Bank of Canada Is First in G-7 To Hike Rates!
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In This Issue..

* Euro's rally fizzles out...
* Rates hikes are not over in Australia!
* Japanese PM quits!
* Brits offer advice to Greece.

And Now... Today's Pfennig!

Bank of Canada Is First in G-7 To Hike Rates!

Good day... And a Wonderful Wednesday to you! Well... Most of you will find 2 Pfennigs in your email box this morning, while some of you, were up late and read the "special announcement" that I made last night. One reader sent me a note, and said, "Chuck, you're up way past your bedtime" HA! It just looked like that! For those of you finding the two emails in your mail box I won't ruin the news for you... Go ahead and open it up and read it, then come back to the "regular Pfennig"!

OK... Yesterday, I told you that the Bank of Canada (BOC) would meet today, and raise rates... Well, I got that 1/2 right! UGH! The BOC did raise rates, but they did it yesterday! Yes, the BOC became the first Central Bank in G-7 to raise rates, 1 1/2 years after the financial meltdown. The BOC tried to play down the move, by saying that they were not entering a rate hike cycle that would yield rate hikes meeting after meeting... But, with GDP, as reported here yesterday, running at 6.1% annualized, there are more rate hikes to come... It just won't be meeting after meeting... The BOC will sprinkle the fairy dust here, and a little there, some for themselves, and a little for us... A little more for them... HA!

Yesterday's price action in the euro and other currencies that followed was very familiar... When I signed off yesterday, the euro was beginning to rally off the overnight low of 1.2110... And that rally continued until about lunch time. The single unit traded above 1.23 after the U.S. ISM (manufacturing) Index reported stronger than expected manufacturing in May, even though it was weaker overall than April!

But, as the day went on, the euro lost that luster of 1.23 and change, and went about losing ground the rest of the day. The overnight sessions haven't really moved things too much, so we're about where we were yesterday afternoon right now...

The Japanese yen is weaker this morning... As the Japanese Prime Minister, Hatoyama, has indicated that he will step down, thus joining a group of 7 Japanese Prime Ministers that have quit in the last 10 years... I've told you many times in the past, that political questions weigh heavily on a currency, and even the Japanese yen is not immune to those problems.

And yen has to deal with another problem... The replacement for Hatoyama, finance minister, Kan, is rumored to be someone that is known to be in favor of a weak yen to introduce inflation to the Japanese economy... It remains to be seen just what will happen here in Japan, but for now, this is what's weighing on the yen this morning.

Yesterday I told you about how the Reserve Bank of Australia (RBA) had kept rates unchanged at their meeting the night before, and how RBA Gov. Stevens spoke words that would have the markets believe the rate hikes are over... However, let me make this perfectly clear to any trader or investor that believes the rate hikes are over... They are only over for the "near term" as Gov. Stevens said! There may be a pause for a couple - three months, but the rate hikes in Australia are not over! And they won't be over, till we say they're over! It wasn't over when the Germans bombed Pearl Harbor was it? HA! (from Animal House, and yes I know it wasn't the Germans... ) over the years, when I've used that line, I've actually had people send me emails telling me it was the Japanese that bombed Pearl Harbor... Ok, now that I have to go through that explanation, it ruins the line! UGH!

In New Zealand... The New Zealand Commodity Price Index shot higher in May to a record level, led by rising milk and butter prices. This report is just another arrow in the Reserve Bank of New Zealand's (RBA) quiver for their meeting that will take place next week... I would be very surprised to see the RBA not hike rates next week. The data for 6 weeks now, has pointed to a rate hike... The only thing the RBA's Gov. Bollard, has to defend himself should he opt for unchanged rates, is the Eurozone problems... But that's a far stretch down here in the South Pacific!

Remember a month or two back when the problems in Greece began to weigh on the euro? I said then that I thought what would be best for Greece would be to leave the euro, go back to the drachma, devalue the drachma, and pay back the debts with a cheaper drachma... Then in a few years, after austerity measures have kicked in, they apply to rejoin the euro...

Well... It seems that I have some readers in the U.K. that agree with me! "The Greek government has been advised by British economists to leave the euro and default on its ?300 billion (£255 billion) debt to save its economy." per a story on the Business Times U.K.

Ok... While I'm not in favor of them defaulting on anything, as I've said before Greece is the like the slowest buffalo scenario... When the slowest buffalo gets killed, it allows the herd to go faster....

The Brazilian real took a shot to the chin yesterday when it was announced that Brazil would cancel the sale of its longest fixed-rate bond for the 3rd time in the past month... The Eurozone debt problems have scared the bejeebers out of Brazilian authorities who fear that being an "emerging market" they won't have buyers for their debt in these scary times...

That would be a problem for most countries these days... So it pays to be the U.S. when you have to get people to buy your debt, eh? No matter how much of that debt they issue, and you hold...

Gold is $3 cheaper this morning...

Then there was this... As reported by the NY Times this morning... "A federal judge said Tuesday that it was unfair to hold Moody's Investors Service and Standard & Poor's liable as underwriters on securities offerings that required their ratings.

United States District Judge Jed Rakoff issued an opinion citing the reasons behind his March 31 dismissal of class-action claims against the credit rating agencies, and some claims against Bank of America, JPMorgan Chase and the ABN Amro unit of Royal Bank of Scotland.

Judge Rakoff rejected the plaintiffs' contention that the agencies should be treated effectively as underwriters because their ratings were "necessary" to distribute the securities."

OK... Back to Chuck... This news just made me go over to the wall and yell at it! I shake my head in disgust!

To recap... The euro's rally yesterday was stopped short at noon, and has backed off to near yesterday morning's levels again. The Bank of Canada raised rates 25 BPS, as I expected them to do, Japanese PM has quit, putting pressure on the yen this morning, and rate hikes are not over in Australia, just on hiatus for a couple of months.

Currencies today 6/2/10: American Style: A$ .8350, kiwi .6765, C$ .95, euro 1.2215, sterling 1.4680, Swiss .8635... European Style: rand 7.6725, krone 6.49, SEK 7.8240, forint 226, zloty 3.3540, koruna 21.11, RUB 31.18, yen 91.90, sing 1.41, HKD 7.7935, INR 46.97, China 6.8295, pesos 12.94, BRL 1.8470, dollar index 86.87, Oil $71.95, 10-year 3.28%, Silver $18.42, and Gold... $1,222

That's it for today... Had a great lunch yesterday with the economics professor that gives me my "continuing education"! I'm not a "by the book" kind of person that follows economics. I'm more of the how does it affect your pocket book... Do you have a pocket book? A purse, a murse (man's purse), a wallet? HA! (local joke) Any way, it's always good to get the professor's explanation of what I'm seeing... A Crazy day on the desk yesterday, led to one worn out Pfennig writer last night! So... What did you think of EverBank's announcement? Pretty cool, eh? That's what having a record of proven strength and growth will do for you in these times! My two oldest children, Dawn and Andrew, who are teachers, are now out of school for the summer. Dawn gives private swim lessons, and Andrew coaches swimming and water polo, so they keep busy... And with that, I'll get this out the door... I hope your Wednesday is Wonderful!

Chuck Butler
EverBank World Markets

Posted 06-02-2010 9:04 AM by Chuck Butler