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In This Issue.
* G7 pledge to seek a truce in the currency wars...
* Vice Chairman Yellen gives the markets what they were expecting...
* Interest rate expectations weigh on the currency markets...
* Six headwinds facing the US...
And, Now, Today's Pfennig For Your Thoughts!
G7 finance ministers seek a 'truce' in the currency wars...
Good day. The world got just a bit more dangerous last night after North Korea detonated a nuclear bomb. It was the third nuclear test for North Korea, and according to the official Korean Central News Agency, the largest explosion thus far. The blast created a 4.9 magnitude earthquake and will undoubtedly will also send shock waves across the markets. Typically these types of events send investors flocking to the 'safety' of the global reserve currency - the US$. But the dollar actually fell just a bit in overnight markets after the announcement, but with most of the major Asian markets closed for the lunar new year we will have to wait for the markets in Europe to give us direction. Overall the currency markets are trading just about where they were at this time yesterday morning; with the precious metals down a bit and oil and US treasuries up a bit.
It was a different kind of war which has been on most currency investors minds, a war which some believe has already started in the currency markets. I wrote about these 'currency wars' in my Pfennig and Pfriends contribution two weeks ago, and the story has continued to grow as more and more central banks look for ways to stimulate their economies. The topic has become so 'hot' that the Group of Seven finance ministers released a released a statement pledging to avoid devaluing their exchange rates. "We raffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates," according to the G7 statement released today in London.
While the pledge is certainly nice, the question now is will the central banks back their finance ministers words with concrete actions? Not likely, as the 'spin doctors' are already hard at work to assure everyone THEY are not the ones using devaluation to help their economy. The Japanese Finance Minister Taro Aso announced the G7 had acknowledged Japan is not chasing a weaker yen and that its policy is aimed at reversing deflation which has gripped his nation. The yen, not surprisingly, moved lower in value after this statement, paring gains it had recently booked vs. the US$ on fears the G7 ministers would aim their policy statement directly at the BOJ.
A statement from G7 is not policy, and while some investors may get a 'warm and fuzzy' from the pledge to end the skirmishes which many believed were leading to a full blown 'currency war' reality is that many of the world's leading central banks continue down a path of forcing their currencies lower. The US, Europe, UK, and the BOJ all continue their easy money polices flooding the markets with their respective currencies. The laws of supply and demand may be temporarily suspended, but eventually all of this liquidity will force the value of these currencies lower. While a devaluation may not be 'policy' for these countries, it is certainly going to happen. I guess we can just call the devaluations 'unintended consequences' of their war on the global economic slowdown (but I believe a better description would be 'intended consequences').
Yesterday morning I wrote about how expectations regarding the Fed's Vice Chairman's upcoming speech was driving the dollar lower. Well Federal Reserve Vice Chairman Janet Yellen certainly followed through with delivering just what the markets expected (she is, after all, the leader of the Fed committee on improving policy communications). Yellen's comments signaled the Fed will continue their easy policies even after the economy reaches the 6.5% employment target. Yellen suggested the Fed could sustain easing beyond the end of its bond buying by continuing to hold interest rates near zero after hitting their near term targets for unemployment or inflation.
Yellen is trying to calm investors worried at the thought of an abrupt end to all of the 'free money' fueling the market's rise. Professional investors typically trade on 'expectations', so just a hint of a drop in the unemployment numbers or a tick up in inflation could send the markets into a tailspin. And a recent interview of our own St. Louis Fed President James Bullard heightened worries after he said the Fed could begin to 'throttle back' the bond purchases sometime in 2013.
But Vice Chairman Yellen gave equity investors hope that the easy money could keep flowing even after the US economy starts to improve. During her speech to the AFL-CIO, Yellen also echoed Chairman Bernanke's warnings against deep fiscal spending cuts. Yellen is actually a bit more dovish than Bernanke, which I guess you could expect since she comes from the San Francisco Fed bank. And her friend, Nancy Pelosi, certainly shares her views on keeping our government spending.
Chuck was emailing me from his hotel room between visits to his doctor's offices (the wait gave him plenty of time to gather Pfennig Pfodder!). And he sent me the following regarding Nancy Pelosi's views on government spending:
Did you see what Nancy Pelosi said? She said that Washington D C doesn't have a spending problem! Oh. So being out of balance with your budget to the tune of $6 Trillion in the past 4 years doesn't constitute a spending problem? I guess I had better go back to school and learn this stuff a different way,eh?
I always thought that our leaders knew they were deficit spending... But maybe not?
Either way they know now and are brazenly bold at telling us its not a problem.
The hotel security people are knocking on my room door and telling me I need to stop yelling obscenities at congress or they will make me leave!
Ok I promised them I'll stop the yelling. For now at least!
I can just imagine Chuck's neighbors calling down to the front desk to complain about his yelling at the walls! I bet the security guys will be back up to his room this evening when the President gives his State of the Union address! And I can see why Chuck is yelling, it is really hard to believe there are still some in Washington DC who don't think the US is spending more than we should. I guess they all want to use Venezuela as an model - spend and spend and then devalue the currency to pay for it all. No harm done!
Moving on to the currency markets, the Swiss franc slipped against the euro after the SNB affirmed it would continue applying its 1.20 per euro ceiling and is prepared to take even more steps to prevent the Swiss franc from further appreciation. But the Swiss aren't getting any help from other European leaders who are pleading with their compatriots to institute polices to try and weaken the euro. French President Francios Hollande has been the most vocal critic of the euro's recent increase in value. But the most powerful of the European leaders, German Chancellor Angela Merkel is not worried about the euro's strength. And as happened during the height of the European debt crisis, Merkel seems to be getting many of the other European leaders to agree with her. Luxembourg Finance Minister Luc Frieden said the value of the euro properly reflects Europe's economic 'fundamentals' and that no immediate response was necessary.
Our neighbors to the south are showing some signs of slowing down after Mexico's industrial production numbers unexpectedly declined for the first time in more than three years. Production fell 1.1 percent in December from a year earlier, surprising economists who had predicted an expansion of 2 percent. The drop in the production numbers caused the peso to drop to a one month low.
And the currency of our neighbors to the north isn't doing much better. The Canadian dollar touched a two-week low on concern the Canadian economy is also slowing. The loonie has been in a bit of a funk ever since a report released last week showed employment unexpectedly fell. Other recent reports showed the nation booked a ninth straight monthly trade deficit and housing starts sunk to their lowest level in almost 4 years. The Bank of Canada has reduced their growth forecast to 2 percent from an earlier prediction of 2.3% as the economy is now expected to not reach full output until the second half of 2014 instead of an earlier expectation of full output by the end of 2013. With these reductions in growth forecasts and full output, interest rates are now expected to remain at their current levels into 2014, which is a negative for investors in the CAD$.
Interest rate expectations were on the minds of investors 'down under' also. The Australian dollar remained lower in light overnight trading after slipping through most of Monday's trading day. The AUD$ weakened mostly on expectations the RBA would possibly look to reduce interest rates after they lowered its forecasts for inflation and growth last Friday. The RBA made the adjustments to their predictions due to a soft labor market and the recent strength of the Aussie dollar. Many currency analysts now believe the RBA will look to cut rates in the next few months, with some now predicting two separate rate cuts during in the short term.
Then There Was This. Yes, many of you will probably be joining Chuck in watching President Obama give his State of the Union address to the country later tonight. Hopefully our president will lay out his plans to keep the country growing while tackling some of the big problems which we face. I was reading through the February issue of Bloomberg Markets magazine this weekend and came across an article by Jeremy Kahn titled 'Desperately Seeking Growth' which laid out some of the major issues which facing our leaders. Kahn interviews Robert Gordon, a Northwestern University economics professor who predicts the centuries-long run of expansion for the US is over.
Professor Gordon did a study which found that, on average, each of six different constraints reduces annual GDP growth in the US by .2 percent. The six 'headwinds' identified in Gordon's study are as follows: 1. Demographics - As more and more US baby boomers retire, the number of hours worked per person declines as so does growth in GDP per capita. 2. Stagnant Educational Attainment - The US lags behind other advanced industrial economies in reading, math, and science. 3. Rising Income Inequality - From 1993 to 2008 the wealthiest 1 percent of Americans captured 52 percent of inflation-adjusted income gains. 4. Globalization and Information Technology - More and more skilled jobs in the US are being automated or are shifting to low-wage countries. 5. Energy and Environment - Possible US efforts to combat global warming, such as a carbon tax, act as a drag on economic growth. 6. Massive Household and Government debt - Spending money on debt payments in the US reduces funds available for productive economic activity.
I think that number six is going to sap more than just .2 percent of GDP if something isn't done about the debt! I would encourage you to read the entire article at the following: http://www.bloomberg.com/news/2013-01-16/davos-pitch-for-dynamism-rams-into-end-of-growth-debate.html
To recap. A nuclear test in North Korea could send investors rushing back toward the US$ (or even the precious metals!). With the Asian markets on holiday, we will have to wait for Europe to give us some direction. The G7 finance ministers released a pledge to keep from entering a full blown currency war, but the 'unintended devaluations' will likely continue. Fed Vice Chair Yellen delivers exactly what the markets expected, and her friend from California Nancy Pelosi says Washington DC does NOT have a spending problem - that had Chuck yelling at his hotel walls! Our neighbors to the south and north are slowing, and their currencies are sliding because of the reduced growth expectations. And finally I shared an article from this month's Bloomberg Markets magazine.
Currencies today 2/12/13. American Style: A$ $1.0254, kiwi .8354, C$ $.99324, euro 1.3447, sterling 1.5611, Swiss $1.0902. European Style: rand 8.9716, krone 5.4974, SEK 6.3801, forint 216.73, zloty 3.0986, koruna 18.8085, RUB 30.0923, yen 94.23, sing 1.2433, HKD 7.7557, INR 53.8512, China 6.2323, pesos 12.7426, BRL 1.9727, Dollar Index 80.22, Oil $97.30, 10-year 1.96, Silver $30.855, Gold $1,646.71, and Platinum $1,708.75.
That's it for today. Late night watching Priory Hockey. They won the first game, forcing a 'mini' game of 10 minutes which ended in a 0-0 tie so it went to a shoot out. Priory's first shooter scored, and that was all we needed as our goalie was absolutely standing on his head. Unfortunately Brendan missed on his shoot out attempt (he claims the puck rolled on him) but it was definitely fun watching his team advance to the semi-finals. And I almost forgot, Happy Fat Tuesday to everyone! Hope everyone has a Terrific Tuesday, and thanks for reading the Pfennig!
Chris Gaffney, CFA
SVP & Director of Sales
EverBank World Markets
8300 Eager Road, Ste. 700, St. Louis, MO. 63144 EverBank.com
Chris Gaffney, CFA
EverBank World Markets
02-12-2013 11:30 AM