When Will the Fed be Called Out?

Good day… And a Wonderful Wednesday to you! I have lots of things to get to this morning, so let’s get to the tape!

Front and center this morning, the dollar continued to hold the advantage over the euro (EUR) and other currencies yesterday and in the overnight market. The euro did attempt to rally overnight, but that move was thwarted, as a European Central Bank (ECB) member, Stark, threw cold water on the rally.

Stark, said, “The markets have understood the Governing Council’s signal”, which meant the markets understood that the ECB was going to raise rates in July… But then the cold water came flying out of the bucket as Stark then said, “However, we are not talking about a series of rate increases.”

Folks… Any time the markets smell that the end of a rate cycle is near, they begin to trade the asset as if the central bank had already begun a new cycle… But, here’s where I think they are mistaken… The euro rates aren’t going anywhere for a while, and neither are the U.S. rates, so… The euro will enjoy the positive rate differential to the dollar for some time to come.

Speaking of rate hikes… All the rage in the United States by Fed Heads and Paulson is to talk about inflation… Like it just snuck up on us and said, “BOO!” Where have these knuckleheads been? But here’s the bugaboo as I see it… The Fed has little at their disposal in terms of ways to fight inflation, given the fact the U.S. economy is teetering on disaster, and the jobless rate is rising.

In a memo from Chuck, “Hey Fed Heads, why don’t you try turning the money supply spigot off? That would be one very BIG way to choke inflation”.

I received a lot of emails yesterday commenting on my baseball ticket story… But one of the best ones was from a reader that… No wait, I’ll let him tell the story…

“I own an industrial hardware store that sells paint, building supplies and related materials to both the commercial sector and homeowners. Without hesitation I can tell you that at least 25% of the products I sell have increased in price in the last six months. Currently we receive approximately 2-3 letters per week informing us of impending price increases and/or fuel surcharges. Our two largest suppliers recently informed us of both item price increases as well as updated increased fuel surcharges. I do not sell food or energy and a gallon of paint thinner I used to SELL for $3.49 now COSTS ME over $6.00. Increases are across the board from paint and sundry/solvent related items to faucets, hammers, tape measures and many other common items.”

We’ll get another Fed Head, Kohn, talking about inflation today. So once again, look for dollar strength, as the markets get taken hook, line and sinker once more. I wonder when the markets will discover that the Fed can talk about inflation, but they are NOT raising rates!

Another thing that gets me burning is the attraction the markets have with Fed talk of intervention. These are not the currency traders that I grew up with! In the “old days” currency traders would have taken on the intervention talk to see if the central bank would indeed intervene… But not these yellow bellies… At least not yet.

OK… Yesterday I had a few moments to think about stuff going on with the dollar, etc., and my conspiracy theory mind began to work overtime. I’ve got two conspiracy theories to talk about regarding dollar strength… So, if you don’t like that kind of stuff, skip ahead to the “***” section.

OK… I came to a couple of conclusions yesterday. Of course, these feed my need for conspiracy theories… And that’s what these are… There are no facts that I know of contained here… Simply theories on what’s going on.

First of all… Don’t you find it strange that suddenly Bernanke and Paulson feel the need to “defend the dollar”? I mean the dollar has fallen for six years with only a blip in 2005 when the Fed was raising rates. Where have they been before now? Well… They have been busy printing money, lowering interest rates to help out their fat wallet buddies on Wall Street, and beating on China to allow their currency to GAIN versus the dollar.

So, now, they feel they need to “intervene”? Well… Here go my two thoughts on this…

1. The OPEC guys are in a pickle… You see (and I’m sure you are not feeling sorry for them) the OPEC guys can’t make the same profit on a barrel of oil that they used to before the dollar went into this dark abyss. So… When Bush visited the Saudis a week or so ago, they put down the law with him. Either get the dollar stronger, or the price of oil is going to go higher. Knowing full well that he can’t go back to the United States and say that oil is going to go higher, Bush calls his buddies, Bernanke and Paulson and issues the edict. And voila! They start talking about intervention to make the dollar stronger.

2. OK, if that doesn’t do it for you… How about this one? Could Bernanke and Paulson be “priming the pump” if you will to get the dollar stronger because they “KNOW” that a “risk event” is about to happen. Take your pick… A major bank… Another brokerage… A large lender (are their any left?)… Even go to an escalation of problems in the Middle East… So, by getting the dollar stronger now, it can withstand the onslaught after a “risk event”.

Call me crazy (you’re crazy, Chuck!), but this is all the Twilight Zone stuff for me… The way the markets are singing from the same song sheet as the Fed and Treasury, without any thought of calling them out on this.


The Bank of Canada (BOC) surprised the markets yesterday when they kept interest rates unchanged. It was widely expected to see them cut rates again to keep pace with the Fed. The BOC indicated that the balance of risks for the inflation outlook have shifted slightly to the upside and that global growth has been stronger and commodity prices have been sharply higher than expected. How about that?

In the United Kingdom this morning, unemployment increased for a fourth consecutive month 9,000. The Bank of England (BOE) has its hands tied on this one. They have little room… In fact… They have no room to cut rates, with inflation above their target level already… This is a real pickle for the BOE, and the pound (GBP). Look for additional pound weakness here.

The euro is bouncing around 1.55, which is good. The guys over at CitiFX put out a reading of a chart on the euro, which looks pretty interesting. The euro chart looks very similar to the euro action in November of 2007. The down, up, down, up movement of November is playing out here again. Hmmm… Does this mean the euro is ready to take off again like it did at the end of 2007? Well… Fundamentally it should… But, just as the charts indicate it could go higher from here… The chartists will change their rhetoric should it go down from here!

The dollar’s strength has even affected the Brazilian real (BRL)… But, I’m not going to lose hair (yeah, like I could lose any more!) on that move. The Brazilian real has it all going for it right now. It just gets caught up in the momentum. Sure looks like some better levels, cheaper at least, to buy reals right now.

The Swiss franc (CHF) and Japanese yen (JPY) are really getting beaten around the head and shoulders these days. Even the DOW’s 400 point drop on Friday, couldn’t break these two out of their doldrums. There’s just not any feeling in the markets these days that another “risk event” will happen, thus there’s no risk aversion in the markets. But, you know me; I think there is another “risk event” out there. You see… There is just too much bad debt being hidden by lenders, banks, brokerages, etc. Once exposed, the chickens will come home to roost on that thought. I believe there’s a smoking gun with mortgage lenders, but we’ll have to wait-n-see.

I hate to head to the Big Finish on such a sour note… But… I’m out of things to talk about, so…

Currencies today 6/11/08: A$ .9485, kiwi .7570, C$ .9815, euro 1.55, sterling 1.9570, Swiss .9615, ISK 77.70, rand 7.9540, krone 5.1525, SEK 6.0350, forint 159.40, zloty 2.1760, koruna 15.73, yen 107.30, baht 33.08, sing 1.3720, HKD 7.8090, INR 42.85, China 6.9180, pesos 10.40, BRL 1.6430, dollar index 73.50, Oil $133.50, Silver $16.58, and Gold… $872.81

That’s it for today… I’ll be away from the office tomorrow, so Chris will have the conn on the Pfennig, but I’ll triumphantly return on Friday. Cardinals won last night, but lost Albert Pujols to an injury… Now that news will give Cardinals fans a sick feeling. This upcoming weekend, is Father’s Day weekend… Amazing! June will be half over, and it just got hot outside! My recent NPR interview is going to be featured on our web site soon. If you haven’t checked out our currency pages, you should, they are chock full of information and research! I’ll let you know when the interview is live on the site, but until then, go check our currency pages out! That’s it for this time. Until next time… Have a Wonderful Wednesday, and I’ll be back on Friday!

Chuck Butler
June 11, 2008

The Daily Reckoning