Retail sales in the US set the tone for trading today...
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In This Issue.

* Retail sales set the tone in today's markets...

* Euro falls below $1.30...

* UK in danger of Triple Dip...

* Mexico gets a boost from S&P...

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

Retail sales in the US set the tone for trading today...

Good day... Wednesday is finally here, the day many currency investors have been waiting for all week. The retail sales figures will be released later this morning, and many believe they will show the US economy is continuing to push ahead. Equity investors certainly believe we will see a positive number as the US markets set another record high. Currency investors have been more cautious, wanting to see verification the US is firmly on a recovery path; and these same international investors have become worried about the global economic recovery after some less than impressive numbers coming out of China and renewed worries about the European recovery.

But the retail sales figures here in the US seems to be what has kept the currency markets in a fairly tight range this week. A Bloomberg survey of 82 economists predicts a .5% rise in Retail sales during the month of February. This increase would match the increases reported by the Commerce Department in December and November of last year, and would be a nice improvement on the .1% increase in January's sales figure. The gain in sales in January, though slight, was seen as a very optimistic number since consumers had to deal with tax increases, budget questions, and a surge in gas prices.

One thing which is pointing to the possibility of a better than expected sales number is last Friday's surprise drop in the unemployment rate. Retailers hired almost 24,000 new employees last month, according to last weeks Labor Department report. So it would follow that sales would have had to be strong in order to give these employers enough confidence to add more workers. But there are other factors which could point to a weaker than expected number. The IRS delayed accepting and processing 2012 tax returns due to the budget impasse during the beginning of the year. Tax refund checks are therefore a bit later than usual, which could impact spending at retail stores throughout the US.

The euro drifted lower in trading yesterday, and is actually in danger of losing its $1.30 handle this morning. The move lower is probably welcomed by members of the ECB who were feeling pressure from European business leaders regarding the recent strength of the common currency. It is kind of funny that these leaders were all over the ECB policy makers about 'saving the euro' just last year, and are now complaining that the euro's value is too high!

ECB council member Jens Weidmann, who heads Germany's Bundesbank, said the euro's exchange rate does not put Europe's recovery at risk. "I wouldn't consider the euro exchange rate a threat to the economy," Weidmann said in an interview. "What we currently see is not completely out of line with fundamentals and corresponds roughly to the historical average." And at least some of the pressure on exporters has been eased with the 4% fall in the value of the euro since the start of February. The recent drop prompted the ECB to drop a reference to the euro's appreciation and the resulting downside risks to inflation from last week's policy statement. Weidmann went on to say the ECB would continue with their very accommodative monetary policies 'for as long as necessary'. Not a very hawkish tone from the Bundesbank leader, which is a bit surprising as I can remember back to when the Budesbank was always seen as the most hawkish bank in the world.

Apparently the European leaders are still not confident they have seen the last of the debt crisis, and I believe this caution is warranted. So does the IMF staff who are encouraging their board to extend the 'emergency lending pool' which was set to expire at the end of the month. The emergency increase in the IMF's credit facility helped calm European bond investors and stabilized rates. The European bond markets are no longer in 'crisis' mode, but many including our own Chuck Butler have continued to warn investors that the problems which brought on the crisis weren't yet solved. The Italian's have done their part in increasing investor's worries recently, and their parliament will be sitting for the first time this Friday.

The euro just lost the $1.30 handle after a report showed industrial production was weaker than expected in January. Data showed output in Europe dropped .4% in January, a number which was even worse than the consensus estimate of a .1% decrease. However, at least some of the drop was due to an upward revision to December's data, so when you take the two months in concert Industrial Production was actually increased over these two months.

The UK has become somewhat of a poster child for what not to do in order to get your economy out of trouble. There are real concerns that the UK economy is headed for a 'Triple Dip' recession after a report showed UK industrial production unexpectedly fell in January. Production dipped 1.2% from December, with manufacturing dropping 1.5% compared to the previous month. Economists had predicted a slight rise, so the markets were surprised by this poor showing. The National Institute of Economic and Social Research estimated that the economy shrank in the three months ending in February.

The pound dropped, adding to its 8% drop vs. the US$ since the beginning of the year. What is worrying for US investors is that the US had been following the lead of the Bank of England with regard to our quantitative easing policies. I certainly hope we will be able to break away from our connection with the UK instead of following them along a path which currently looks like it leads to another recession. BOE policy makers have tried to reassure the markets, stating that they 'stand ready' to increase their QE efforts to support the UK economy. But that statement causes me to question just what they are accomplishing with all of this 'easy money'. They do seem to be supporting their equity markets, but the overall economy is still struggling. It seems like they could be throwing good money after bad with another increase in their bond buying programs! What will it take to make them understand they need to look to a different solution?

The Swedish krona continues to be one of the best performing currencies, and the only European currency which has a positive return vs. the US$ since the start of the year. But this strength is not worrying policy makers in Sweden's central bank. Deputy Governor Barbro Wickman-Parak said the krona's appreciation still doesn't threaten the bank's inflation target. "If we get a strengthening that's much bigger and more permanent, it would affect inflation." Wickman Parak said today in Stockholm. "The day you face problems you have to deal with them, but we are not there now." The currency appreciation has helped cool inflation in the export driven country, with consumer prices actually falling in February compared to a year earlier. The Riksbank kept its benchmark rates unchanged last month after cutting them four times over the previous year. And apparently policy makers won't take their currency's appreciation into consideration in the next rate meeting, clearing the way for more upward pressure on the Swedish krona.

The other two currencies with positive returns vs. the US$ during 2013 are the Brazilian real (up 4.58%) and Mexican peso (up 3.73%). Mexico got a boost overnight when Standard & Poor raised their outlook on Mexico's credit rating. The S&P changed their outlook to positive from stable helping to send Mexico's currency to its strongest level in more than a year.

Brazil's currency dropped a bit after the central bank intervened yesterday to weaken the best performing currency of 2013. This is what frustrates Chuck and I regarding the Brazilian real; the government continues to intervene to try and 'control' the currency markets. But the Brazilian central bank just doesn't have the 'staying power' of the BOJ or SNB both of whom have been much more successful at controlling their currencies over longer time periods. Instead, the Brazilian policy makers intervene, and impact the short term direction of the real only to have it all reversed as the markets take the currency back to the levels they believe it should be trading at. This latest intervention is their attempt to 'tap the brakes' on currency appreciation which was beginning to accelerate similar to what occurred a few years ago. Brazil continues to have a strong commodity base, and interest rates which are attractive to international investors. But investors need to continue to be cognizant of the volatile nature of this currency.

Then there was this... Regular readers know I like to use The Economist magazine in my research on the currency markets. One of my favorite sections of the weekly magazine is Buttonwood's notebook. This weeks notebook discusses what some researchers say is one of the best crisis indicators available; the current account deficit. While budget deficits have recently taken center stage in both the US and Europe, current account deficits have traditionally been a much better indicator of crisis. According to this week's post in the Economist, "Back in 1994, for example, a current account deficit of 6% of GDP preceded Mexico's peso devaluation and emergency loan from the US the first Asian country to get into trouble in the later 1990s was Thailand, which had a deficit of 8% of GDP. A big deficit means a country relies on the "kindness of strangers" to provide financing. Should the foreigners lose confidence for whatever reason, a crisis can ensue."

I feel the current account deficit is one of the most important factors to consider when evaluating a possible currency investment. And the Buttonwood column points out 5 of the G20 countries which have troubling current account deficits of 3% or more: the US, Australia, UK, Canada, and India. You can read the entire Buttonwood's Notebook by clicking here:

To recap. Retail sales will be released later this morning and are expected to show the US economy is continuing to grow. The Euro lost the $1.30 handle as it continues to slide vs. the US$. The UK is in danger of a triple dip recession after data showed Industrial production dropped last month. The Swedish krona continues to be one of the best performing currencies, along with the Mexican peso which got a boost from S&P. And I ended today's Pfennig with a TTWT from The Economist magazine.

Currencies today 3/13/13. American Style: A$ $1.0305, kiwi .8242, C$ $.9731, euro 1.3003, sterling 1.4962, Swiss $1.0553. European Style: rand 9.2237, krone 5.7338, SEK 6.3818, forint 235.17, zloty 3.1867, koruna 19.7114, RUB 30.7292, yen 95.73, sing 1.2486, HKD 7.7573, INR 54.3063, China 6.2142, pesos 12.4571, BRL 1.9647, Dollar Index 82.645, Oil $92.72, 10-year 2.01%, Silver $29.1525, Gold $1,595.60, and Platinum $1,594.25.

That's it for today. The Rams finally made a move to bolster their offense with the signing of a big tight end yesterday. It was certainly a busy day for NFL owners and agents with the opening of the 'signing period' for free agents. I just found out I am supposed to be in JAX on Friday, apparently I had missed the fact that an all day meeting I am attending was in JAX and not St. Louis. Looks like I will be heading out on Thursday afternoon. I've got a busy day ahead, so I will end today's Pfennig and wish you all a very Wonderful Wednesday. Thanks for reading the Pfennig.

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

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 03-13-2013 12:58 PM by Chuck Butler
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