Details of Greek aid package boosts the euro...
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In This Issue..

* Details of Greek aid package boosts the euro...
* Officially the US recession is still not over...
* Commodity currencies take a breather...
* Polish zloty holds steady after tragedy...

And Now... Today's Pfennig!

Details of Greek aid package boosts the euro...

Good day, and welcome to another week.  It is a holiday here in St. Louis, as it is the home opener for Cardinal nation.  Looks like the fans will have an absolutely perfect day for the celebration, with sunny skies and temps in the upper 70's.  Opening day truly is a local holiday, and a big number of workers will be calling in sick in order to go downtown to enjoy the festivities.  Let's hope the Cardinals can bring the home crowd a winner!

The EU gave the euro a big boost over the weekend as they announced the details of a $61 billion aid package for Greece.  The announcement of the details calmed the markets and sent the euro shooting up close to $1.37 for the first time since mid March.  The plan was hammered out back on March 25th, but details of how the aid package would be structured were not revealed, causing many to question it.  Now that the details have been revealed, traders reversed some of their short positions and the euro has recovered.

But Greece has still not asked to use any of the loan package which has been offered by the EU.  The Greek Prime Minister called the agreement a 'loaded gun on the table' which he hoped would halt the rise in borrowing costs for Greece.  "Our goal is, and we believe we can, to continue to borrow smoothly from the markets," Financial Minister George Papaconstantinou told reporters yesterday.  "The Greek government hasn't asked for this mechanism to be activated, even though it is already immediately available." For now, the 'loaded gun' on the table seems to have sent the short sellers heading for the door, which is exactly what the EU wanted to accomplish.  In an ideal world, just the existence of the aid package will allow Greece to refinance their debt a slightly better yields than what the markets were demanding over the past month, and will buy them enough time to implement their austerity plans.  Now the burden has shifted to the Greek government; it will be up to them to get the spending cuts passed and bring down their deficits.

The euro's advance sent the dollar index down by the most in over a month with currencies closely associated with the European continent performing the best.  The Euro and Danish Krone were the best performers, climbing over .7% vs. the greenback.  The Swiss franc also gained over .5%, and the Swedish krona, British Pound, and Norwegian krone gained over .33% vs. the US$.  The commodity currencies, which had been outperforming all others lately, took a break and slid a bit vs. the US$ as oil moved lower.

The only data released on Friday here in the US was wholesale inventories, which increased a bit more than expected.  Inventories at US wholesalers in February increased by .6% following a .1% increase the month previous, a number which was revised up from the original estimate which showed a .2% drop for January.   Sales advanced .8%, causing wholesalers to begin restocking shelves after a record reduction in stockpiles last year.  The tight inventories should help give the US economy a bit of momentum once it starts pulling out of the recession; as companies will have to boost production as demand picks up.  The rebuilding of inventories were reported to have accounted for two-thirds of 4th quarters 5.6% pace of economic growth here in the US.  Inventories contributed 3.8% to the GDP from October through December, the most in 22 years.

But in order for companies to continue this inventory rebuilding, they will want to see further proof of the recovery.  The committee of economists who are charged with determining the official turning points in the nation's business cycles isn't yet convinced that we have seen the end of the latest recession.  The committee is expected to announce today that it cannot yet declare an end to the recession that began in December 2007.  Despite recent data which show some improvements in employment and income, the committee still worries that the US economy could double-dip back into recession.  The uncertainty for the US recovery will continue to weigh on the dollar, and keep investors guessing with regard to interest increases by the FOMC.  I don't see the Fed raising rates here in the US until sometime next year, and currencies of those countries which are further along in their interest rate cycles will outperform the greenback in 2010.

The Brazilian real is certainly one of those currencies.  The real has not done much vs. the US$ this year, after posting the best performance of any currency in 2009.  The Brazilian government has been selling their currency and buying dollars in order to cool the appreciation of the real, and this intervention has worked thus far.  But as Chuck always says, you can only swim against the tide of the markets for a short while.  And the central bank of Brazil just doesn't have the deep pockets it takes to stage a long term battle against the currency markets.  As the global economy recovers, higher commodity prices and interest rate differentials will move many investors toward the Brazilian real, which could come back to be one of the best performers again in 2010.

Two other commodity based currencies were down a bit over the weekend.  Both the Australian dollar and Canadian dollar have been strong performers, with the loonie hitting parity with the US$ and the Aussie dollar creeping within spitting distance of the $1 mark.  Data released in both countries caused both currencies to back off of their recent gains vs. the US dollar.  The Canadian dollar fell from parity after a report showed Canada's employment failed to increase as much as economists had predicted.  The report showed a 17,900 job gain in March after the Canadian economy added 20,900 jobs the month previous.  Canada's unemployment rate held at 8.2%, high but still trending lower.  Bank of Canada Governor Mark Carney signaled last month that he is open to raising the benchmark overnight interest rate from a record low as soon as June 1.  An interest rate move by the BOC should push the loonie back through parity with the US$.

The Australian dollar fell after a report showed the housing market is weakening.  The number of loans granted to build or buy houses and apartments in Australia dropped 1.8% from January according to a report released earlier today.  This was almost double the number expected by economists, and showed the housing sector is cooling.  But this isn't necessarily a bad thing, and is in fact what Central Bank Governor Glenn Stevens wanted to see.  He has been aggressive with interest rate moves in order to make sure a housing bubble doesn't inflate in the land down under.  While the data caused a pullback by the Australian currency, I think the cooling of the housing market is a long term positive for the Australian economy and look for any pullback by the Aussie dollar as a good opportunity to add to positions.

The Polish zloty held reasonably steady after the tragic plane crash over the weekend which killed Poland's president and central bank chief.  The zloty declined immediately following the news of the wreck, but then erased earlier declines and actually saw a bit of an increase in early European trading.  The Polish economy has held up well during the global financial crisis, and state-asset sales have helped fund the budget deficit.  The zloty is up slightly on the year vs. the US$, with a .48% YTD return.  The loss of the President, central bank Governor, and several leaders of the opposition and military is a major tragedy, and will probably weigh on the zloty in the coming months, limiting any currency appreciation.

Staying in the region, the Russian ruble gained to its strongest level against the dollar in more than four months as the Greek bailout helped stabilize recovery prospects.  With oil prices moving above $85 again, the Russian ruble has been able to post over a 3.5% gain vs. the US$ in 2010.  The higher ruble will help investors who purchased our popular BRIC MarketSafe CDs.  Speaking of MarketSafe CDs, expect a big announcement this week regarding our newest MarketSafe offering!  I can't give you details, but it will be based on the price of metals.  Again, don't call the desk, as we don't have information to give you, but stay tuned to the Pfennig and you will be one of the first to find out about out latest offering.

Currencies today 4/12/10: American Style: A$ .9273, kiwi .7126, C$ .9933, euro 1.3591, sterling 1.5426, Swiss .9429, European Style: rand 7.2394, krone 5.8846, SEK 7.169, forint 195.34, zloty 2.8478, koruna 18.5488, RUB 29.00, yen 93.58, sing 1.3916, HKD 7.7585, INR 44.5038, China 6.8257, pesos 12.2005, BRL 1.764, dollar index 80.566, Oil $84.84, 10-year 3.89%, Silver $18.485, and Gold... $1,164.90

That's it for today... We are celebrating opening day here in the office with a special 'ballpark lunch' of dogs and brauts, and everyone is wearing their Cardinal red.  We had an absolutely gorgeous weekend, and it was packed full of activities.  Both Christine Peplow and I ran in the GO St. Louis marathon, I ran the half marathon and Christine participated in a relay team which ran the full marathon.  We both did better than our goal times, so yahoo for us!!  We have a visitor on the desk this week, welcome to Mike Harrel who is joining us from Jacksonville to learn more about the currency and metals markets.  That will do it for today, hope everyone has a Marvelous Monday.  GO CARDINALS!!!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 04-12-2010 8:39 AM by Chuck Butler
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