A Pfennig For Your Thoughts

In This Issue…

  • FOMC issues dovish minutes…
  • Hu visits Bush today…
  • Global growth is taking over…
  • Is a commodities correction due?

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And Now… Today’s Pfennig!

Running Into Resistance…

Good day… Another wild trading day in the currencies yesterday with the FOMC minutes causing all the commotion not only in currencies but stocks, too! Yes, the FOMC minutes were dovish, but be careful here because this could be a trap… Just because the minutes sounded dovish doesn’t rule out the chances of another rate hike in May…

Well… The euro put in a nice performance vs. the dollar yesterday climbing all the way to 1.2370 in the late afternoon… Funny thing was that just a few minutes before hitting that figure, I told the desk that there was rumored strong resistance at 1.2370… And right about that time, 1.2370 was hit… And you should have seen the euro back off that level in a NY minute! It had indeed run into resistance…

But, always, always I tell you, when a currency makes the first run at a line in the sand (resistance), it will fail to break through… But that won’t be the only attempt at 1.2370, and once it breaks through… Look out! And… Don’t forget that if a currency makes several attempts to break through, that spells sell-off for the currency… In this case, I expect the euro to break through with no problems…

I say that because of all the other movements vs. the dollar by the Big Boys… Japanese yen, Chinese renminbi, U.K. pound sterling and Canadian loonies. It’s all starting to come together for the currencies… And pretty quickly, too, I might add… Which is a bit concerning to me, given the fact that when an asset runs up too fast, it usually makes a visit to lower levels soon after to “fill in the gaps”… We’ll have to see if the markets believe this is too fast… If they turn the other cheek… Then watch out, dollar!

The Chinese renminbi had its biggest advance vs. the dollar since the peg was dropped (last July) overnight… Funny how that happens the night before Chinese President Hu visits Washington DC… Yeah, funny… Last night’s move puts the renminbi’s total gain vs. the dollar since the peg was dropped, at 1.2%… Add that to the 2.1% revaluation when the peg was dropped, and the total gain has been 3.3%… No great shakes… But… Better than a sharp stick in the eye! OUCH!

However, 3.3% is not going to cut it in Washington DC, as these people believe that all the cures to their ails resides in a stronger renminbi vs. the dollar… They have no idea… But as long as they stomp and whine about how the renminbi needs to get stronger vs. the dollar, the more it should signal to investors that they want the dollar weaker… And sooner or later, the traders will get off the SIRT they’ve been smoking and realize this!

Monday, I highlighted Thai baht telling everyone that baht was a player… But it’s not the only player in Asia… Baht just happens to be one of the few players in Asia that pay interest! But on that list of non-interest-paying currencies is Singapore dollars… Yesterday, I told you that China had posted a +10% GDP in the first QTR… Well, tiny Singapore is proud of their +9% GDP, too! Manufacturing is up 16% in the first three months of 2006, proving that Singapore’s boost in GDP is not made of fluff and defense spending!

This brings me to a thought that I shared with Frank Trotter the other day… And that is global growth showing up everywhere… Interest rate hikes popping up all over, and just a general good feeling about how all these countries are growing… The roll call is long… But here are some of the Asian countries cooking with gas these days that we deal in… China, Japan, Thailand, Singapore, India, and Hong Kong…

In Europe, growth is on the rebound, too! I’ve chronicled the growth in the Eurozone, but have not talked about the rest of Europe… Norway, Sweden, Switzerland, and Denmark have all posted their own contribution to global growth… Things are really looking up with regard to the currencies…

No longer do I have to defend the Eurozone economy, and say it doesn’t matter, because the euro is the offset to the dollar, and things are worse in the U.S… Now… I can say… Economic recovery is in full bloom in the Eurozone, the ECB is on a rate hike cycle, and they are running a Trade Surplus! These are all reasons to buy the euro…

On Monday, I told you that I thought India’s Central Bank would raise interest rates at their Tuesday meeting because of higher oil prices putting inflation pressures on the economy… Well… Yesterday, India’s Central Bank decided to keep rates unchanged saying that they believed their proactive monetary policy stance has contained inflation and inflation expectations. However, they added that inflation may end up higher than now and they may need to monitor and respond appropriately.

I guess I’m OK with that decision… However, I would much rather see them tear a page out of the Reserve Banks of Australia and New Zealand’s manuals on fighting inflation, and raise rates when oil prices are rising instead of waiting for them to put pressure on the economy… On the good news front… S&P has just raised India’s rating outlook to “positive”!

And are oil prices rising or what? OK… Where are all those young dudes that carried the news that oil prices were going back to $40? I sure hope they stop rising soon… But I knew in my heart of hearts that the increased demand from India and China where we never had to share oil before was going to bring the price of oil back to $70… And it has! Of course, I would have rather been wrong about it and only paying $1.50 for a gallon of gas right now!

And not trying to sound like a broken record… Or scratched CD for the young crowd, gold and silver rallied again yesterday and overnight… There was some tough rhetoric going back and forth between the U.S. and Iran yesterday… And that helped to push gold higher… Oil higher and my blood pressure higher! President Bush said yesterday that “all options are on the table to keep Iran from developing nuclear weapons.” Please, will everyone calm down?

My trader friend at RBC just sent me a chart on the Commodities Index, that if you are a chartist you probably are concerned with the pattern… And I have to say that commodities have really blown out of the water here in the past two weeks… So… A correction is not out of the realm of possibilities!

Now that I’ve said that… I’ll tell you that the Commodity Currencies of Australia and Canada with New Zealand tagging along have all hit pay-dirt again, with Australia hitting the .7440 level, Canada the .8785 level, and New Zealand the .6350 level… That’s just awesome performance…

Today, we’ll see the trumped up CPI for March… Longtime readers know that I totally dismiss this piece of data due to the way it is put together… It totally underrates the inflation level in this country… But we get the March report today, and I don’t expect any currency movement from it… That is unless they decided to come clean with the report! HAHAHAHA!

Currencies today: A$ .7440, kiwi .6350, C$ .8785, euro 1.2355, sterling 1.7855, Swiss .7865, ISK 77.56, rand 5.9710, krone 6.3370, forint 214.22, zloty 3.16, koruna 23.10, yen 116.85, baht 37.65, sing 1.5970, INR 45.10, China 8.0137, pesos 10.92, dollar index 88, silver $14.26, and gold… $626.15

That’s it for today… Well… I nailed that Housing Starts forecast yesterday! I said the number would be weaker than forecast, and that it was… Sure looks to me as though the benefit the economy got from housing the past 4 years is about to end… Wait, what am I doing here? This part of the Pfennig is supposed to be reserved for little slices of news and fun! Anyway… Our hockey Blues put an end to a real bummer of a season… First time they’ve missed the playoffs in over two decades! UGH! It’s “Wired Wednesday” so we’ve got that going for us, eh? Have a great Wednesday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

PFENNIG DISCLOSURE