The Honeymoon Is Over

Good day. Well, I trust you had a nice weekend. We sure did here in St. Louis. The Butler boys survived the weekend without supervision! HAHAHA! My beloved Cardinals are beginning to play better. I hope that continues. G-7 finally got off their duffs and said something about the currencies other than that they wanted “more flexibility.” This time, they’ve really gotten the currencies to shake rattle and roll!

The Group of Seven industrialized nations (G-7) stepped out and decided to do something about the global imbalances. The G-7 called for faster appreciation of the currencies in the Asian region. The G-7 even went so far as to say that it was “critical” for the Asian currencies to let their currencies rise versus the dollar.

“The honeymoon period is now really over,” Jan Lambregts, head of research at Rabobank Groep, said in Singapore. “The world is really starting to pressure China. There will be appreciation pressure on Asian currencies.”

So, it’s all coming together for the Asian currencies. Sure, the Asian central banks will attempt to “manage” the gains made their currencies, by intervening and selling their own currency, but those will be temporary blips, and should be used as opportunities to buy!

The dollar has been sold like hotcakes at a state fair, overnight. It will be interesting to see if that will continue once the U.S. traders arrive. I would imagine so, but you never really know. You just never know. The thing I keep thinking about is the story I told you on Friday – about Big Ben sending a letter to lawmakers telling them, “If dollar declined sharply, it would not necessarily disrupt markets.” I said, at the time, I thought he was giving them a “heads up.” And then, right after that, G-7 comes out with their call for Asian currency appreciation. Hmmm…smells a little fishy to me!

On Friday, we saw the euro and other currencies rally back a bit on the day after a story hit the streets that was quite interesting. Recall, I told you on Friday that Sweden’s Riksbank had told everyone that they had reduced their dollar reserves in favor of euros. Well, in the face of Riksbank’s reserve adjustments away from the dollar, we had the Russian Finance Minister comment on the reserve status of the dollar. Let’s listen in to see what he had to say: “The U.S. dollar is not the absolute reserve currency”

OK. I know – what does the Russian Finance Minister know? But, as we have visited a few times in the past couple of years, foreign central banks continue to make noise about their currency reserves and how they need to adjust the dollar portion of the total reserves. This is a great conspiracy story, and one I can really sink my teeth into! Was the Russian FM tipping his hand, and the hands of other central banks? We’ll have to wait and see, eh? I’m guessing that he did, but that’s just a guess at this point!

On Friday, my long-time friend, Ed, sent me this note: “With the world in its present state, a move into hard assets makes complete sense,” said Michael Fitzpatrick, vice president of energy risk management at Fimat USA Inc. in New York, “Any decline in oil should be looked at as a buying opportunity.”

Given how George mishandled Mr. Hu, I would not be surprised if China started spending it’s dollar reserves on all the crude oil supplies they can purchase – at any price. What will be more valuable to their economy next year, $75 U.S. dollars or a barrel of oil?

OK! The spin is coming out already! Now, onto precious metals. One day after the big sell off of gold and silver, they came roaring back – and rightly so! As the gentleman above said, “a move into hard assets makes complete sense.” The good news around the campfire is that gold and silver did not go into a multi-day sell off.

Gold has really been telling us that 1. There is too much instability in the world today, 2. Inflation is higher than what the reports say it is, 3. Investors now understand better than in the past how important it is to diversify their investment portfolios with different assets – assets that don’t have the same pricing mechanisms as their other holdings. Currencies and precious metals fall into that category!

On the EverBank World Markets trading desk, we are always running a program on our Bloombergs called “WCRS.” This program will give us returns of currencies versus the dollar for different time periods. We’re always running it for year-to-date figures. Last week, we noticed that for the first time in a long time, more currencies have positive gains versus the dollar this year. That’s the other way around! That feeds back to my comment last week about the dollar’s negative momentum!

There’s a traffic jam of data due out this week both in the U.S. and in the Eurozone. I’m hearing that the U.S. data will show strength for the first quarter. Well, that may be, but remember this. A star burns the brightest right before it stops shining altogether. The Eurozone economic data should show that the recovery continues to move along, and that the previous rate hikes have not hindered the recovery in any way. When we get to Friday, we’ll see the April CPI data. It’s expected to inch up (due to oil prices) to 2.3%. If that is to come about, the ECB will have more than enough powder to get wet whenever they decide to raise rates again. Recall, I have called for a June rate hike.

Tomorrow, the Bank of Canada meets, and I’m calling for them to raise rates 25 BPS. This should be a “no brainer,” but stranger things have happened! And don’t look now, but the loonie has passed through the 88-cent level!

And finally, the Mexican Central Bank lowered interest rates 25 BPS on Friday, which doesn’t help the peso. But then, the Mexican Central Bank announced that they had probably reached the end of their interest-rate-cut cycle. That should be good for the peso. You just have to be sure that “probably” means “for sure.”

Currencies today: A$ .7470, kiwi .6360, C$ .8810, euro 1.2385, sterling 1.7910, Swiss .7880, ISK 76.85, rand 5.9925, krone 6.33, forint 212.10, zloty 3.12, koruna 22.94, yen 115, baht 37.55, sing 1.5870, INR 44.95, China 8.0165, pesos 11.03, silver $13.08, and gold $638.50

That’s it for today. I’m writing from home this morning, as I have to hang around the house and get my little buddy on the bus for school before I head in. On Thursday, I head to Puerto Vallarta to speak at the International Living conference. I’m back home two days next week, and off again to Atlanta for the Atlanta Conference. Then, home for a week before I head out again to Las Vegas for the Las Vegas Money Show! Whew! I just got worn out typing that! Anyway, if you’re in the Atlanta or Las Vegas area, get registered for the show and come out see Frank, Chris and me! Have a great Monday and week!

Chuck Butler
April 24, 2006

The Daily Reckoning