Waiting On The ECB

Good day. Well, same-o, same-o. The dollar continued to swing the hammer yesterday and in the overnight markets on the inflation-fighting words of Big Ben Bernanke. The euro did lose that grip on 1.28, and is now trading two full cents lower than when I came in on Monday morning! Recall that the markets were convinced that after the awful showing of jobs data last Friday, the Fed would pause later this month when they meet.

But, Big Ben set us straight on that subject, didn’t he! And that’s all the markets have focused on since! The euro isn’t the only currency that’s seeing red the past three days. Line ’em all up; they’ve all gotten the hammer swung at them, too!

That could all change this morning, as the ECB meets to discuss rates. I’ve talked about this over and over again, but for those of you who are new to class, the ECB (European Central Bank) will raise rates today, 25 BPS. That’s already priced in and counted on. But the wild card could be a 50-BPS rate hike that has been whispered about recently. Nothing says “inflation fighting” like a nice strong rate hike. And since the ECB’s main objective, dictated by the Maastricht Treaty, is to provide price stability, we could see a 50-BPS hike…

A 50-BPS hike would turn the euro around on a dime, and bring the rest of the currencies along for the turn-around! We’ll have to wait-n-see though, because I doubt the rate announcement will be made before I hit the “send” button. If it is a 50-BPS hike and the euro does turn around aggressively, I’ll send out an additional note to everyone! How’s that for service with a smile?

Speaking of fighting inflation, did you see that Turkey raised rates 175 BPS yesterday?

Yesterday, I called the Australian economy the Goldilocks economy. With 3.1% annual growth, it’s not too hot…nor is it too cold. And according to the Reserve Bank of Australia’s governor, it’s just right! Well, in May, the Goldilocks economy posted the largest jobs gain in two years! The jobs gain was more than four times what the “economists” had forecasted! This jobs gain in May has pushed the unemployment rate in Australia to a 30-year low!

This labor report will do a bang-up job of keeping the Reserve Bank at the interest-rate hike table. And while I said yesterday that I don’t see them on the warpath of higher interest rates, they do maintain a tightening bias. This report gives credence to that bias! Good stuff!

The Reserve Bank of New Zealand (RBNZ) left rates unchanged last night, as fully expected. Not even a thought of a move had entered my mind.

Last night, I was looking at the world equity indices and noticed something that could be a bad sign as we go along in 2006. Last year, it seemed you could throw a dart at any stock market in the World and you would hit one with a very nice positive gain on the year. It’s not so clear in 2006. While most of them are positive, the sell off in recent times is eating away the positive gains. And the one that really doesn’t make any sense is the Japanese Nikkei, which is down 9% on the year. Talk about a reason the yen just can’t seem to catch some positive wind in its sails!

The Bank of England’s Monetary Policy Committee (MPC) is also meeting as I type away at the keyboard. However, I really don’t expect anything but a confirmation that the tightening bias has been maintained from the MPC. Besides, the pound sterling will get plenty of inflation fighting fuel should the ECB go the 50-BPS rate-hike route this morning. You see, pound sterling would follow the euro, should the euro go higher, which I believe it will!

One of my favorites in this year of “buy the currencies of countries with a positive balance of payments” is Sweden. Sweden posted a smaller-than-expected budget surplus in May. But that’s no worry to me. This government has done all the right things to right the ship in Sweden, and is now looking to make a one-time pension payment that greatly reduces the budget surplus. But think of that as an investment in the future of Sweden.

Norway is another one of my faves in this year of – no wait I already said all that. Anyway, Norway has already gone through the pain of making pension payments that Sweden is going through right now.

The dollar has also received some benefit from the news that the most wanted man in Iraq, Al-Zarqawi, was killed in a U.S. air raid last night.

Fed head Guynn (a voting member) said yesterday, “if the slowdown is real, rates are close to appropriate.” Hmmm…Interesting don’t you think? Big Ben is spouting off about inflation, and Guynn is talking about the slowdown in the economy. I think it’s all choreographed. This gives the Fed an “out” to pause at then end of the month if the data continues to show a slowdown.

Did you hear Big Al Greenspan say that he believes oil could go to $100 per barrel, yesterday? Well, I really didn’t hear him say it, but I read it. You would think that the gold and oil markets would have taken heed. But Noooooo! Commodities were off again yesterday. But I already went through my thoughts on this. If you missed it, you can go read yesterday’s Pfennig at the Pfennig’s web site!

The news from the Bank of England’s MPC just came across the screens. They did just what I thought they would and kept rates unchanged. I’m stalling to see if the ECB’s announcement comes through.

Currencies today: A$ .7460, kiwi .6284, C$ .8965, euro 1.2765, sterling 1.85, Swiss .8175, ISK 73.20, rand 6.8170, krone 6.1320, forint 206.94, zloty 3.10, koruna 22.12, yen 113.75, baht 38.45, sing 1.5940, INR 46, China 8.0089, pesos 11.42, dollar index 85.26, silver $11.60, and gold $618.90

That’s it for today. Still waiting on the ECB, but it looks like I’ll have to do that follow up note that I talked about. You should see the looks on the faces of our two “soccer fanatics” Frank Trotter and Ty Keough. The World Cup begins tomorrow. Good luck to the boys from the United States. They drew a very tough pool and it will be difficult for them to advance. But they made the “Big Dance” and that alone was a great accomplishment! Have a great Thursday!

Chuck Butler
June 8, 2006

The Daily Reckoning