A Pfennig For Your Thoughts

In This Issue…

  • Leading Indicators to fall?
  • Rate hikes to slow economy?
  • Huge consequences for yen shorts…
  • Great-looking data from Canada!

But first a word from our sponsor…

Seek Higher Yields from Strength in the Oil Sector

Diversify your holdings with a multi-currency Index CD from EverBank® World Markets. With one CD, you can equip your portfolio with several different foreign currencies. For instance, with the FDIC-insured Petrol Index CD, you access a mix of currencies from three of the largest oil-producing nations outside of the Middle East—namely Norway (the Norwegian Krone), Great Britain (the British Pound), and Mexico (the Mexican Peso). Seek higher yields from strength in the oil sector. Click here to open a Petrol Index CD today, or contact a Currency Specialist at 888.882.EVER (3837).

And Now… Today’s Pfennig!

Finally… Some Data!

Good day… Well… The first day of summer brought us some very HOT weather here in the Midwest… It’s about time things heated up! The weather hasn’t helped the currencies heat up, though, we’re still playing home, home on the range, with range-bound trading…

The euro did pop up 1/2 cent yesterday in U.S. trading, but as we went through the night, it came right back to wear the same clothes as it had on yesterday. We finally get back to the data cupboard this morning, as May’s Leading Indicators will print. April’s Leading Indicators were a -.1%, and May’s are forecast to have fallen by .5%…

This is the bugaboo that I keep talking about regarding 2 years of interest rate hikes… That’s right, the Fed’s rate hike cycle began in June 2004. The bugaboo I’m talking about is the slowing down of the economy, and if May’s Leading Indicators did indeed fall .5%, it will be further evidence that the economy is indeed slowing down and not in need of further rate hikes.

I’ve explained this rate hike thing before, but for those of you who missed class that day… It takes about 6 months to a year for a rate hike to fully filter into an economy… However, since the Fed started at such a low rate of 1%, it wasn’t until they hit 4% did the rate hikes really count (in my opinion). So… If that’s the case, and I’m certain it is, then the economy is just now feeling the pain of rate hikes made 6 months ago, and there have been 100 BPS added since then!

So… I’m afraid the Fed will have once more gone too far with rate hikes… But don’t let that little fact get in the way of Big Ben Bernanke’s rate hikes to fight inflation… Unfortunately for Big Ben, his predecessor should have begun rate hikes to fight inflation long before June of 2004, and he should have used more than a pop-gun (25 BPS at a time)!

OK… I’m going to stop right there, because I could go on until I’m blue in the face about the Fed… And especially… Big Al Greenspan!

How about some upbeat comments? OK… Let’s try this on for size… How about Canada’s Retail Sales surging 1.7% in April? Or how about Canada’s Leading Indicators rising .3% in May? See… There’s the proof in the pudding that Canada’s economy continues to perform well in the second quarter… And there’s more to the reports… . Six of the ten components of the Leading Indicators recorded increases. Strength in the household sector supported the index’ rise with consumer spending on furniture and appliances and other durable goods posting solid increases.

Unfortunately for the loonie, though… The Bank of Canada’s Gov. Dodge tried to keep a lid on the loonie’s rise, and successfully, I must add, by watering down the strong reports by saying… “that some indicators have come in weak and others strong, but that on balance the projection we set out in our April Monetary Policy Report appears to be reasonable.” In other words, folks… He didn’t want add to the loonie’s rise… He wanted to remind everyone that he previously pushed away from the rate hike table!

I really wish Gov. Dodge hadn’t gone down this path… For now I have to start calling him out for this foolishness… He had done a masterful job of guiding the Central Bank, but now he’s putting his hands in the currency business and acting like he knows what he’s doing!

I had a reader asking a question about the “carry trade” and how one would participate… And that got me thinking about the number of “short” positions there are in Japanese yen… I just think those people that are short yen are playing with fire… For, in my opinion, once the Bank of Japan begins to hike interest rates, those short positions are going to get expensive, and they will begin to get closed out, which means that the yen gets bought… And when the yen gets bought, it will rise in value, causing more losses for short positions, and when the carry trades get unwound because they are too expensive and causing losses… Watch out!

Higher Japanese rates will have HUGE CONSEQUENCES on the carry trades… And the future value of yen… Which I’m still saying will visit the 100 and below figure… However, that won’t happen until the Bank of Japan begins to raise rates, and the U.S. removes the prop for the dollar with the end of their rate hikes.

As you know… I’ve been touting the currencies of countries with Current Account Surpluses for some time now, while sending warnings regarding countries with Current Account Deficits… Well… Two countries with Current Account Deficits, South Africa and New Zealand, both saw Current Account data yesterday and last night… And… Well, let’s just say, the currencies performed badly after the data was printed.

South Africa’s Current Account Deficit rose to 6.4% of GDP, while New Zealand’s widened to 9.3% of GDP… I used to let New Zealand off the hook because while the % to GDP was high, the actual deficit number was manageable… But no longer, and not since late last year. The actual deficit number is $9 billion (in US$ terms)

Well… While I was sitting here writing, the euro dropped 1/3rd cent to the dollar… Apparently, the U.S. traders just coming in on the East Coast don’t feel as though the Leading Indicators are going to be enough to sway the Fed one way or another… This is crazy… Serenity Now!

Currencies today: A$ .7370, kiwi .6125, C$ .90, euro 1.26, sterling 1.8325, Swiss .8060, ISK 75.10, rand 7.30, krone 6.3150, forint 221.10, zloty 3.2450, koruna 22.61, yen 115.50, baht 38.37, sing 1.5925, INR 46.11, China 7.9963, pesos 11.4070, dollar index 86.16, silver $10.59, and gold… $590.10

That’s it for today… Another spanking by the White Sox on my Cardinals last night… OUCH! Good luck to the U.S. men’s soccer team, who will play Ghana early this morning… If they win, they have a chance to go to the next round… If not… An unexpected early trip home… We’ll have it on the TV, and our resident soccer analyst Ty Keough will be explaining all the “rules” of the game to the “non-soccer people”… Have a great Thursday!

Chuck Butler
EverBank World Markets