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In This Issue..
* FOMC keeps rates low...
* Carry trade is back on...
* Senators try to legislate a higher renminbi...
* An Irish toast...
And Now... Today's Pfennig!
FOMC keeps rates low...
Top of the mornin to ye... Happy St. Patrick's Day to all of the Irish readers, and all of those who are Irish for the day! Both Chuck and I have pretty deep Irish roots, and St. Patrick's Day is always one of our favorites. Chuck will be spending the day enjoying baseball in the sunshine of Florida; and I will be heading to Florida myself later today. Speaking of which, I have to catch a plane in a couple of hours, so I better get going on today's Pfennig.
The currencies got the green light to rally yesterday as the FOMC kept interest stable and currency traders moved back into carry trades. The non-move in interest rates was a given, but many on the street had been calling for the Fed to remove the 'extended period' language from the accompanying announcement. But committee members kept the dovish tone, pledging to keep their benchmark rate 'exceptionally low' for an 'extended period'. "While the economy is improving, employers are still reluctant to hire, homebuilding is depressed and inflation will be subdued for some time," the FOMC said in their statement. So it looks like Bernanke is playing from the same sheet of music the FOMC has used during the last two recessions. In both the 1990-91 and 2001 recessions, the Fed waited an average of 33 months after the recession ended before raising rates. This recession 'officially' ended toward the end of last year (although it certainly looks like we could dip back); so that would mean rates won't start rising until sometime in 2012.
As I wrote earlier this week, the future Vice-Chairman of the Fed, Janet Yellen, is an expert on unemployment; and I think the trigger for the next FOMC move will be the unemployment rate. They will wait to see a sustained uptick in employment before moving rates higher. We will be keeping a close watch on the payroll numbers to try and determine when we will get a move by the Fed. Without strong jobs data, the FOMC will keep rates low throughout 2010, disappointing the dollar bulls who are expecting an early exit from these ultra low rates.
The Bank of Japan did the Fed one better, moving to ease credit even further. With rates at .10 percent, the BOJ couldn't cut them any further, so they announced they would double a lending program aimed at stoking credit growth. According to a statement released after their meeting yesterday, the BOJ increased their three month loan facility to 20 trillion yen ($222 billion). They have put these measures in place to try and stimulate credit growth in order to combat deflation which continues to grip their economy.
The biggest benefactors of these announcements by the Fed and the BOJ were the high yielding currencies which are attractive to carry trade investors. Yes, the familiar carry trade is back on! The South African rand, Australian dollar, and the New Zealand dollar were some of the biggest gainers yesterday vs. the US$. The kiwi rose to a six month high and the Aussie dollar moved to the highest level in two months after the FOMC announcement.
The Australian dollar was boosted by a central bank official who suggested Australian interest rates will be moving higher sometime soon. RBA official Guy Debelle, said interest rates "look likely to rise a bit further" in a panel discussion earlier today. The RBA became the first G20 member to raise rates in 2010 on March 3 when they bumped them up .25%. This was the fourth move up by the RBA in five meetings, and signaled further gains would occur as the economy strengthens. Data released overnight by Westpac Banking Corp showed economic indicators rose in January to the highest level in more than a year. Aussie was also helped by the move in Gold which is up nearly 2% in the past two days.
Another story caught my eye this morning; 5 US Senators introduced legislation yesterday to make it easier for the US to declare currency misalignments and take corrective action. This bill is clearly aimed at China, and the lawmakers are trying to pressure President Obama and Treasury Secretary Geithner to take a stronger stance against them. This has been brewing for a while now, with a war of words heating up between the congress and the Chinese leader Wen Jiabao. Jiabao continues to dismiss any rapid appreciation of the renminbi, stating "We will continue to improve the mechanism for setting the renminbi exchange rate and keep it basically stable at an appropriate and balanced level". But congress wants a more aggressive approach to what everyone knows is a manipulated currency. The Senators would like the US to try and bully the Chinese into letting their currency move higher.
But these Senators don't really know what they are asking for. If the Chinese let the renminbi appreciate dramatically, it would automatically cause the value of their large holdings of US Treasuries fall in value. Who do these Senators think will step up to purchase all of the bonds the US Treasury has to issue in order to pay for all of their spending? Do they truly believe the Chinese will continue to purchase US debt and then turn around and push the value of this debt lower by letting the renminbi appreciate vs. the dollar?
And if they believe a higher renminbi will automatically lead to a correction of global imbalances, they are wrong again. "To leave currencies to the vagaries of the market" won't help rebalance the global economy, according to a report relapsed by the United Nations Conference on Trade and Development released yesterday. "A viable long-term solution to the problem of massive trade distortions and global imbalances cannot be expected from individual central banks trying to find a unilateral solution to a multilateral problem like the exchange rate." A one time move higher by the renminbi isn't the 'silver bullet' which some of our Senators believe it would be.
At EverBank WorldMarkets, we continue to believe this 'tough talk' and even the proposed legislation will not make the Chinese move. The Chinese have let their currency appreciate 21% vs. the US$ since floating it back in July of 2005. We believe they will keep the appreciation of the renminbi at a 'slow and steady' pace of around 5 percent per year vs. the US$. The markets seem to be agreeing with us, as forward contracts to purchase the renminbi have fallen to the their lows of the year.
US data released yesterday showed the prices of imports moved lower while housing starts dropped by almost 6%. Today we will see the PPI data which is expected to show inflation on the producer side is tame. Tomorrow will be a bigger day with the release of CPI, weekly jobless claims, the current account balance, Philly Fed index, and the Leading indicators. Certainly should be an interesting day in the markets tomorrow!!
I'll wrap it up there, as I am running late for my plane to sunny Florida.
Currencies today 3/17/10: American Style: A$ .9226, kiwi .7140, C$ .9883, euro 1.3787, sterling 1.5338, Swiss .950, European Style: rand 7.2942, krone 5.8129, SEK 7.0677, forint 190.63, zloty 2.8087, koruna 18.437, RUB 29.15, yen 90.54, sing 1.3920, HKD 7.7617, INR 45.385, China 6.8259, pesos 12.502, BRL 1.7674, dollar index 79.57, Oil $82.45, 10-year 3.65%, Silver $17.555, and Gold... $1,131.90
That's it for today...... I'll close this morning with a Happy St. Patrick's Day wish to my favorite Irishman, Dad. I have written the Pfennig on St. Patrick's day for the past few years, so many of you know this story, but I want to share it with any of you who are new to this newsletter. My father is a first generation American, so St. Patrick's day is a very big deal in the Gaffney family. My grandfather left his home in County Roscommon at the young age of 11 and rode his bike across Ireland to Dublin where he went to work at the Guinness factory in order to earn enough money to come to America. After a few years, he sailed away from England on a sister ship to the Titanic bound for New York. As the luck of the Irish would have it, a young girl who would eventually become my grandmother was also on her way to America. Both ended up coming to St. Louis where they settled down and raised 6 boys and a girl. So each St. Patrick's day I raise a glass of Guinness, who financed my Grandpa's trip to this great land of opportunity. Happy St. Patrick's Day to all of you!
Chris Gaffney, CFA
EverBank World Markets
03-17-2010 11:35 AM