The euro continues to climb, vaulting through $1.34 for the first time in almost a year...
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In This Issue.

* Euro climbs above $1.34

* Japanese yen continues to slide

* US trade deficit widens on increased imports

* Bud Conrad comments on the Fiscal Cliff deal

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

The euro continues to climb, vaulting through $1.34 for the first time in almost a year...

Good day. I want to start off this morning's Pfennig with a quick correction/clarification of something Chuck ran on Friday morning. Chuck encouraged all of the Pfennig readers to go out and sign the petition to force the government to audit the US government's gold holdings. But apparently the link Chuck provided in Friday's Pfennig was shut down and removed. Here is what Chuck had to say: "So, I immediately went into conspiracy mode, and thought that. The Gov't put it up on their website, thinking that no one would notice it, then in a couple of months they would be able to say, that the people didn't demand an audit when they asked... Unfortunately for them, someone noticed and the word got out, and seeing thousands of names on the petition being added, the Gov't pulled it, before it got to 25,000..."

But in the end. it was just a bad link (I had gotten it from the GATA site). Chuck was able to find another link which seems to work (I tried it over the weekend) here is where you can all sign the petition and watch the government squirm: We only until Feb 8th to sign.

Direction was given to Friday's markets by the euro which continued to march upward vs. the US$. The positive rhetoric by ECB President Mario Draghi continued to support the euro which climbed quickly through the $1.32 handle and then vaulted right through $1.33 touching $1.3404 as a high. This is the highest level for the euro in almost 11 months. Both Mario Draghi and Luxembourg Prime Minister Jean-Claude Juncker, who leads the euro-area finance ministers, made convincing arguments last week that the 'worst is now behind for the euro'. But is the worst really over? Or is the European debt crisis simply taking a back seat while the US debt ceiling and budget negotiations dominate the markets?

Draghi pulled off what has got to go down as one of the best verbal interventions of all time with his statement regarding 'unlimited support' for the European bond markets at the height of the European debt crisis. This can now be seen as a definite turning point in the crisis, and what is sometimes forgotten by the markets is that the European Central Bank has still not spent a single euro supporting Draghi's statement. No country has asked the ECB for the help which Draghi offered last summer, but the markets continue to be convinced that help is available, and that has kept the bond vigilantes away.

2012 was definitely a challenging year for the euro area, but Draghi and the ECB seem to have pulled through the worst and are actually looking forward to 2013. "We spoke a lot about contagion when things go poorly, but I believe there is a positive contagion when things go well," Draghi said. And you really can't argue with Draghi's optimistic outlook. The markets are no longer betting the Euro will collapse, and even a Greek departure is no longer such a 'sure thing' with bets placed at implying just a 15 percent chance vs. a 49 percent chance at this time last year. And the rest of the PIIGS are also looking better. The economies of both Portugal and Ireland, two of the first countries needing help, are looking better. Chuck sent me a note last night regarding something he had read on the plane down to Florida: Just read in The Economist, which is always required reading when I travel, and came across an article On Ireland. Our ancestor's homeland may just may be able to leave their bail out program at the end of this year! WOW!

So much for all those that say austerity doesn't work eh?

The currency strategists over at Goldman Sachs certainly think the euro will continue to move higher. A report released last Friday by strategists in London said the euro would strengthen to a 14 month high of $1.37 in the near term. It always gives me a 'warm and fuzzy' when the boys over at Goldman agree with our thoughts, as Goldman Sachs is still in charge of the global financial system.

The other big mover in Friday's currency markets was the continued slide of the Japanese yen which reached its weakest level since June 2010. The new Prime Minister continues to push the Bank of Japan for further stimulus measures in order to boost the stagnated Japanese economy. Abe will probably get the BOJ to adopt the 2% inflation target which he as been advocating; double their current 1% target. This would allow the BOJ and Abe's government to get even more aggressive in their attempts to stimulate their economy. The yen continued lower Friday after the Japanese announced they would spend 10.3 trillion yen in new stimulus plans.

The weaker yen has made the return of the 'carry trade' very profitable for investors. Readers may recall I spoke about the return of this carry trade a few months ago, just when the Japanese yen began its slow spiral down in value. Data compiled by Bloomberg showed carry trades funded by the Japanese yen returned an annualized 77 percent in the past three months. This compares to a 7.8% gain for carry trades funded by the dollar, and a loss of 4.3% for those trades funded with euros.

The Japanese economy continues to be stuck in a funk, but the rest of Asia is recovering. According to data I found on Bloomberg, Asian economies are expected to expand an average of 4.8% during 2013 compared to just .65% growth in Japan. This higher growth should continue to benefit the currencies of China and Singapore, both of whom tend to use their currency as a tool against higher inflation which typically accompanies higher growth rates. We have pointed out Singapore's use of their currency as a means to combat inflation in many of the presentations we give to interested investors. While many central banks choose to combat growing inflation pressures with increased interest rates, the export driven economies of Singapore and China put more focus on using their currency levels to combat inflation. As the global economy continues to heat up, raising inflation expectations, the central banks of Singapore and China could continue to allow their currencies to appreciate.

The commodity currencies were slightly lower over the weekend, but the moves lacked any real conviction. Both the Aussie and Canadian dollars fell from their strongest levels in over a quarter, and the pull back was largely seen as an adjustment after the recent moves. Positive news out of the Chinese economy has bolstered all of the commodity currencies recently. A report released on Friday showed inflation accelerated more than forecast to a 7 month high. Chinese inflation rose 2.5% in December from a year earlier, compared to an increase of 2% gain in November. The increasing inflation data has caused some investors to worry that China's recovery could overheat again.

Does anyone else feel this is just a bit ridiculous? We have stories one month stating the Chinese economy is heading for a 'hard' landing, and then the next thing you know we have other stories claiming the Chinese economy is at risk of overheating. I guess all of these knee jerk reactions should be expected since most investors don't feel they can trust the numbers coming out of China. More transparency in the Chinese financial markets could go a long way toward smoothing out some of these volatile reactions to data releases, but that will take time.

Reports on Friday showed the US trade deficit which unexpectedly widened in November. The deficit swelled to $48.7 billion from October's $42.1 billion shortfall. This widening surprised the markets, and our oiwn Chuck Butler who felt the deficit would probably narrow as oil prices moved lower. But imports actually increased 3.8% with purchases of foreign made cars and parts leading the surge. Exports also increased, but could only manage a 1% move during the month of November. The future does look a bit brighter for the trade deficit though, as a falling dollar and recovering global markets should lead to an increase in exports. This is one of the 'silver linings' of the devaluation of the US$, our exports get cheaper and can better compete in the foreign markets. But as Chuck pointed out during a conversation on the desk last week, the US really doesn't export anything anymore, so any positive impacts of a falling US$ will probably be minimal.

Then There Was This. Bud Conrad over at Casey Research, put his own viewpoints on the recent Budget Deal aka the Fiscal Cliff deal... I couldn't agree with him more! here's Bud... "I had been trying to ignore the massive, blanketed coverage by our media of this political circus. I knew ahead of time what the result would be from this deficit-cliff exercise. When it comes to holding the line against more government deficits, spending, and taxing, our government is dysfunctional. This event is more seminal than the results indicate: we can expect the politicians to repeat this process in a couple of months, and so on until there is a major loss of confidence in the dollar. There will be no return to fiscal responsibility. My point is simply this: we are already beyond the point of ever returning to a sensible, balanced-budget system. We may be distracted by wars, some crazy or false-flag terrorist event, or by even a natural disaster, but the conclusion is already inevitable: The US dollar will be toast; Treasuries are a dangerous investment; interest rates will start rising; and even the massive Federal Reserve manipulation supported by the banking cartels will be unable to overcome that. We will likely start in a slow fashion his year and will escalate out of control in the decade ahead."

Thanks to Chuck for pointing Bud's piece for me to include in today's Pfennig. Chuck also sent me an update regarding the trillion dollar platinum coin he mentioned last Friday. I was a bit amazed that many people were actually pushing this idea to the White House, but the Treasury department came out with a news alert carried by the Wall Street Journal over the weekend stating that they won't pursue the idea of the platinum coin. Maybe they heeded Chuck's warning on just what that coin would mean for the dollar!

To recap. The euro vaulted through the $1.33 level and reached a 11 month high of $1.34 on 'good vibes' sent out by Draghi and Goldman Sachs. The Japanese yen continued to move higher (dropping in value) after the new PM pushed for even more stimulus measures. Rising inflation expectations should boost the Singapore dollar and Chinese currencies. And reports out of the US on Friday showed the trade deficit unexpectedly widened in November.

Currencies today 1/14/13. American Style: A$ $1.0566, kiwi .8413, C$ $1.0153, euro 1.3363, sterling 1.6076, Swiss $1.0906. European Style: rand 8.6994, krone 5.5136, SEK 6.4582, forint 222.15, zloty 3.0836, koruna 19.1676, RUB 30.228, yen 89.32, sing 1.2260, HKD 7.7524, INR 54.50, China 6.2203, pesos 12.6545, BRL 2.0324, Dollar Index 79.539, Oil $94.04, 10-year 1.84%, Silver $30.76, Gold $1,668.95, and Platinum $1,656.50.

That's it for today. Did you catch any of those football games this weekend? While last week was a bit of a yawner for games, this week certainly had some great last minute lead changes. Our spring like weather which had spoiled us a bit last week moved away over the weekend and the 60 degree temps were replaced with wind chills in the single digits. But it made it a perfect weekend to make a fire and watch the playoff games. Hockey is baaaaack. The St. Louis Blues took to the ice this weekend and there were over 6,000 fans who attended their first practice since the end of the lockout. The Blues will begin their season this weekend at home against the Detroit Red Wings; GO BLUES!! Hope all of you had a great weekend, and thanks for reading the Pfennig. Have a Marvelous Monday!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 01-14-2013 12:14 PM by Chuck Butler