The U.S. Economy Remains In A Rut

Good day. It’s a cold wintry day here in St. Louis, this third day of spring. A chill came down over the currency markets yesterday, leaving us just about on top of where we stood yesterday morning: Range bound. So, the dollar still has the hammer in its hand.

Today we’ll see data on the sales of previously owned homes in the United States during the month of February. The forecasters have the total below last month’s figure, and if that were to play out, it would mark the sixth straight month that sales of previously owned homes had fallen. But, don’t let that get in the way of Big Ben Bernanke’s call that the economy is strong!

This is just another in the long line of economic reports that have been coming in weaker, and I can’t believe that traders are not noticing this! The economy is in a rut. Yes, sometimes it looks as though it has spun its wheels to get out of the rut, only to slip back into the muddy mess!

Overnight in Japan, a report showing that imports had jumped 30% in February versus the previous year’s figure. This really had the yen moving in the right direction versus the dollar. Then, along came a Bank of Japan official (Nakahara) who wanted to remind everyone that the Bank of Japan would be “very slow” to move interest rates higher. Well, that let the air out of the yen’s balloon in a heartbeat!

This is simply another case of verbal manipulation of the yen by the Bank of Japan. I don’t know what will ever make them stop. But, we need to realize and learn to accept these manipulations, as the Bank of Japan isn’t going to allow the yen to move too fast. We can’t just wash away the fact that Japan’s imports jumped by the largest amount in over a decade. This proves the point that I’ve been trying to make about how strong the domestic demand is in Japan.

Deflation is dead here, I don’t care what hogwash Prime Minister Koizumi keeps talking about! Domestic demand is strong. The annualized GDP grew at a 5.4% clip last year, and interest rates will soon be rising. Can you say, “A stronger yen”? I thought you could!

While I’m in Asia, I might as well make a stop in China and see what our two favorite (NOT!) U.S. lawmakers, Schumer & Graham, are up to. Hmmm…Senator Graham seems to believe that he can help China “find a way to let the currency achieve a market value.” HAHAHAHAHA! Hey, Todd, that’s so funny I forgot to laugh!

China will move, when China wants to. Memo to Schumer & Graham, go home. Don’t go home mad – just go home! While you’re home, you might want to see if you can “find a way to reduce our dependence on foreign capital!”

The commodity currencies have really been placed on the burner lately. But, I think we can use last week’s price performance in the dollar/euro to provide us some comfort. Last week, you may recall that we saw the dollar get sold after reports showed the Fed might not raise rates again after their meeting later this month. When the euro responded to the dollar selling by pushing as high as 1.2190, the rest of the currencies fell in line, including the commodity currencies!

So, I still believe that the euro will test the 1.30 figure again. If that’s happening, the rest of the currencies will fall in line – along with gold, which has really seen some pressures this week. This also hurts the commodity currencies of Australia and Canada.

The pressure on the emerging markets currencies has really taken its toll on the currencies of Brazil and Iceland, but not far behind is the Mexican pesos, which has lost ground since this “risk aversion” thing started last month.

Oil is rising again after a report showed a drop in inventories. Oil posted a 1.4% gain on that news, and probably won’t stop there.

Speaking of oil, not a word from Iran on their oil bourse. “Delayed” is all I’ve heard.

OK. Yesterday, when I was talking about silver, I jumped the gun and said that the SEC had approved the silver ETF. In reality, the SEC approved rule changes for a silver ETF. Yes, it sure sounded like the deal was done at first – but no so fast there! It will come, soon. However, the news was still responsible for the move in silver to a 22-year high!

Currencies today: A$ .7190, kiwi .6290, C$ .8580, euro 1.2070, sterling 1.7440, Swiss .7650, ISK 71.35, rand 6.30, krone 6.60, forint 219.20, zloty 3.23, koruna 23.84, yen 116.95, baht 39, sing 1.6170, China 8.0277, pesos 10.84, dollar index 89.92, silver $10.49, and gold $550.23

That’s it for today. Had a tough time answering the bell this morning; only one more day of waking up when the young adults are just coming home! Had a visit from Allison Road last night. What a cutie! Have a great Thursday!

Chuck Butler
March 23, 2006

The Daily Reckoning