The Heat Is On...

Good day… Well… A wild start to the shortened week, fizzled out as the day went on yesterday, and in the end, we were left with basically the same currency levels VS the dollar as when I hit the “send” button yesterday…

However, I don’t mean to water down the trading activity that went on in the morning, as U.S. traders tried to play catch-up with the currency movements overnight. Right after I signed off yesterday morning, the euro fell 1/2-cent, only to turn on a dime and make a bee-line for 1.29, which it hit briefly before profit taking set in, and everything calmed down…

Yesterday saw some great numbers for Canada… The Current Account Surplus, of which you know that I believe is very important, came in stronger than expected for the first quarter posting a C$ 10.5 Billion figure, VS the forecast C$ 8.5 Billion… This C$ 10.5 Billion figure was below the 4th quarter’s record $13 Billion, but still… A very nice showing for Canada… And that spilled over to the loonie, which is now trading above the 91-cent handle VS the greenback!

Late last summer, I wrote in our customer only monthly newsletter, The Review & Focus, that Canada’s economy was juiced… That was based on the rising prices of coal, oil, natural gas, etc. And that scenario continues to bring about profits to Canada… Yesterday, a report printed showing Canada’s Producer prices rising sharply in April, largely due higher prices for petroleum and primary metals.

This report will keep the Bank of Canada intrigued… And at least interested in remaining in the rate hike game for now. This is “all good” for the loonie… Oh! If you live in the St. Petersburg, Florida area, did you see the story in the St. Petersburg Times yesterday regarding the Canadian dollar? The writer, Susan Martin, was kind enough to quote me, in her well written article.

Well… Yesterday, I was telling you about a “RUMOR” that Donald Evans would be named the new Treasury Secretary… That “RUMOR” didn’t pan out, as Henry Paulson was the actual person named to replace John Snow… The point of the discussion wasn’t really on “who” would be named Treasury Sec., but that a change was being made… The thought was that with the change of personnel, a change in currency policy could be made…

It will be interesting to see what Henry Paulson, who was the head of Goldman Sachs Group, will bring to the table with regard to China…

Remember the song from the mid-1980’s, The Heat Is On? Or how about the 1960’s, Heat Wave? Or there’s more… But I couldn’t get that 1980’s song out of my head yesterday after reading a story about the European Central Bank,(ECB) and interest rates… Yes, the heat is on the ECB… They made the markets wait in May for a rate hike, and now we’re sneaking up on June. As I said yesterday, I believe the ECB will make that rate hike at their June 8 meeting… But here’s the thing that’s most important… The ECB needs to keep talking tough, and how interest rates are still low, etc.

That will go a long way toward boosting the euro even higher, as we head to summer! Yes, recall last summer for the euro? It was the summer of discontent for the single unit, as two countries vote no on the European Union’s Constitution, France saw lots civil unrest, and we had all those rumors regarding Italy leaving the euro… Things got pretty bleak for the euro, but I kept telling you that the single unit just needed to put a 100 miles of desert between its hide and the Constitution votes, and all would be forgotten… Looks like that 100 miles of desert has been traveled by the euro, eh?

The news form India this morning is positive… India’s first quarter GDP grew 9.3% VS the forecast of 7.9%! Again… All of Asia is growing by leaps and bounds, unemployment in these countries is falling, and interest rates are either rising, on will be on the rise soon… Wait a minute… Hold that thought……… OK, I’m back now, I just went and screamed at the wall, The Asian currencies are not moving with a vengeance against the dollar like they should be!

Take the Indian rupee… A great GDP posting, and the rupee loses ground VS the dollar… However, I think that India is getting tarred with the same brush as all the other emerging markets that are being sold in what I’ve already explained as the newest “Risk Aversion”… Like I said yesterday, the good news is that the length of these “Risk Aversion” patterns normally don’t last very long.

I was asked yesterday about what my vision going forward for the Aussie dollar was… I hesitated, because these things always come back to bite me, and bite me hard! But… I had second thoughts… And got me thinking about Aussie dollars… While I think the move VS the greenback will be very slow but will eventually lead to the Aussie dollar trading back above 80-cents later this year…

The interest rate differential between Aussie and the U.S. is going to remain steady Eddie, and that leaves us with the fundamentals…

Speaking of which… We’ll see the Chicago Purchasing Manager’s report for May today, and the minutes of the May 10 FOMC meeting, which might hold a surprise… You never know!

Currencies today: A$ .7610, kiwi .6390, C$ .9135, euro 1.2880, sterling 1.8795, Swiss .8265, ISK 71.65, rand 6.64, krone 6.0850, forint 203.93, zloty 3.0650, koruna 21.9150, yen 111.90, baht 38.05, sing 1.5750, INR 46.35, China 8.0215, pesos 11.2750, dollar index 84.28, Silver $13.17, and Gold… $654.75

That’s it for today… The Big Boss, Frank Trotter left yesterday for the 4th Annual True Wealth Gold & Collectibles Conference, in Long Beach CA… If you’re going, make sure you stop by to say hi to Frank! I’ve just been asked to speak in Montreal Canada in September. When I know more, I’ll pass it along. Game one of 4 this week went to the “good guys” last night, as my little buddy got one hit, and got hit by a pitch… Have a great Wednesday!

Chuck Butler
May 31, 2006

The Daily Reckoning