Another day, another shift in sentiment...
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In This Issue.

* Another shift in sentiment

* Prices stagnant in the US

* SDR reduce weightings of US$

* Gold climbs for first time in 5 days

And, Now, Today's Pfennig For Your Thoughts!

Another day, another shift in sentiment...

Good day... Investors shifted their focus away from Ireland and back to the US$ overnight which wasn't a good thing for holders of the dollar. Data here in the US showed prices aren't moving, encouraging those calling for further Quantitative Easing. And gold followed the reversals in all the other markets, breaking a 5 day run of lower prices to climb over $20. More on that in a bit, but let's start with the latest news out of Europe.

The focus of the currency markets over the past week has been on Ireland and how far the EU would go to protect the Emerald Isle's impact on the single currency. Bond traders have forced the spreads on Irish debt to record levels, and Irish banks are the ones who are paying the price. Thus far, the EU has lent their vocal support to Ireland, assuring the markets that they stand behind Ireland's attempt to restructure their economy. But it may now be time for them to step up and put some action behind their rhetoric. Over the next few days EU and IMF officials will be reviewing the books of Ireland's debt-laden banks to assess whether or not the Irish government can fix the banking system on their own. Most of what I have been reading suggests Ireland will have to fall back on the EU-IMF rescue fund which was set up after the Greek crisis hit. There is approx. 750 billion euros ($1 trillion dollars) available in the fund, and it is predicted that the Irish will need to open a line for up to 80 billion of them.

Irish central bank Governor Patrick Honohan said he expects the country to ask for a bailout from the EU and IMF worth 'tens of billions' of euros to rescue its battered banks. "It is my expectation that will happen, absolutely," said Honohan. "It will be a large loan because the purpose of the amount to be made available is to show Ireland has sufficient firepower to deal with any concerns in the market."

The EU members seem to have handled the run on Irish debt as deftly as they handled the Greek crisis. They have stuck to the same game plan which ended up working in Greece: 1. Voice support, trying to jawbone confidence back into the markets, 2. Announce the availability of much more credit than what they believe will be needed for support, and 3. Support the bond markets by making purchases in the open markets. We have moved past the first step and will probably get an announcement of a support package sometime later this week. The final step is still up in the air, as several members of the ECB are urging the European central bank to start pulling back the bond purchases it began nearly a year ago. But several members of the ECB, including Bundesbank President Axel Weber, oppose any additional bond buying.

Weber was against the bond purchases from the start, and increased his opposition rhetoric six months ago. He felt the move to purchase bonds in the open market to support the Greek bailout was setting the stage for future crisis in each of the peripheral European countries. The danger, according to Weber, was that the ECB erodes its independence by financing debt-strapped nations and keeping banks on life support as Europe's debt crisis persists. This is exactly what has happened thus far in Ireland, and we still have Spain, Portugal, and Italy waiting in the wings. Weber's warnings are coming to fruition, but was there really an alternative? Would a default by Greece or Ireland be a better thing for the euro? It certainly would have meant a much different euro than the one we have today, with these peripheral countries falling out of the euro. But that is not what happened, and the EUs moves seem to be calming the markets for now. The euro rose nearly 1 ½ cents over the past 24 hours, proving the EU has accomplished what they set out to do.

But don't for a minute think the debt problems in Europe are over! Just when the Irish crisis seems to be calming, Greece will be announcing their 2011 budget later today. Many predict the Greek budget will include a larger deficit than originally planned, putting the 110 billion euro bailout at risk. Deficit goals were part of the terms of the EU led bailout, and if Greece can't meet the terms of the loan it risks another default. Austrian Finance Minister Josef Proell threatened earlier this week to withhold his country's share of the EU loans because Greece wasn't achieving its fiscal goals. As I said earlier, the Euro is not nearly out of the woods, and it will remain one of the most volatile of the currencies as the debt crisis ebbs and flows.

But right now, the pendulum has swung back in favor of the euro, and against the US$. Data released yesterday showed US consumer prices excluding food and fuel had the lowest annual increase on record. Other data showed housing starts fell 11.7% MOM and building permits were also lower than expected. Several stories on the newswires said this data supports the FOMC's move to increase stimulus. The stock jockeys and cable news were quick to point out how the US economy is stuck in the mud, and Ben Bernanke was going to save us all with his newest round of stimulus. But as most readers know, both Chuck and I question just how much good this latest round of QE will do. I have read several stories which suggest most of the money the US is pumping into our economy is quickly leaving the US, financing projects overseas where better yields can be found. But I digress, back to the data.

Today we will see the weekly jobs numbers which are predicted to be largely flat vs. last week. We will also get a view of the Leading Indicators which are predicted to have rose during the month of October by the most in five months. If these numbers come in as expected, they would seem to throw cold water on all of the stories which pointed to yesterday's weak data as the reason for a need for QEII. But no matter what this data shows, it is too early for the Fed to do anything about QEII; the bond purchases haven't begun yet, but the ship has left the port!

JP Morgan predicts the US dollar will suffer due to the QEII announcement. According to Tohru Sasaki, head of foreign exchange research, the dollar will fall to below 75 yen next year as it becomes the worlds "weakest currency" due to the Fed's monetary easing program. Sasaki predicts the US central bank, along with those in Japan and Europe will keep interest rates at record lows. Investors will turn away from these currencies and focus on the higher yields available elsewhere.

Ty sent Chuck and I a note the other day which I forgot to include in yesterday's Pfennig. The IMF reduced the weighting of the dollar and yen in the Special Drawing Rights basket, increasing the weight of the euro. Readers will recall that these SDRs were brought to the front of everyone's minds last year when both China and Russia suggested they replace the US$ as the world's reserve currency. The IMF bases the weightings on each countries share of global trade. But one currency is visibly absent from this basket; the Chinese Renminbi is not considered 'freely usable' by the IMF and therefore is not included in the valuation of the SDR. But with the Renminbi closely linked to the US$, its exclusion really doesn't impact the over value. Perhaps if/when the Renminbi starts trading more freely, the IMF will move it into the calculation, even further reducing the weight of the US$.

For now the SDR and its calculations really don't have much of an impact on the currency markets. But the shift by the IMF is another indication of the falling importance of the US$ and yen in the global markets, and the rising importance of the euro.

The Norwegian krone snapped an 8 day run of losses vs. the US$ and ended up as the top performing currency overnight. The krone benefitted from the calming of fears in Europe as the Irish debt crisis took a pause. We have long pointed to Norway as one of the most fiscally solid countries on the globe, and investors see Norway as having the world's smallest default risk. Norway's budget surplus equaled 10.3% of GDP last year as oil revenues helped boost the economy. Norway also has the lowest unemployment rate in Europe, and a fully funded pension system. Norway has become a safe haven currency, and should continue to be one of the 'base currencies' in investor's portfolios.

With the return of a bit of investor optimism, the higher yielding currencies of the commodity countries rebounded. The Brazilian real moved higher along with the Australian and New Zealand dollars. These three currencies were among the top performers vs. the US$ following the lead of the Norwegian krone. Most of the move was a reaction to the calming of the markets in Europe, and the support for Ireland which was announced by the EU. But the kiwi was also helped by a report released overnight which showed producer prices in New Zealand jumped faster than expected. PPI increased .7% during the third quarter, and Producer output prices rose an even greater 1.2%. Higher inflation rates may cause the central bank of New Zealand to have to raise rates more aggressively than previous estimates, widening the interest rate differentials which have supported the kiwi.

Gold also climbed overnight, jumping over $20 and snapping a 5 day losing streak. The weaker dollar and return of investor confidence in Europe seems to be reason for the turnaround in the shiny metal. Gold has been moving inversely to the greenback, so a weaker dollar caused a jump in the precious metals. Silver also turned around, rising back over $26 and looking like it could push the $30 barrier sometime soon. London based research firm GFMS, Ltd released a report yesterday which stated Silver would top $30 an ounce in 2011 on demand by investors seeking protection of their wealth. Sounds like the folks over at GFMS have been attending some of Chuck's recent talks!

Chuck sent me the following note to include in today's Pfennig, so I decided to end with it since it is some great news:

Chris...first of all... I want to thank everyone that sent me a note yesterday with their heartfelt words of comfort. I am a very lucky man to have such a "large family" of readers that care about others.

Second... wasn't it great / wonderful news to hear that our own Stan "The Man" Musial is being awarded the Presidential Medal of Freedom, just in time for his 90th birthday this Sunday? There's never been a combination of ball player, gentleman, father, the list could go on, but most of all a wonderful human being, like Stan Musial... Stan has a statue outside our baseball stadium that has these words inscribed on it... "here stands baseball's perfect warrior, here stands baseball's perfect knight.

To recap, investors have shifted their sentiment again, in favor of the euro and against the US$. The IMF reduced the weighting of the US and yen in the SDR, but won't include the Chinese Renminbi. Commodity currencies rally, led by the Norwegian Krone. And Gold finally snapped its losing streak and brought along Silver for the ride.

Currencies today 11/18/10: American Style: A$ .9882, kiwi .7772, C$ .9815, euro 1.3651, sterling 1.6013, Swiss $1.0134, . European Style: rand 6.9660, krone 5.9683, SEK 6.847, forint 201.52, zloty 2.882, koruna 18.0513, RUB 31.068, yen 83.31, sing 1.2947, HKD 7.7541, INR 45.23, China 6.6334, pesos 12.3032, BRL 1.7139, dollar index 78.50, Oil $81.65, 10-year 2.93%, Silver $26.5349, and Gold. $1,355.80

That's it for today. I also appreciate reading all of the nice emails you readers sent to us in support of Chuck. The community of Pfennig Pfnatics is a great big family, and it is just heartwarming to read how everyone is so supportive. It was great news to hear 'Stan the Man' got the Medal. My wife is good friends with one of Stan's daughters, and my daughter Lauren is in class with Stan's granddaughter. Lauren has had pancake breakfasts with Stan more than a few times on 'sleep-overs' and says he is the nicest 'old man' she knows. So a big Congratulations to Stan, it is an award he certainly deserves. Hope everyone has a Terrific Thursday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 11-18-2010 9:45 AM by Chuck Butler