Dollar continues to slide.
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In This Issue.

* Dollar continues to slide.

* ECB to leave rates unchanged.

* Brazil raises rates.

* Ruble tops gains vs. US$...

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

Dollar continues to slide.

Good day. Busy day on the desk yesterday, with a number of new customers calling the desk to find out about our latest MarketSafe CD, and existing customers calling to buy into the currencies and metals. After the phones were turned off last night I was speaking with the guys and we figured out the 'call of the day' was people looking to purchase silver. It seems that in spite of silver trading at an all time high, investors still want to get in. And I really can't blame them, with Bernanke and his boys turning a blind eye to inflation concerns, and the unrest in the Middle East driving oil above $100 per barrel. Metals are an excellent 'uncertainty hedge' and we certainly have our share of uncertainty in the world right now. More on that later, but first let's turn to the currency markets.

The dollar continued to slide vs. most of the major currencies yesterday, as investors continued to move into defensive positions. Last year, investors would have been flocking into the dollar in the face of global uncertainty, but attitudes have changed. It seems that investors have become a bit fearful of the inflationary risks posed by QEII and a possible QEIII!! Yes, as Chuck has predicted, it is looking more and more likely that QEII will be followed up with another sequel. Asked at a House Financial Services Committee hearing yesterday what conditions would warrant a third round of QE, Chairman Bernanke said that "what we would like to see is a sustainable recover. We don't want to see the economy falling back into a double dip or to a stall-out."

Bernanke's testimony over the past few days has certainly not give me the warm and fuzzies regarding the Feds ability to control price increases. And while the spike up in oil will hopefully be short lived, other commodity price increases aren't going away so easily. And the higher oil prices will certainly be a drag on the US economic rebound, as consumers will be spending a larger chunk of their income just to fill up their gas tanks.

Late yesterday the Federal Reserve released its Beige Book which details their view on the current state of the economy. The book was predictably upbeat on the future of the US economy, and pointed to what they believe is an improving labor market as proof. "Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement." Overall, the economy "continued to expand at a modest to moderate pace". We will get another indication of just how strong the labor market is with the release of the weekly jobs data this morning. Initial jobless claims are expected to show a modest increase from last week, and continue to stay stubbornly close to 400k. Data released yesterday by ADP showed private sector job growth, while the public sector has begun shedding jobs. I'm sure most of these public sector job losses are coming at the State and local level, as governments deal with budget shortfalls. This seems to be a good sign for our economy, and I sure hope this trend continues (larger private sector and smaller government!). Tomorrow will shed even more light on the employment picture here in the US, with the release of February's employment data.

The Bloomberg terminal on my desk just chirped an alert, and I see the ECB left rates unchanged (as we expected). The markets will probably turn their focus to the press conference which Trichet will hold later this morning to see if the ECB is moving to a more hawkish position. Recent interviews with ECB members suggests there is a growing consensus among the council members that they must pull back their recent stimulus. I would expect Trichet to sound a hawkish tone in the face of $100 oil. Higher oil prices, if they continue, will certainly push inflation past the ECB's limit, and force an interest rate increase. As I reported yesterday, European Producer Price inflation accelerated more than economists forecast in January, and these producer prices will undoubtedly trickle down into consumer price increases in the coming weeks.

A tightening policy by the ECB should be good news to the Euro. Bank of America certainly thinks so, as they have raised their first quarter and long term forecasts for the euro vs. the dollar. BOA believes the US will have difficulty dealing with its budget deficit, and the recent euro price increases will continue. BOA moved its forecast for the Euro to $1.35 for year end 2011 from $1.30 and from $1.35 to $1.40 for December 2012.

The pound sterling dropped a bit, after reports showed UK house prices fell for an eighth month. An index of British service industry activity fell to 52.6 in February, lower than economists had forecast. But the fall in the pound sterling was ended as a report was released which showed UK construction grew at the fastest pace since last summer. This last report suggests the BOE may need to raise rates again to control inflation. Higher rates by the BOE would help support higher Sterling prices.

The Swiss Franc has been on a good run, and the SNB seems content to let it continue appreciating. Swiss central bank Vice President Thomas Jordan said that policy makers don't see a need to intervene, in spite of a nearly 5% appreciation over the past 3 months. "The franc is currently very strong and poses a lot of problems for the Swiss companies," Jordan told reporters after a press conference in Bern today. Still, "at the moment there is no necessity of intervening in the currency market." This is good news for investors in the Swiss franc, as the SNB has attempted to cap the appreciation of the currency in the past. Interest rates remain low, and Jordan did not indicate he would support raising them any time in the near future, so Swiss investors will need to be content with currency appreciation only.

Investors looking for higher interest rates have been turning toward Brazil, and all indications are that rates will continue to rise. Brazil's central bank raised the overnight rate 50 basis points yesterday, and signaled it would be hiking the rates even further next month. The 50 basis point move was predicted by most economists, and had already been priced into the market. Annual inflation in Brazil has been accelerating, and the central bank is moving rates higher in order to combat these rising prices. The central bank targets inflation of 4.5% with a two percentage point range on either side; and consumer prices are expected to be within this range at 5.8% this year. President Dilma Rousseff has announced cuts to spending on defense, education, housing, subsidies to companies and farmers and payroll outlays as part of her plan to cut the budget deficits. Fiscal discipline, along with high interest rates and a growing economy certainly paint a pretty picture for the Brazilian real.

With oil rising, you would expect the commodity currencies to be doing well, and the Norwegian krone, Russian ruble, and Canadian dollar have all been gaining vs. the US$. Norway is a favorite of the desk, and the Canadian currency is another popular currency with the desk, and looks like it is firmly entrenched above parity vs. the US$. We don't trade the Russian ruble directly, but many of our investors own it as part of our BRIC MarketSAfe CDs which were issued last year. The ruble reached its strongest level since December 2008 after the central bank loosened exchange rate controls and the finance minister said the ruble will strengthen to help lower inflation. The ruble is the best performing currency vs. the US$ this year, up 7.6%.

The Aussie dollar eased from a two month high against the dollar after government reports showed some cracks in the housing market. The number of permits issued in Australia dropped 15.9% in January, the biggest decline in over 8 years. Another report released in Australia today showed Australian exports slid 4 percent in January, the largest decline since July of last year. Australia's fortunes are linked to a growing Asia, so a report released in China showing a contraction in non-manufacturing industries added to the negative sentiment.

Currencies today 3/3/11... American Style: A$ $1.0183, kiwi .7463, C$ $1.0288, euro 1.3862, sterling 1.6269, Swiss $1.0792, ... European Style: rand 6.9041, krone 5.5672, SEK 6.3228, forint 195.45, zloty 2.8725, koruna 17.492, RUB 28.246, yen 81.8, sing 1.2688, HKD 7.79, INR 45.045, China 6.5720, pesos 12.065, BRL 1.6553, dollar index 76.73, Oil $101.55, 10-year 3.48%, Silver $ 34.46, and Gold... $1,427.85... and let's not forget to check out the debt:

That's it for today. Chuck will be upset that he is missing out on the quarterly Fire Alarm testing this morning. Even though they warned us, I still jump every time the alarm starts up. Thanks to everyone who sent me nice notes regarding my father, there hasn't been any change in his condition. The sun is starting to crest the downtown buildings, and it looks like it is going to be another beautiful day here in St. Louis. With Chuck and Mike gone, I am going to have to jump on the phones today, so I better get this out the door. Hope everyone has a Tub Thumpin Thursday!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 03-03-2011 12:19 PM by Chuck Butler
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