookie year! Have a great Tuesday!

Chuck Butler
November 28, 2006

The Daily Reckoning