Yen Drives The Currency Bus!

Good day… Well… Every day’s a new day… And every way’s a new way… And so it was yesterday with the currencies and commodities. After seeing weakness that had some questioning whether the rally in these two assets were over, both recovered nicely yesterday. Oil is back above $70, the dollar is weaker, and the price of Gold is stronger…

Carrying out the opening line theme, the euro has lost about 1/3 cent overnight to the dollar as a report showed French Business Confidence dropped in May… No worries, from this end… The euro shot up 1-cent yesterday, so the large institutional traders saw an opportunity to take a profit… This French Business Confidence report will be forgotten about as fast as it takes an Albert Pujols home run to reach the seats!

You know… Last week, I was asked by our PR people to put together some notes about currencies that, in my opinion, I see gaining VS the dollar other than the euro and yen…In other words… “Under the radar currencies”

I started with the currencies of countries that sport Current Account Surpluses… In Europe, that’s Norway, Sweden, and Switzerland (there are more, but I wanted to hit on the ones people knew!) and in Asia that list is too long to go through, so I just highlighted the currencies from the countries that were liquid… Singapore, Hong Kong, and China…

I then highlighted two currencies that sport tiny Current Account Deficits… India, and Thailand… So… There you go… Now if the meat of the story gets printed… I’ll let you know…

The OECD (Organization for Economic Co-operation and Development) has issued their first quarter reports on nearly every country on earth, and when reporting on Norway and Sweden, the OECD says that these two country’s Central Banks should raise interest rates! So… I beat the OECD to the punch!

The Big mover yesterday was Japanese yen, which had gotten taken to the dark side of the moon by the Bank of Japan last week, when they disappointed the markets by not taking any action on interest rates… Recovered a whole yen after Bank of Japan (BOJ) official Fukui indicated that the BOJ was not going to fall behind curve… This has gotten the Japanese rate hike campers out of their doldrums, and has them talk rate hike in July! We know how hard the yen rallied leading up to last week’s rate decision, and I fully expect for it to rally that hard again, leading up to the July BOJ meeting.

The yen also got a boost when Japan’s Debt Rating Outlook was raised to “Positive” by Standard and Poors… This means that what was once a huge albatross around Japan’s neck (Gov. Debt) is being addressed, and a reduction is even possible… But the key is that it is no longer growing! Just another reason to hang your hat on the Japanese yen rack!

With Japanese yen driving the bus for the Asian currencies to go higher VS the dollar yesterday, Chinese renminbi had no other move to make but to gain too! But it still remains above the 8 handle… The People’s Bank of China issued a report yesterday that said… “The Bank of China will increase the flexibility of the renminbi, while keeping the currency basically stable.”

Speaking of China… Last night, they raised their forecast for 1st Qtr GDP to 10.3% from 10.2%… Not much of a change, however, I think the important point is just how strong the Chinese economy remains… I wonder where all those “China is going to slow down and hurt commodities” naysayers are right now…

In other words… “manipulated”! But don’t tell U.S. Treasury Sec. John Snow, for he didn’t have the intestinal fortitude to use that word last week, when the Treasury Dept issued their report on “currency manipulators”!

OK… You know how fast I said the French Business Confidence report would be forgotten? Well… A report on German Consumer Spending just came out, and guess what has already been forgotten? You Are Correct Sir! Anyway… During the first quarter, German Consumer Spending rose .6%, the most since 2004… This is just another reason for the ECB to raise rates again in June… And then in September… And don’t forget that Chuck call for an additional rate hike in December!

All of these rate hikes will eventually take away the rate hike differential that the dollar enjoys over the euro. As I tell my audiences… The markets are always looking ahead… And even though the Fed might have 2 more rate hike arrows in their quiver, the markets believe that they see an “end to the rate hikes”… And, if they see “an end” to U.S rates, while the ECB is still raising rates… There goes the rate differential benefit that the dollar has received for over a year now!

The data cupboard is still relatively empty… So… We’ll head to the Big Finish with the currencies in rally mode VS the dollar, and no U.S. data to stop them!

Currencies today: A$ .7550, kiwi .6240, C$ .8985, euro 1.2855, sterling 1.8835, Swiss .8280, ISK 72.50, rand 6.52, krone 6.09, forint 204.40, zloty 3.08, koruna 22.01, yen 111.25, baht 38.20, sing 1.5775, INR 45.50, China 8.0240, pesos 11.24, dollar index 84.45, Silver $12.95, and Gold… $662.75

That’s it for today… Did you see EverBank’s World Currency CD’s mentioned in the Wall Street Journal yesterday? How about that 2-hour ending of “24”? That show is so intense! Things are back to normal on the desk, with everyone present and accounted for! Our MarketSafe Gold CD continues to get a ton of publicity, and why not? It was a Top Ten Financial Innovation for 2005! Have a great Tuesday!

Chuck Butler
May 23, 2006

The Daily Reckoning