Dollar gains ground as European crisis moves back into the news...
Daily Pfennig

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In This Issue.

* Dollar gains ground on Friday...

* Nordic countries get some love from the Economist...

* China surpasses the US as the largest trading nation...

* Gold slips as Lunar Holiday saps demand...

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

Dollar gains ground as European crisis moves back into the news...

Good day. Chuck is headed down to Houston for a checkup, and then he will be traveling with his son Alex to visit some colleges. I traded emails with Chuck last night, so I know he was able to make it down to Houston without any delays. Lucky for him that he wasn't headed out East! The weekend news was dominated by the weather which brought a major snow storm to the upper east coast on Friday night and severe storms to the southeast last night. The video of the tornado ripping across Mississippi was certainly scary. I just hope everyone was able to take cover.

Currency traders were running a bit scared on Friday as they moved out of 'risk trades' and back into the US$. The dollar index continued to move higher, and has not had a 'down' day in February. The index has recovered as the euro continues to give back some of the gains it had booked during the first month of 2013. But the euro is trading a bit higher this morning on expectations that Federal Reserve official Janet Yellen will strike a expansionary tone when she speaks later today in Washington. The Fed's Vice Chairman is seen as one of the more dovish members of the FOMC and will probably make a case for extended monetary stimulus here in the US. Vice Chairman Yellen is seen by most to be the logical successor to Chairman Ben Bernanke when his term ends in a year, so the markets definitely pay attention to what she has to say.

News out of Europe is also helping to strengthen the euro a bit this morning. As Chuck reported last week, ECB President Mario Draghi threw the common currency under the bus when he voiced concern that the euro's strength would hamper the nascent European recovery. This was a classic case of 'jawboning' by the ECB President, and it certainly worked as the euro dropped just under 2% after his warnings. But Draghi has resisted calls from French President Francois Hollande to steer the value of the euro even lower to boost growth. "The exchange rate is not a policy target, but it is important for growth and price stability," Draghi said late last week. "We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability." Spoken like a true central bank leader - maintain price stability!!

But the crisis in Europe isn't over by any means. Spanish bond yields have started to move higher again after reports of corruption by the ruling party were published by a major Spanish newspaper. A presidential election in Cyprus is also weighing on the value of the euro as many believe a bailout will be needed for the tiny island nation. I read over the weekend that many believe the aid package needed for Cyprus will match the overall size of their economy (about 18 billion euros). While the size of the rescue package isn't really a concern, if for some reason European leaders can't agree on the aid we could see Cyprus default. This could throw fuel back on the embers of the European debt crisis causing it to erupt back into the forefront of the currency markets.

The Nordic countries continue to be the bright spot on the European continent. Norwegian underlying inflation unexpectedly accelerated in January, increasing 1.2% from 1.1% in December. Policy makers in Norway's central bank have signaled they would raise rates if/when inflation becomes a problem. Officials of the Norges bank left rates unchanged during their meeting in December, but stated they could possibly raise rates as early as March if inflation warranted it. Norway's economy continues on solid footing thanks to oil exports, and a rate increase would definitely be seen as a positive for the Norwegian krone.

As I stated in my opening paragraph, Chuck flew to Houston last night, and both he and I love to read the Economist magazine whenever we travel. Chuck sent me the following email regarding an article which caught his eye in this week's Economist.

Sitting here at Lambert waiting to leave reading the latest Economist when the title of an article seemed a bit out of place for this publication: The next supermodel. No, they weren't talking about swimsuits, but instead they were talking about the Nordic countries.

Here's a snippet: Sweden has reduced public spending as a portion of GDP from 67% to 49% it has also cut the top marginal tax rate by 27 percentage points since 1983. This year they are cutting corp tax rate from 26.3% to 22% It's public debt fell from 70% of GDP in 1993 to 37% in 2010 and its budget moved from an11% deficit to a surplus of .03%

It goes on and on about Sweden, Norway and Denmark. Great article that proves what we've been saying about Norway and Sweden for years!

Chris again, and yes, we have been big fans of the Nordic currencies for a while now. Norway and Sweden continue to be very popular with clients calling into the desk, as both of these countries provide some shelter from the debt crisis in Europe.

In other European news, the pound sterling weakened for the first time in four days against the dollar after UK employment confidence declined in January. The gauge of employment prospects dropped to minus 45 from minus 42 in December. The pound has been weakening vs. the Euro this year, giving up nearly 4.8% of its value vs. the Euro and dropping 3.3% vs. the US$.

Chuck was right on with his call for a narrowing of the Trade Deficit here in the US for December. The Trade Balance narrowed to a deficit of $38.5 billion, much narrower than the expected $46 billion. January's figure was unchanged at $48.6 billion. As Chuck suggested, the weaker dollar helped narrow the deficits as imports decreased.

A story I read this morning on Bloomberg announced that China had surpassed the US to become the world's biggest trading nation last year. US exports and imports of goods last year totaled $3.82 trillion, and China's trade in goods during 2012 amounted to $3.87 trillion. The interesting part of this equation is the emergence of the Chinese consumer. While exports still dominate the Chinese economy, imports are increasing at a much faster rate in China. According to Goldman Sachs Group's Jim O'Neill, Germany will probably export twice as much to China by the end of the decade as it does to France. The Chinese consumer is definitely changing the global economy, and will vault China into a much more powerful global position. Next step, will the Chinese Renminbi overtake the US$ as the next reserve currency? I don't think it will happen quickly, but we are definitely on a steady path toward that very outcome.

Today we don't have any major data releases, with only a couple of mortgage reports expected. Tomorrow will be a light day also, with just the Monthly budget statement and NFIB Small Business Optimism for January. Wednesday will bring the Retail Sales and Business Inventories. Thursday (VALENTINES DAY - reminder for all of you husbands and boyfriends out there) will bring the weekly jobs data and then we will end the week with a flurry of data including the Empire Manufacturing data, Net TIC flows, Industrial Production, Capacity Utilization, and U of Mich confidence data.

Gold declined a bit in trading over the weekend as most of the Asian markets are closed for the Lunar New Year. China and most other Asian markets are closed most of this week for the celebration, and without the Chinese in the markets the price of gold slid. The Chinese are the second biggest gold buyers, after India. We could see further slides in prices as demand slackens a bit during this holiday week. As Chuck always suggests, these dips are excellent buying opportunities!

And finally, I read that Venezuela devalued its currency for the fifth time in nine years on Friday. President Hugo Chavez's government announced they would weaken the exchange rate by 32 percent. The devaluation is designed to help narrow a massive budget deficit by increasing the amount of currency received from oil exports. The budget deficits tripled last year as Chavez went on a spending spree to help him win a third six-year term.

Hmm. Spend a lot of money which your country doesn't have in order to get re-elected and then devalue the currency in order to help decrease the debts and deficits you created with your spending. Sound familiar?? Could be describing our own congress.

Then There Was This. In a shocking announcement this morning Pope Benedict said he would be stepping down at the end of the month. Not since the 1400's has a Pope decided to leave the office as leader of the catholic church. The Cardinals will now be heading to Rome to pick a new Pope, with the odds favoring the selection of one of the Latin American Cardinals. I recently shook hands with one of the possible candidates from the US; Cardinal Timothy Dolan. Cardinal Dolan is a native of St. Louis and was in town for the funeral of Stan Musial. I realize the changing of the guard in the Catholic church isn't exactly 'market moving' material, but it will give the media something to focus on besides the budget negotiations here in the US.

To recap. The dollar rallied on Friday as investors were fearful, but the euro ticked back up over the weekend. Vice Chairman Janet Yellen is expected to sound a dovish tone today in Washington. Spanish bond yields ticked up and a rescue will probably be needed for Cyprus. The Nordic countries are the darlings of the currency markets, and Chuck was correct with his call for a narrowing of the trade deficit. And finally Venezuela devalued their currency by 32% in order to help narrow the budget deficits which were created by Chavez in order to get re-elected.

Currencies today 2/11/13. American Style: A$ $1.0274, kiwi .8321, C$ $.99315, euro 1.3388, sterling 1.5685, Swiss $1.0891. European Style: rand 8.8973, krone 5.5194, SEK 6.4134, forint 217.18, zloty 3.102, koruna 18.856, RUB 30.1322, yen 93.39, sing 1.2396, HKD 7.7549, INR 53.855, China 6.2324, pesos 12.77, BRL 1.9727, Dollar Index 80.235, Oil $95.45, 10-year 1.98, Silver $31.21, Gold $1,657.67, and Platinum $1,713.75.

That's it for today. I spent a very nice evening Saturday night with my son attending his high schools Father / Son banquet. The speaker was an amazing man who gave a very inspiring speech about overcoming major obstacles in your life. Mr. Andree Norman was our speaker, I would encourage anyone who has an opportunity to hear him speak to take advantage of it you can read more about Andre at . Mardi Gras was in full swing as we drove downtown for the banquet; if you haven't heard St. Louis' party is second only to New Orleans for the largest celebration. My son's hockey team lost their second round playoff game Friday night, so tonight's game is do or die. GO REBELS! Thanks to everyone for reading the Pfennig, and I hope you have a Marvelous Monday.

Chris Gaffney, CFA
SVP & Director of Sales
T. 314-951-1619
EverBank World Markets
8300 Eager Road, Ste. 700, St. Louis, MO. 63144

Posted 02-11-2013 10:53 AM by Chuck Butler
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