Waiting for the ECB's Statement

Good day… Today is a day of remembrance for the “Day that will live in infamy” – Pearl Harbor Day. On this day in 1941, people heard the news and were shocked beyond belief. On a side note, traveling on the same plane as me the other day was a gentleman that was flying to Hawaii for the remembrance ceremony of the attack. He had lived through it. What a nice ovation he received by the other passengers when his story was broadcast over the intercom on the plane. Good Show!

On that same plane was the UCSB (U. of Calif. Santa Barbara) soccer team – fresh from their National Championship that was won here in St. Louis. They sure were well behaved for just having won a college National Championship! Another Good Show!

OK…Some of you might be wondering just what the heck is going on here, as I DID tell you on Monday that I would be back on Friday. Well…I was wrong! I’ve traveled so much this year that I get my days mixed up now and then, and Monday was a prime example of that! So you’re stuck with me this morning! HA!

The currencies have backed off on their assault of the dollar. And that’s fine with me, for I still see much more currency rally in their tanks. Today, we’ll see the ECB raise interest rates, but what’s more important is how strongly ECB President Trichet comes across with his statement afterward. I personally think that he will come out with both guns a-blazin’! You see, he has a new “worry”…and that is rising wages. Both French and German governments have recently approved wage increases, as the economy grows in both countries. This has Trichet worried, and he will let the markets know about how “vigilant” he will be in fighting the inflation pressures that come from rising wages!

A quarter point hike today would bring the internal rates in Euroland to 3.5%. Recall, yesterday I sent a note to Chris saying that I still believe the ECB won’t want to end this rate cycle until 4% is reached. So…that means a rate hike in the first quarter, and one in the second, and then a wait-n-see stance. And this thought alone should underpin the euro to reach its previous highs versus the dollar that were seen in December of 2004.

The Reserve Bank of New Zealand left rates unchanged last night, but really threw a curve ball to the markets with a statement that sounded like they should have raised rates right then and there! Here’s the skinny…Reserve Bank Governor Alan Bollard said: “Medium-term inflation pressures remain persistent. While the short-term inflation outlook has improved, we are less optimistic about medium-term prospects. Economic activity has been stronger than expected, given the resilience in domestic demand, and medium-term inflation risks appear weighted to the upside.”

Sounds like rates are going higher in New Zealand…but not until Bollard and crew are ready to see a stronger kiwi.

In the United Kingdom, a sharp drop in industrial output in October really put the kyboshes on the pound sterling’s drive to “two”…for now, that is. Industrial output dropped 0.8%, and manufacturing followed that up with a 0.4% decline. So…economic growth is still keeping the light on for higher rates in the United Kingdom. But for now, that thought has been put on the back burner as the markets try to work through these declines in industrial output and manufacturing.

The Bank of England’s Monetary Policy Committee is meeting as I write. I don’t see a rate hike from them at this time, given the recent reports on the economy. But we’ll see.

And in Japan…What are these dudes waiting for? Almost every piece of economic data that prints in Japan says the economy is on terra firma…and growing. Domestic demand and spending is good, inflation is on the rise – and still the “boys” at the Bank of Japan (BOJ) keep dragging their feet and giving us one reason after another for not raising rates. But just about the time the markets give up the ghost on a rate hike this month, BOJ officials say something to keep the markets hanging around.

The other night it was BOJ member Nishimura’s turn to spin the rate hike bottle. The BOJ had better be careful, because if they don’t let the bottle stop spinning, and kiss someone with a rate hike soon…there won’t be any players left around to kiss!

One of the best performing currencies this year has been the Swedish krona. And why not? Inflation is running less than 2%, at 1.6%, GDP (at last reading) is at 4.4%, and there is a positive balance of payments. That’s right…a surplus!

A year ago, I was asked to give my thoughts about currencies for 2006. I said then (and this is in print in case you think I’m just making this up) that I thought the countries that had positive balance of payments/surpluses, would be the best performers in 2006, as they would not have deficits weighing down their economies. So look…at that time I listed Sweden, Norway, Switzerland, Thailand, Singapore, Japan, and China as the “surplus” countries. I then said that the euro would continue to perform well, due to rising interest rates and the fact that it remained the offset currency to the dollar.

So that thought for 2006 didn’t turn out too bad, eh? Yes…I know Japan and China are laggards…but look at the rest of these! I guess I had better get my thoughts on 2007 ready, as I’m sure that some news journal will be coming back for more!

Sweden is a prime example of the thought that “interest rates aren’t all that.” Yes, interest rate differentials are very important to a currency’s value versus another, but they’re not the “only” things – and Sweden proves that. The currency has gained almost 17% versus the dollar this year, which tells me that a surplus can more than make up for a lack of interest rate differential!

Early this year, I created the Euro Trax CD, which included the currencies from Sweden, Norway, Switzerland, and the euro. Let’s see now…Sweden +16.93%, Norway +10.61%, Switzerland +9.92%, and euro +12.19% (all year to date). Looks like the markets liked the “surplus” currencies too!

Oh, and as long as I’m talking about those surplus countries…how about Thailand? This currency continues to put the coup in their rear view mirror, and move forward. The economy is strong, and the currency is too! Again…Thailand doesn’t have a deficit to weigh down the economy.

There’s no real market moving data due today. We will see the Weekly Initial Jobless Claims, which by the way have been trending the wrong way lately, and Consumer Credit. The markets will most likely take their cues today from the Trichet statement following the ECB rate hike, and then sit back and wait for tomorrow’s Jobs Jamboree. The last couple of months of jobs creation has been disappointing to say the least, and the “experts” have forecast yet another disappointing job creation for November of just 103K. I don’t see how the Fed can change their course of keeping rates unchanged if job creation remains a problem.

Currencies today: A$ .7910, kiwi .6910, C$ .8715, euro 1.3295, sterling 1.9675, Swiss .8370, ISK 68.98, rand 7.0520, krone 6.0970, SEK 6.7930, forint 192.65, zloty 2.8685, koruna 21.06, yen 114.90, baht 35.55, sing 1.5380, HKD 7.7665, INR 44.64, China 7.8236, pesos 10.83, dollar index 82.70, Silver $13.67, and Gold… $631.55

That’s it for today… This just in…The Bank of England did leave rates unchanged this morning. The quick trip to Phoenix was nice, the conference was great, and I got to get out of the cold for a couple of days! That’s my last trip this year. Whew! There have been a lot of them! And the Big Boss tells me there are more planned next year! At least it will be February before I start singing, “On the Road Again.”


My darling daughter Dawn is going to have a baby! Dawn and her husband Jerry are excited as can be…and so is my beautiful bride. We’ve known for a week, but Dawn wanted us to wait to tell people. So that was very difficult for my beautiful bride! How about that news for the Butler House?\

Chuck Butler
December 7, 2006

The Daily Reckoning