The Loonie Wears An "S"

Good day, from sunny Central Florida! We’ve had a very nice time this week leading up to the start of the Money Show last night. Chris brought me all up to date, so I’ve got that going for me, eh? Speaking of ‘eh,’ I get so many people asking me if I was originally from Canada. Not so. I get the urge to add an ‘eh’ at the end of a sentence from years of listening to hockey games on the radio as a young man…long before hockey was ever shown on TV! OK, so now we’ve got that out of the way!

It’s also Groundhog Day, which by the way, is a favorite movie of mine. If I lived here in Central Florida, I wouldn’t care if “Phil” saw his shadow today or not! But back home in St. Louis, I do want to know if there will be six more weeks of winter!

Well, on Monday, as Chris told you, the Fed did raise interest rates 25 BPS, as expected, and then hit a fork in the road. After stopping to pick it up, they decided to go down the path of least resistance. They dropped the term ‘measured’ and downgraded the word ‘likely’ to ‘be needed’ in its reference to further tightening. I think this is a clear indication that we are nearing the end of the rate hikes. Like I’ve said for over a month now, we’ll get a rate hike at Al’s last meeting…and we did. We’ll get one at Ben’s first meeting in March. After that, who knows? But if there’s one more after that in May, I wouldn’t be surprised. I’m on the fence as to whether Big Ben will steer the Fed to that decision. There’s more that needs to be seen.

So, the Fed raised rates. The ECB is meeting as I type away in my hotel room. While I doubt the ECB will raise rates at this meeting, I believe in their effort to make their policy direction perfectly clear. How clear? Crystal! They will make a statement following their meeting today, signaling the need for higher interest rates. So, as I have expected, the ECB will most likely move rates higher in March, June and September of this year. Their rates will be going up. While the U.S. rates will have peaked.

People ask me all the time, “Why do you think the euro will rebound this year?” Well, that scenario above will go a long way toward euro strength. In addition, Germany’s economy is really gearing up. Germany’s manufacturing sector is really starting to show real bonafide signs of strength, and it looks like the German economy has pulled itself off rock bottom. With the outlook for new investment, exports, and job creation all giving indications that this recovery is for real, and that we now have prospects of better times.

The Bank of Canada is also looking to raise rates higher. Since their last rate hike two weeks ago, and the dovish statement that came out from the bank afterward, bank officials have been scrambling to set the record straight: They are hawks! Rates will go higher, which will be a real help to the loonie. This currency is so strong, instead of a loon on the coin, it ought to have a ‘S.’ OK, for you youngsters, the ‘S’ stands for the big ‘S’ that Superman wore on his suit!

Speaking of the Bank of Canada, I was sent this quote yesterday by The Bank of Canada’s Deputy Dawg, Paul Jenkins. It was titled “U.S. deficits must be resolved.” Senior Deputy Governor Jenkins said what the central bank has said all along, but put it in strong terms: “No country, even one as big as the United States, can keep increasing its external indebtedness as a share of its GDP. Ultimately, these imbalances will have to be resolved.” Jenkins told the Board of Trade in Saint John, New Brunswick, that “the U.S. current account deficit has widened – by about U.S. $300 billion since 2002, to U.S. $785 billion, or 6 1/2 per cent of that country’s gross domestic product (GDP). And the level of U.S. indebtedness to the rest of the world has more than doubled over the past five years to more than 25 per cent of its GDP.”

Wow! It sure is nice to see someone besides myself, and a host of good economists like Stephen Roach, and Nouriel Roubini, talking about this.

OK. You’ve waited patiently. The currencies yesterday were range bound. With really only the Canadian dollar/loonie looking strong versus the dollar. Overnight, there was not much action either, except from the Japanese yen. My, oh, my what is happening to this currency? It has fallen back above the 118 handle, on thoughts that the interest rate differential between Japan, the United States, and Europe is going to widen.

However, there’s a story out this morning that one of the central bank’s top three officials, Muto, said in an interview that the chances are increasing that the Bank of Japan’s deflation-fighting policy will end this year. That means that Japan could be coming off its 0% rate policy this year. That would be huge for the yen! For now, the markets have blinders on for the present…not the future. I would think that the more stuffing they beat out of yen, the more opportunity investors have to pick up the stuffing and make a stronger yen!

Now, back to Big Al and his last meeting. You know, I’ve been pretty hard on the Beaver over the years. And that’s because I just didn’t think that the dollar’s value was high on his hit parade. And now that Big Ben is stepping in with his inflation targets, the attention to the dollar will be pushed down even further on his hit parade, which is why I keep harping on the dollar bulls that keep buying the greenback. Why? Your own central bank doesn’t think much of the currency! If it weren’t for the grace of foreign central banks defending the dollar over the years, that downward slope that represents the dollar’s value since 1971 would look more like a straight line down!

So, go ahead, dollar bulls, buy all the greenbacks you want. You’ll be sorry, somewhere, sometime down the line!

Currencies today: A$ .7530, kiwi .6880, C$ .8750, euro 1.2060, sterling 1.7755, Swiss .7750, ISK 63.25, rand 6.1250, krone 6.677, forint 208.41, zloty 3.17, koruna 23.67, yen 118.50, baht 39.375, sing 1.6335, China 8.0616, pesos 10.46, silver 9.845, and gold $575.00.

That’s it for today. Not bad for doing this in my hotel room, with the lights all off so the rest of the family can sleep, eh? Yes, like one of our favorites on the desk, Billy Squire, I’m singing: “In The Dark.” There was no dollar index to report today. I don’t have the same screens on the road. The Big Boss, Frank Trotter, will be here today, and we’ll team up to do our EverBank/World Currency presentation. Tomorrow’s presentation will be Web cast, as I told you last week, so you might want to tune in. And then again, with the prospects of looking at my mug, you might not! HA! Have a great Thursday!

Chuck Butler
February 2, 2006