The Reserve Bank of Australia Comes Through

Good day…Whew! Aren’t you glad that the mid-term elections are over – along with all their ads and finger pointing? I sure am! How was your polling place? I live in a small town, and it was not exactly as smooth as in previous years. But I kept telling myself that it could be worse!

OK…Onto other things! First, the currencies really found some air in their sails yesterday morning, as the U.S. traders picked up on the two things I told you were giving the overnight crowd a bias to sell dollars – 1. The Yellen speech, and 2. The Fukui speech. Adding to the mix were some wild rumors going around about the upscale builder, Toll Brothers; they turned out to be just that – wild rumors. But Toll Brothers did talk about a horde of cancellations for homes, and that they did not see an end to the housing problems.

The euro pushed past 1.28 and was tacking the headwinds of the election polls very nicely…when along came a story about how OPEC members don’t believe their bothers in barrels are complying with the production cuts. That was followed by a report that showed U.S. oil supplies to be high. These two things knocked the stuffing out of the price of oil, which then carried over to gold, as the thighbone is connected to the knee bone, etc. Gold weakness led to dollar strength, and by the end of the day, all the gains in the currencies had been wiped out. UGH!

However, AND THIS IS NOT A POLITICAL STATEMENT, the news overnight that the Democrats had gained control of the House for the first time in 12 years has caused the dollar to back off again. Observers are already contemplating whether the Bush tax cuts will survive…which if they didn’t, would cut back spending, which would cut back economic growth, etc. I don’t know how they can already make claims like that, but they have.

Last night, the Reserve Bank of Australia (RBA) came through as I expected and raised their key interest rate 25 BPS to 6.25 percent. Those in the markets that didn’t believe this would happen had better pay closer attention to the Prime Minister when he says that “a rate hike is on the way.” This is exactly what PM John Howard had said the night before; the rate move has underpinned the Aussie dollar, as expected it would. Now we just need to see some follow through!

Yesterday, I told you I believed that the Aussie dollar should be an 80-cent currency. Well, Stephen Koukoulas, chief Asia-Pacific strategist at TD Securities Ltd, in Sydney believes that “there are plenty of reasons for offshore investors to want to participate in the Aussie market on the running yield” and that “the currency will reach 84-cents in the first quarter of 2007.”

That’s a strong forecast for the Aussie dollar, and it doesn’t mean it will come true. But I wanted to point out that I’m not the only one that sees good times ahead for the Aussie dollar.

Tomorrow, the Bank of England’s Monetary Policy Committee (MPC) meets, and as I’ve said for a month now, I fully expect a rate hike from them. Going into the meeting, the MPC will know that U.K. Consumer Sentiment has just risen to a nine-month high! I think that this report will lead the MPC to not only hike rates tomorrow, but again in 2007.

As you know, I’ve been writing about the fact that China would reach 1 trillion in reserves (mainly dollars) by the end of the year. Well…last night the Chinese reported a surge in their Trade Surplus for October to the tune of $23.8 billion. Talk about something that will strain a relationship! With the mid-term elections over with, I can see lawmakers like Schumer and Graham crying “foul” and setting their sights on the renminbi exchange rate – which, by the way, continues to gain versus the dollar, setting yet another new record high (since the peg was dropped).

So get ready to listen to all that talk about tariffs again.

I received a note from a gold trader that outlined how his research team was thinking about the relationship between gold and the mid-term elections. Basically, all of the scenarios played into a stronger level for gold. You have to admit that the performance of gold in the past six weeks has been quite impressive…and makes much more sense moving in small pieces with some profit taking each day. This past spring’s surge was really out of control. But now we seem to be moving with the fundamentals and not being fed huge amounts of investment by hedge funds. At least that’s how it seems to me.

Currencies today: A$ .7710, kiwi .6695, C$ .8850, euro 1.2795, sterling 1.9085, Swiss .8015, ISK 68.25, rand 7.36, krone 6.4475, SEK 7.15, forint 204.50, zloty 2.9990, koruna 21.9180, yen 117.50, baht 36.65, sing 1.56, HKD 7.7848, INR 44.69, China 7.8663, pesos 10.8540, dollar index 85.29, Silver $12.57, and Gold… $621.55

That’s it for today…Pretty foggy out this morning. Not as bad as the fog at the college football game last night between Northern Illinois and Toledo. Crazy stuff! I was reading one of my faves (and friend) the Mogambo Guru’s weekly letter yesterday and almost fell out of my chair laughing. If you don’t read it on the Daily Reckoning, you should. He gets to say a lot of the things I would say, if I weren’t sponsored by a bank! HAHAHA! Have a great Wednesday!

Chuck Butler
November 8, 2006

The Daily Reckoning