In This Issue.
* North Korea does some saber rattling...
* BOJ policy may be at risk...
* International investors search for yield...
* 'Fringe' European currencies get some ink...
And, Now, Today's Pfennig For Your Thoughts!
The North Korean leader prepares his troops for war...
Good day... Chuck is headed down to what he typically calls 'heaven on earth'; Jupiter Florida and the St. Louis Cardinals spring training. He stopped by the office last Friday, and you could just sense his excitement regarding this trip down to Florida. I will be brining you the Pfennig for the next couple of weeks, and Mike will take over for the last week of March as I take my own spring break.
The dollar continued to trade in a fairly tight range yesterday, with a slight bias to the upside left over from last week. As Chuck suggested yesterday, the currency traders are mostly waiting on Wednesday's release of Commerce Department data regarding US retail sales. Most economists seem to agree with Chucks BHI and last weeks positive surprise on the labor front have only led to even higher expectations for this month's retail sales numbers. Today I would expect the currency markets to continue to trade in a fairly narrow range, waiting for tomorrow's big data release.
The Supreme Leader in North Korea continues to spew heated rhetoric at the US, telling his soldiers to 'get ready to annihilate the Americans'. The heated talk is probably contributing to the positive bias of the dollar and has also led investors to increase their sell orders for the Japanese yen on Monday. The Japanese yen continued to trade near the 4 year lows it reached on Friday, as investors moved away from what was formerly seen as a safe haven asset. Technical analysts suggest the yen may depreciate further to 100 yen / dollar if it breaches support levels at 97.75. The fall in the value of the yen is definitely welcomed by the new leaders of Japan as they continue their attempt to inflate their way back into positive growth. But not all of the policy makers in Japan agree with Prime Minister Shinzo Abe's ultra loose monetary policy.
An opposition lawmaker said his party will oppose one of Abe's picks for deputy governor of the BOJ overnight. This helped to give the yen its first rally in a week, reversing the losses it had posted during the first day of the week. Currency traders had already priced in further easing by the Bank of Japan as they believed Abe's picks for the BOJ would sail through the confirmation process. But this morning's announcement by the opposition party has forced currency investors to rethink their bets and some are now seeing the recent sell-off in the Japanese yen as 'overdone'. I'm still in the 'further weakness' camp regarding the Japanese yen, and think we are more likely to see 100 yen / dollar before we see a move back toward 90.
The Japanese yen isn't the only currency where analysts have begun to shift their expectations. Currency trader's forecasts for the Canadian dollar are falling at the fastest pace in the last couple of years. Strategists have cut their estimates for the loonie by over 2 percent during the first quarter after reports showed growth slowed to just .6% during the fourth quarter, well below the central bank's own estimate of 1%. But not all of the strategists are expecting the loonie to weaken vs. the US$. George Davis, the chief technical analyst for currency strategy at Royal Bank of Canada said the Canadian dollar will strengthen to 1.016 CAD/US$ over the coming days. And the latest employment report, showing an increase of 50,700 jobs last month will certainly help push short term expectations higher.
Bank of Canada Governor Mark Carney, who will be leaving to take his new job as leader of the Bank of England at the end of next quarter, helped push expectations for the loonie lower when he renewed his commitment to maintaining a freeze on Canada's ultra low interest rates. According to strategists at both UBS and Citigroup, international investors have started to move out of the Canadian dollar in search of higher yields.
Many of these international investors are migrating south in a search for yield; and they don't have to move too far as our neighbors to the south continue to attract capital. The Mexican peso rallied to the strongest level vs. the US$ in over a year and one half. The peso moved higher after policy makers in charge of interest rates down in Mexico indicated the interest rate cut last week is a 'one and done'. Mexican Central Bank Governor Agustin Carstens said last week's rate cut "doesn't represent the start of a cycle." Rate expectations are important to investors in the Peso which boasts one of the highest real interest rates of the developed world.
Moving further south, the Brazilian real is another currency which recently has begun attracting interest from investors looking for a bit more yield. The real is best performing currency vs. the US$ during 2013, appreciating 4.8%. The Brazilian currency has recaptured the attention of currency investors who were driven away by the governments attempts to devalue the real. These government actions were successful in driving Brazil's currency lower, with the real losing 9% vs. the US$ in 2012 and 11% the year before. But recent worries regarding inflation have convinced these same policy makers to reverse course and allow currency appreciation. President Dilma Rousseff has been taking a more hawkish approach to monetary policy, and policy makers dropped a pledge to keep borrowing costs unchanged for a 'prolonged period'. They have also been intervening by selling currency swaps to prevent the real from falling too quickly. Finance Minister Guido Mantega continues to suggest the new goal of Brazilian policy makers is to stabilize the currency in order to "transition to a more solid, competitive, and efficient economy."
Jumping over to some currencies which don't get much ink in the Pfennig, the Hungarian forint slid again yesterday, adding to the over 5.6% fall since the beginning of the year. Central Bank Governor Gyorgy Matolcsy didn't project much confidence in his institution after he stripped tow of his deputies of some of their duties last week. Currency investors took this dramatic action as a sign that major changes to the current monetary policy would soon follow. Government officials tried to slow their currencies slide yesterday with the economic minister suggesting policy makers stand ready to intervene if the recent weakness is sustained. This verbal intervention seemed to work, as the Hungarian forint was able to pare losses in early European trading.
The bad news in Hungary has spilled over to impact the value of the Polish zloty which experienced the biggest decline in value since the beginning of the month. Poland's central bank cut its forecast for GDP from 1.5% to 1.3% following a fairly impressive 2% growth rate last year. 2% growth may not sound all that impressive to some, but for Poland to pull that kind of growth off during what was a very volatile European environment was what I would consider an accomplishment.
Sticking with the 'fringe' currencies on the European continent, the Czech koruna weakened the most in more than 2 weeks after a report showed inflation increased at the slowest pace in over 1 ½ years. The Czech koruna had been enjoying a four day rally prior to the release of data which showed consumer prices increased just 1.7% last month from a 1.9% reading in January. The February data was below economists' forecasts of 2%, and increased bets that the central bank may look to take actions to weaken the Czech koruna during the second half of 2013. We will get a clearer picture of the Central bank's intentions when they comment on the most recent inflation data later today.
Moving back into currencies which we more frequently comment on, the Australian dollar dropped after a report showed Chinese factory output had its slowest start in more than 3 years. The Aussie dollar is very dependent on continued strength in the Chinese economy, so the weaker industrial production numbers drove the value of the AUD lower. But investors seem to be rushing back into the AUD looking at the levels reached last Friday as good buying opportunities. And as I type this the AUD has actually moved back above the $1.03 level which it lost back in mid February.
Then there was this...I frequently pull items from the 5 Min. Forecast to include in the TTWT section. I find 'The 5' a quick easy read which is packed full of great information. Chris Mayer started yesterday's email off with a couple of charts which make a compelling case for buying gold. The first chart illustrated the tremendous growth in Central Bank balance sheets over the past several years. Readers of the Pfennig are certainly aware of just how fast the central banks of Europe, Japan, England, and the US have been adding to the assets on their balance sheets.
The second chart plots the price of gold on top of the expansion of the central bank's balance sheets. There is a very obvious correlation, and unless you think the central banks will abruptly stop their quantitative easing, the direction of the price of gold is also pretty obvious.
You will be able to view both charts, and read the rest of 'The 5' at http://5minforecast.agorafinancial.com/behind-golds-next-rebound.
To recap. Chuck is heading down to 'heaven on earth' so readers are stuck with Mike and me for the rest of the month. The North Korean 'supreme leader' saber rattling is largely ignored by currency markets who are focusing instead on tomorrow's US retail sales numbers. The BOJ's ultra loose monetary policy may be at risk, and expectations for the yen's direction have shifted. International investors have begun to search for yield, benefitting both the Mexican peso and Brazilian real. I showed some 'fringe' European currencies love, but the markets aren't as the CZK, HUF, and PLN are all lower. And I ended today's Pfennig with a discussion by our friends over at 'The 5' making a case for gold.
Currencies today 3/12/13. American Style: A$ $1.0331, kiwi .8259, C$ $.9747, euro 1.3065, sterling 1.4894, Swiss $1.0584. European Style: rand 9.1279, krone 5.6969, SEK 6.3625, forint 233.33, zloty 3.1708, koruna 19.6294, RUB 30.6555, yen 95.96, sing 1.2462, HKD 7.757, INR 54.1925, China 6.2163, pesos 12.4852, BRL 1.9552, Dollar Index 82.50, Oil $93.11, 10-year 2.03%, Silver $29.2244, Gold $1,594.13, and Platinum $1,607.75.
That's it for today. Ok, I'll admit it, I watched the final episode of The Bachelor last night. I know Chuck will never let me live that one down! My daughter is leaving tomorrow to spend the rest of the week with my mom down in Florida, and she is my excuse. I told her I would spend last night doing whatever she wanted, and not unlike a lot of teen girls, she said she wanted to watch The Bachelor finale (I had no idea it was going to be a 3 hour show!!). I'll have to work hard to get my 'man card' back... maybe I can start by talking about football; the Rams division got a bit tougher after both Seattle and San Francisco upgraded their offenses. The Rams are needing a reliable receiver, and the price the Ravens got for Boldin sure seemed cheap! And March Madness is almost here, the new guy on the desk, Dane, will be running the 'brackets' this year. Can't wait until the games begin. And did any of catch this weekend's PGA event? If so you probably heard them mention that EverBank is the main sponsor of next week's Tampa Bay Championship. Apparently there will be EverBank signage all over the course at Innisbrook's Copperhead course, and I look forward to watching the final rounds on NBC this weekend. Hard to believe how far our 'little' bank has come. I 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
Chris Gaffney, CFA
EverBank World Markets
03-12-2013 12:56 PM