Trade Deficit Prints Today

Good day…Well, the currency markets shrugged off the mid-term election results for the most part yesterday. I think all the initial thoughts by observers were swept aside, and for once the markets acted like they were from Missouri…they wanted to be shown!

Today, we’ll see the color of the September trade balance/deficit – which if you recall on Monday, I talked about how the media would jump with two feet at the news that the deficit had “narrowed.” Yeah, “narrowed” to $66 billion (as forecast), like that’s any great shakes! I was looking at the monthly trade deficit postings this year, and besides the last two months when back to back record deficits were posted, this month’s $66 billion (as forecast) will be the highest one month deficit since January.

I would sure like for the media to report the number as it is. It’s still too large. It’s still on the way to an $800 billion trade deficit this year. It’s not just oil; and U.S. consumers are still spending way too much instead of saving!

Oh well. You and I know that’s not going to happen, so get ready for the hype…and the dollar strength.

The Bank of England’s Monetary Policy Committee (MPC) is meeting as I type away here, and I expect to have something later regarding their rate decision. They usually announce it just as I’m heading to the Big Finish. I’ve beaten the drum long and loud enough for a rate hike from the MPC, so let’s hope they keep the beat!

Like the beat that’s being kept alive by ECB ministers…every day, I turn on the screens and see quotes from another ECB minister talking about how accommodative the Eurozone monetary policy remains…how growth in the region is strong…how inflation pressures remain. And what’s more…all these quotes are pointed toward interest rate hikes, thus narrowing the interest rate differential to the United States and making euros more attractive. The “Tale of Two Cycles” is in full force!

The tax on Canadian Income Trusts that was proposed last week has gone one step further toward becoming a law. The House of Commons voted to put the tax in place yesterday. It has one more vote in the Senate, and then onto the stamp of approval. I still don’t believe the Canadian lawmakers had their thinking caps on when they decided to tax these huge money making trusts. They were attracting foreign investments by the truck load…and the lawmakers decided that they needed some of the action. Anyway, the Canadian dollar/loonie survived the initial attack on it when the tax was announced, so I would have to think that the sellers have all sold.

Yesterday I put the spotlight on the Aussie dollar…and talk about a kiss of death! OK, just kidding…but after rallying on the rate hike news from the night before, the Aussie dollar sold off yesterday after a disappointing employment report. Australian employment fell a surprising 32,100 in October, against expectations of a rise of 7,500. So when I talked about how kiwi would have to clutch onto the Aussie dollar’s coat tails, it goes both ways. The Aussie dollars got sold off, and with the kiwi hanging on for dear life, it got sold too.

But I can’t help but think this is nothing more than “daily noise.” The general trend of Aussie dollars is pointing upward.

And speaking of not being able to hold onto gains…the Japanese yen just can’t seem to keep any wind in its sails for any appreciable amount of time. The yen does seem to react nicely whenever Japanese officials speak. So…maybe the Japanese officials need to tear a page out of the ECB’s handbook, and send a different minister/official out each day with a message. As long as they all sing from the same song sheet, they should do fine…as too should the Japanese yen!

The Great Wall of China has officially turned into the “Great Wall of Cash”! China’s currency reserves have passed a record $1 trillion, and continue to grow at a rate of $20 billion per month. China’s reserves have grown from $100 billion in 1996 to $1 trillion today and are expected to double to $2 trillion by 2010. Did you know that China accounts for almost 20% of the world’s foreign exchange reserves, with Japan being second with some $900 billion of reserves? Oh…and guess what currency is the largest holding in those reserves. I know, you already know…the dollar!

Talk about “mad money” or a “safety net”…these two countries have them, eh? And herein lies the big global imbalances problem. Yes, it’s great for these two countries to have strong reserves like this to even out turbulent times, which in China could happen in a New York minute. But enough is enough. Too much of a good thing, quickly becomes a bad thing to have. It’s time for the currencies of these two countries to begin gaining versus the dollar, and quickly!

At this point I’m stalling for the Bank of England’s MPC to announce their rate decision. So, today we’ll also see the latest U. of Michigan Consumer Confidence report, and the Weekly Jobless Claims. However, I’m sure these will go unnoticed for the most part with the focus on the trade deficit.

Alrighty then! The Bank of England’s MPC just announced that they would indeed raise their benchmark interest rate 25 BPS to 5 percent. The Bank has also left the door open to further rate hikes in 2007, which is exactly the way I explained it to you yesterday!

The currencies are trying to rally at this point…so it’s a good place to stop, and head to the Big Finish…

Currencies today: A$ .7655, kiwi .6645, C$ .8840, euro 1.2785, sterling 1.9030, Swiss .80, ISK 67.90, rand 7.3380, krone 6.4350, SEK 7.1320, forint 203.40, zloty 2.9950, koruna 21.93, yen 118, baht 36.72, sing 1.5625, HKD 7.7845, INR 44.55, China 7.8645, pesos 10.84, dollar index 85.40, Silver $12.58, and Gold… $620.10

That’s it for today…I picked up a copy of the Special Commemorative Edition of Sports Illustrated honoring the World Series Champion Cardinals yesterday. Towards the back there’s a story on the “Greatest Cardinals” by position, and right there is my fave…Ted Simmons, as catcher. Why this man is not in the Hall of Fame is beyond me! Recall I told you about a story from my spring training trip this past spring, when I ran into Ted Simmons, and had my picture taken with him. A prized possession! Ted Simmons and I worked together at the Mark Twain Bank way back in 1981 & 1982. Anyway…enough. Have a great Thursday!

Oh! I almost forgot! I’m supposed to tell anyone that is attending the New Orleans Investment Conference next week that Frank Trotter (the Big Boss) will be hosting a dinner on Saturday night. If you would like to attend and meet Frank…here’s the skinny… For more details and to RSVP for the event please call 802-253-4681 ext. 2138

Please RSVP by November thirteenth.

Now! Have a great Thursday!

Chuck Butler
November 9, 2006

The Daily Reckoning