The Trade Deficit Revisited…

Good day. Not much new going on in the currency markets this morning…there’s still a bias to buy dollars, and all the hawkish talk by central bankers is being swept under the rug. The dollar’s move to the lower end of the 1.25 level in euros was put on hold overnight as traders were reminded that the U.S. trade deficit for August will print this morning. This Pfennig will be short-n-sweet today, as there’s just not much new to talk about.

Yes, we’ll see the August U.S. trade deficit this morning. At this point the experts think it will come in around $66.7 billion vs. July’s $68 billion. I can tell you right here, right now that the media will see this and proclaim that the trade deficit “narrowed,” and sound the “all clear” horn on the trade problem. Never mind that even at $66.7 billion the United States is still on course to threaten last year’s record trade deficit! No way, the media will pick up on that! There’s no “feel good” story to that way of looking at the deficit!

However, if the trade deficit doesn’t play along with the experts and their forecast, we could see some real movement in the euro / dollar; meaning a bias for euros if the trade deficit is larger, and look for an increase in the bias for dollars if the trade deficit has narrowed more than expected.

I have to tell you though that while the long-term trend weak dollar trend still remains in place, the short term seems to look brighter for the greenback. The BLS announcement last week of adding 810K jobs next spring really threw a cat among the pigeons, and has completely changed the market’s outlook for interest rates in the United States. And we all know how the dollar fared while the Fed was raising rates every six weeks for over two years, don’t we! So…don’t be shocked to see short-term dollar strength.

The FOMC meeting minutes printed yesterday, and the Fed Heads were all expressing their inflation fears, which really lathered up the rate hike campers, and more dollars were bought. I guess they did do something besides play “battleship” at the meeting!

I see where China’s trade ministry has announced that they have plans to balance trade by 2010. I find this to be quite an undertaking, given they will probably have a surplus this year of $200 billion! Not unless there’s a major change in the currency policy…could this be the wink and nod from the trade ministry that a currency policy change is on the way? I doubt it. Can they achieve this lofty goal? Again…I doubt it. Look at Japan…remember when lawmakers in the United States were all over Japan like a cheap suit to reduce their Trade Surplus? They never did…and as I said above, I doubt the Chinese will achieve their goal either.

More good news from Australia this morning that will be used by the rate hike campers as evidence that a rate hike is needed. August Australian employment rose 31,500, more than six times the “forecast amount” by economists. This plays right along with what I told you yesterday that new Reserve Bank of Australia (RBA) Gov. Stevens said in his first meeting. I said yesterday that I fully expected a rate hike from the RBA in November, and today that’s just confirmed as far as I can see! November 7th. Book ’em Danno!

Things continue to get back to normal in Thailand. Consumer confidence has bounced back after hitting a four-year low in early September. An economist with Standard Chartered Bank says that Thailand’s economy will probably grow 5.2% nest year, after the political stalemate was resolved after the bloodless coup. The baht continues to be a Steady Eddie during the change over in the government, and would look to be a good performer going forward. There’s an interim prime minister, along with a government in place to make sure things continue to get back to normal. Things are looking up here.

Currencies today: A$ .7497, kiwi .6610, C$ .8810, euro 1.2550, sterling 1.8570, Swiss .7875, ISK 68.65, rand 7.6550, krone 6.7323, SEK 7.3675, forint 212.40, zloty 3.12, koruna 22.55, yen 119.40, baht 37.50, sing 1.5870, HKD 7.79, INR 45.6125, China 7.9143, pesos 10.9757, dollar index 86.99, Silver $11.30, and Gold… $575.50

That’s it for today. Was that eerie or what when you saw that building in New York on fire after a small plane crashed into it yesterday? Brought back bad memories. Cards and Mets rained out last night and will try to play game one tonight. The new EverBanker Newsletter has a feature story that I put together on Commodities, you can go to our website to read it! See…I told you, short-n-sweet! Have a great Thursday!

Chuck Butler
October 12, 2006

The Daily Reckoning