Will China / U.S. Relations Upset The Applecart?

Good day… Whew! Spring has finally come to St. Louis! That was a great, weather wise, weekend, filled with lots of football for my little buddy, Cards-Cubs baseball games, yard work, and outdoor grilling! Not too much yard work for me, as I’m still recovering from a torn hip-flexor…

The week has begun with the dollar gaining back some ground it has recently lost… Profit taking or just rounding out the recent run on the dollar, that probably went too fast… The two pops we’ve seen in the currencies, that I talked about last week, really had the steam building on the dollar negativity… But today lowers the heat on the dollar, and that’s OK in my book… We certainly don’t want to see a “run” on the dollar… A simple general depreciation of the greenback, is better in the long run.

The dollar did see some gains from a story in a weekend newspaper that reported the Bank of Greece’s Gov. and ECB voting member, Garganas, as saying, “the strengthening euro may prevent the ECB from raising rate further.” The Bank of Greece has been all over this story since it printed, denying that Garganas ever said such a thing… And I can’t believe he would say something like that… ECB members have been so good, singing from the same song sheet…

But the damage had been done… The cow was out of the barn… And so on. Now, I think it will take some hawkish words from ECB President Trichet, to right this ship… And Garganas needs to remember that loose lips sink ships!

We’ll start seeing more data this week from not only the U.S. but the Eurozone, and U.K. too! The Eurozone will see Industrial Orders, and another think tank IFO survey. The U.K. will see the color of their 1st QTR GDP, I expect that the Eurozone and U.K. will see up ticks in their data, which will fuel the fire for higher interest rates from both Central Bank.

Speaking of rate hikes… Norway’s Norges Bank meets this Wednesday, and I fully expect them to hike rates… This has been building up steam for some time now, and it shows with the nice performance of the krone VS the dollar. So… The actual act of hiking rates won’t push the krone higher… But… If the Norges Bank issues a statement that sounds hawkish, the steam building begins all over again.

In the U.S. we’ll see Consumer Confidence tomorrow, Durable Goods and New Home Sales on Wednesday, and the 1st QTR GDP… Recall, that we ended the year with a 2.5% GDP, right? Well, the experts have forecast a measly GDP of 1.8%… Well… You can’t say I didn’t tell you the economy was slowing down! But, we have to wait to see the actual number…

There are lots of stories being printed about the U.S. / China relations… Last week’s fantastic GDP of +11% in China has really stirred the pot on the relations… I guess the question in all of this is how does a strained relations between the U.S. and China affect the markets? Hmmmm… Well… My thought on this is that as long as the relations remain on the chilly side, there won’t be any overturning of the applecart… But should U.S. lawmakers go ahead with an all out assault on Chinese exports to the U.S. with tariffs… I believe the applecart will be overturned… And this becomes a problem for everyone!

Standard & Poors (S&P) has raised Japan’s debt rating one level from AA- to AA… I think that Japan’s improving economy is even evident to the likes of S&P! And that should bode well for the yen… But… You know that there’s just not enough market interest in a such a low yielding currency… Except that is to use it as the “funding currency” in the carry trade!

The Canadian dollar / loonie has moved above 89-cents overnight… The recent data from Canada has been strong, thus leading some to believe that the Bank of Canada will raise interest rates… I think that the Bank of Canada will need to see further evidence that the data will continue to be strong before they make that move. Stronger data like February’s Retail Sales rising…

But… I’m really happy to see the loonie back above 89-cents… Recall, what I said last year, when the loonie fell from 91-cents to 86-cents… That I didn’t see the currency getting back to 91-cents until Gold got back to $700, and oil to $70… Well… Gold isn’t $700 and oil isn’t $70… YET! But they are certainly headed in that direction, eh?

Recall… That recently the Indian rupee sold off, and it was rumored that it was Central Bank intervention? Well… I think that our proof that it was Central Bank intervention has been shown, as the rupee has stormed back even stronger than before the sell off!

Currencies today: A$ .8334, kiwi .7405, C$ .8910, euro 1.3560, sterling 2, Swiss .8255, ISK 64.50, rand 7.04, krone 5.9720, SEK 6.7750, forint 180.80, zloty 2.7850, koruna 20.50, yen 118.60, baht 32.35, sing 1.5125, HKD 7.8140, INR 41.66, China 7.7240, pesos 10.98, dollar index 81.78, Silver $13.91, and Gold… $691.30

That’s it for today… Two local news stations have their trucks outside our building with the periscope dishes extended two floors high… They pulled in as I arrived this morning… I thought they were probably here to interview me! HAHAHAHAHAHA! Just kidding… I’m off to Las Vegas tomorrow morning, so Chris will have the conn on the Pfennig until Friday, when I return… What I am going to do in Las Vegas for 3 days is beyond me! Time to hit the send button… Have a great Monday and week!

Chuck Butler — April 23, 2007

The Daily Reckoning