RBA raises interest rates...
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In This Issue..

* RBA raises rates...

* Higher oil prices drive CAD$ toward parity...

* PIMCO favors commodity currencies...

* Geithner delays report on China...

And Now... Today's Pfennig!

RBA raises rates...

Good day, Chuck's eye is still giving him problems, so you get another Chris Gaffney edition of the Pfennig. Thanks to Mike for covering while I was out on vacation. He puts a lot of pressure on me, as his Pfennigs are typically longer, and go out a bit earlier than when I am writing. Today I will do my best not to get distracted and will hopefully get this out the door at the usual time.

The currency markets were pretty quiet yesterday, with the dollar drifting higher vs. most of the major currencies. Two pieces of data were released here in the US, and both indicated the US recovery may be getting a bit more broad based than previously thought. First, the ISM non-manufacturing composite numbers were released, which is an indication of the health of the services industry here in the US. The index was expected to show a slight increase from February's 53 reading, but instead showed a pretty major jump to a reading of 55.4. This is the fastest pace of service industry expansion since May of 2006. Service sector jobs make up 90 percent of the US economy, so economists were encouraged by this strong increase.

And the good news just kept on rolling in for the US yesterday, as Pending home sales jumped by the most since 2001. Pending home sales were expected to be flat during the month of February, but instead jumped 8.2% compared to pending sales in January. The YOY number was even more impressive, increasing 17.3%. This was the second biggest gain on record, and the largest monthly gain since October of 2001. The homebuyer tax credit was the reason for the big uptick, as purchasers scrambled to get homes under contract before the deadline.

As I turned on the currency screens this morning, the dominant story on the screens was Australia's interest rate increase. Yes, the RBA went ahead and increased rates another .25% yesterday, and indicated that further increases were likely. This was the fifth increase in the past six central bank meetings, and all indications are that rates will continue to rise. Governor Glenn Stevens said the move was a 'further step' toward returning interest rates to average levels. He is trying to cool a housing market which continues to look as if it is in danger of overheating. "Interest rates to most borrowers nonetheless have been somewhat lower than average," the governor said in today's statement. "With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average."

The Australian dollar has been steadily marching toward parity with the US$ since hitting a year to date low of .86 in early February. This latest move puts the Aussie dollar back into the trading range we saw it settle into during the last quarter of 2009, but a move above .94 would break it out of this range. A climb through .94 would be a strong indication that parity for the Aussie and US dollars is coming soon.

Mike Meyer knew I was getting in after trading hours had ended yesterday, so he sent me a note to try and give me the 'feel' of the currency markets yesterday. Here is what Mike had to say about Monday's trading action:

"For the most part, there wasn't much in the way of fluctuation in the market as most currencies traded in a very tight range today. I would have expected a bit more action since both reports released this morning surprised on the upside by leaps and bounds, but that wasn't the case. The big movers and shakers today were the Canadian dollar, gold, silver, and oil.

Crude oil has jumped to a year and a half high today and was trading just under $87 as it topped out at $86.90. Oil has traded in a range between $68 and $84 a barrel over the past 6 months, so it looks like the whole economic recovery story has gained momentum and is putting upward pressure on all commodities. It seems like oil jumped up almost stealth like as it has traded a few dollars on either side of $80 for the past couple of months and sort of lulled us to sleep. As traders are starting to jump all over the latest data reports here in the US, let's hope that triple digit prices aren't on the horizon."

With the global recovery chugging along, oil prices have been slowly moving higher. With a recovery taking hold in the US, and oil prices moving higher, the Canadian dollar rose to the highest level since it hit parity with the US$ in July of 2008. The Canadian dollar is the second best performer vs. the US$ this year, increasing over 5% vs. the $ over the first 3 months of the year. The best performing currency for the year is the Mexican pesos, which is up almost 7% during the same time period.

Both country's economies are tied to crude oil, as it is their biggest export. And most of this crude oil is shipped into the US, where the recovery is driving demand higher. The latest data showing the US economic recovery is taking hold will continue to help these two currencies, with the only risk being the possibility of a double dip recession in the US.

The folks over at PIMCO, who run the world's biggest mutual fund, seem to agree with our own Chuck Butler and his calls for commodity based currencies to outperform. Pimco fund manager Paul McCulley suggested investors look at the currencies of Brazil, Canada, and Australia along with China. He agrees with our thoughts that a sustained recovery in China will push commodity prices higher and support the currencies of those countries who can supply China with raw materials. According to McCulley, the Federal Reserve will hold interest rates at a record low into next year as inflation and economic growth in the US remain subdued. However, developing economies will continue to expand at a respectable pace.

We certainly agree with McCulley, as Chuck has been writing about these commodity producing countries for some time now. He created our Global Power Shift CD last year in anticipation of the continued growth of these currencies. This basket CD combines the currencies of Australia, Brazil, Canada, and Norway. While McCulley didn't mention the Norwegian currency in his report, we feel the krone matches many of the positive traits of the currencies he is suggesting and also has excellent underlying fundamentals. If investors are looking for a way to benefit from the improving global economy, the Global Power Shift basket certainly looks like an excellent investment choice.

There was a whole lot in Pimco's report which I agreed with, in fact, it seemed like McCulley is probably a Pfennig reader! We agree with his thoughts that China will continue to drive the global recovery as increased internal demand take up some of the slack from a slower recovery in the US and Europe. The emergence of consumer consumption in China's huge economy will allow them to slowly adjust their currency higher, with less risk to their exporters.

Treasury Secretary Timothy Geithner was put into a very difficult position with China by some aggressive talk from the US congress. In what has become very typical for our US politicians and decision makers when faced with a tough decision; Secretary Geitner decided to delay. He announced a couple of days ago that he would not release the annual review of China's currency policy on the stated deadline of April 15th. Geithner was being pressured by members of Congress to label China a 'currency manipulator' in this annual review; a move which could spark a trade war. Instead, Geithner said he would hold a series of meetings with China over the next three months to try and bring policy changes to China which would lead to a stronger 'more balanced' global economy.

I have to think Geithner know's who really holds all the cards in the global poker game. Without China to purchase our debt, rates in the US would increase substantially, stalling what is just starting to look like a recovery. He will continue to do whatever he can to keep the Chinese buying our debt, but needs to appear to be playing hardball with them. As we have written several times in the Pfennig, the Chinese will just go back to their slow appreciation of the Renminbi, letting it run up 5 to 7% vs. the US$. Just enough to quiet US lawmakers, but still not enough to have a major impact on their exporters. But over time, this slow and steady appreciation will bring the value of the Renminbi in line.

I'm not as early as I wanted to be, so I better head to the currency wrap up now:

Currencies today 4/6/10: American Style: A$ .9244, kiwi .6999, C$ .9997, euro 1.3408, sterling 1.5162, Swiss .9362, European Style: rand 7.2642, krone 5.9796, SEK 7.2043, forint 197.97, zloty 2.8591, koruna 18.8575, RUB 29.3025, yen 93.94, sing 1.3973, HKD 7.7657, INR 44.525, China 6.8257, pesos 12.2659, BRL 1.7618, dollar index 81.385, Oil $86.43, 10-year 3.95%, Silver $17.9275, and Gold... $1,124.70

That's it for today...It is great to be back in St. Louis. I had a wonderful Easter weekend with my family, but it is always great to get back home. I got to catch bits and pieces of the Cardinals game yesterday, it looks like they won't have any problem scoring runs this year. It was great to see Pujols hit one out on his first at bat of the regular season! My son, Brendan, finally got to see a Blues home win, as we made it back in time to watch the Blues notch an overtime win at home. They are statistically still in the playoff race, but their chances are pretty slim. And Duke pulled it out last night, beating a very good Butler team. I had Duke in our office NCAA pool, so that means I get to buy everyone lunch. Unfortunately the winnings don't usually cover the cost of lunch, but it is still fun to win!! Hope everyone has a terrific Tuesday!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 04-06-2010 8:44 AM by Chuck Butler