Valentine's Day!

Good day. And a Happy Valentine’s Day to one and all! This is one of those days that creep up on you. You’ve just paid the last bill from the Christmas bonanza, you turn around and it’s Valentine’s Day! Well, I took my own advice and acted ahead of time. Let’s hope you did, too!

A range-bound day yesterday, for sure! The euro did edge up all day, but the move was barely noticeable. There was news that came across the screen yesterday, after I had signed off, regarding the euro that should have really bolstered the currency for a number of reasons, but the markets have blinders on for rate hikes right now. This news seemed to pass them by like ships in the night. But you know me, I won’t let this news slip pass you!

Syria’s government will use the euro instead of the U.S. dollar as the currency for its international trade because of U.S. threats of sanctions. The Syrian state-run newspaper, Ath-Thawra, reported Prime Minister Muhammad Naji Otri instructed that the portion of the government budget in foreign currency be changed to euros from U.S. dollars. The Damascus-based daily was citing a circular the premier issued on Feb. 5, 2006.

Now, Syria’s total reserves only amount to $4 billion (look at me talking about $4 billion like it’s pocket change!), which isn’t going to move a market one way or another unless all $4 billion goes in at the same time, which in this case, it won’t. I see this as just a small snowball rolling down a hill; I suspect it will gather girth as it rolls. Remember, the Iranian Oil Bourse is set to open in March. This is where Iran will not only sell oil for euros, but it will buy it only in euros, too. So, in essence, Syria beat Iran to the punch. Believe me now and listen to me later: Iran has a much bigger punch to affect the price of euros and the dollar!

You know, the commodity currencies continue to get beaten about the head and shoulders, because commodity prices, namely oil, gold, and other base metals, are correcting. I’m seeing quite a bit of rhetoric in the markets about this move being more than a correction. Others speculate that the correction is going to be a deep one, thus this is just the beginning. Well, who knows for sure? This is just “Deep Thoughts,” by Jack Handy, as far as I’m concerned. History shows us that we’ve got a lot further to go with a bull commodity market. So, I’m pinning my colors to the mast of history.

The people saying that the bull market for commodities is over are saying so because they believe China is going to have a crash landing in their economy very soon. I say: Haven’t we heard this before? Haven’t we heard these people that think they know what’s going on in China, calling for a slowdown, thus taking commodities to the woodshed for a month or so, before the dust settles and China posts yet another 9% GDP? Yes, we have. I was in Tucson in 2004, when USA Today ran a big story on China slowing down and there have been others as we’ve gone along, but they have all been wrong. So, why would the markets believe these speculators this time?

Well, one would think that the markets would be reminded of the “boy who cried wolf, ” but I guess not! The only thing I can think of is the fact that China keeps posting 9% GDP growth. Yes, sooner or later (later, I think) that has to come down, and if you just keep throwing darts at it, you’ll be the one that said, “See, I told you China was going to crash land.” My dad used to have a saying about this stuff. It involved throwing “you know what” at the wall, and seeing what stuck. That’s what the markets are doing right now with commodities.

The Japanese yen is on the move higher versus the dollar, once again. This time, the move is being fueled by the thought that Japan’s economy is going to show that it not only outperformed Europe (who can’t do that!), but also the United States in the fourth quarter. You know, we’re getting close to March (thank goodness), and March is the fiscal year-end of Japan, which in the past would see lots of dollars earned abroad being repatriated to Japan, and exchanged for yen. So, if the yen can hold onto a stronger level before that time, it could really begin to build some momentum.

We also have the large number of short positions on the IMM. I’ve talked about this before, but for newcomers to class, the IMM futures tracks the long and short positions in currencies. A large long position could spell trouble for a currency going forward, as the long positions could be sold, creating a weaker currency, and vice-versa for short positions. A large short position could create buying to close out the position, which would put, in this case yen, on a roll.  We’ll have to watch for that!

Today, we’ll see the color of the U.S. retail sales report for January. Looks like lots of cars were being bought in January, which is strange, in that you don’t think of January as a “car buying” month, but, once again, GM was giving away the store on their cars. So, consumers thought, “Why not?” I also saw a note that retail sales would be higher because consumers cashed in gift cards they received for Christmas. Hmmm. Didn’t that already get counted for when the gift card was purchased? Don’t tell me we’re going to be double dipping! No, not us! Since when would we cook the books to make things look better?

OK, I’m being facetious, but that’s what I do best! I’m a true believer that you can put lipstick on a pig, but it’s still a pig!

OK. J.P. Morgan has jumped on the euro’s bandwagon. In a report issued by J.P. Morgan Private Bank, Anton Pil, head of currencies, bonds and commodities, said, “In the beginning of the year you are going to see the dollar probably continue to do fairly well until Bernanke is finished raising rates, which will probably happen in May…From there onwards, the rest of the year will be a year for the euro.”

Now, I have yet another following in my footsteps and singing from the same song sheet I wrote months ago! Shoot, Rudy, even the chartists, as I reported last week, are with me on this one. Oh, before I forget, J.P. Morgan’s Pil is calling for a euro 1.27 by the year’s end.

It is being reported this morning that the Eurozone’s GDP stumbled in the fourth quarter. I’m sure that was mostly early on in the quarter, because all of the business surveys strongly suggest the Eurozone economy will have a Super Ball-like bounce back! In fact, I wouldn’t be surprised to see this fourth quarter revised upward in the future.

Oh, and I forgot to talk about it yesterday, probably because it was a non-event, but the G-8 meeting was about as useless as a – no wait, I don’t want to finish that one for fear of what I might say! Ha! But really, G-8 is noting but a boondoggle; nothing ever comes from it, except the same old, same-old. So, on that uplifting note (Not!), I’ll head to the big finish!

Currencies today: A$ .7375, kiwi .6725, C$ .8655, euro 1.1905, sterling 1.7355, Swiss .7650, ISK 63.83, rand 6.1680, krone 6.8370, forint 211.47, zloty 3.1880, koruna 23.93, yen 117.20, baht 39.30, sing 1.6270, China 8.0485, pesos 10.5275, dollar index 90.61, silver $9.2250, and gold $541.95

That’s it for today. I know my little buddy is growing up on me. Last night, he informed us that he is not taking Valentine’s Day cards to his classmates for their party today. That’s a sign. Next, he’ll be asking me for the car keys! UGH! Hope you have a great Valentine’s Day.

Chuck Butler
February 14, 2006

The Daily Reckoning