UK Unemployment rate falls more than forecast, pushing the sterling higher
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In This Issue.

* Pound Sterling pushes higher on labor data...

* BOJ bullish on inflation target...

* Aussie $ bounces back on signs of inflation...

* Gold falls on taper worries...

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

UK Unemployment rate falls more than forecast, pushing the sterling higher...

Good day. Thanks to Mike for covering the Pfennig for me yesterday; as usual he set the 'Pfennig-Pfill-in-writer' bar pretty high. You will be stuck with me the rest of the week, and then we will split responsibilities again next week. Chuck got out of here just in time, as the snow and bitter cold temps slammed back into the area, and apparently our co-workers in NY are experiencing blizzard like conditions. As Mike mentioned, the week has started out as expected with fairly quiet markets due to the holiday and a lack of data releases here in the US.

Without anything to focus on here in the US, currency investors moved their attention across the Atlantic where the pound sterling jumped to one year highs. The sterling has been the fastest rising major currency in the past 6 months, jumping almost 8% vs. the US$. A report which showed the UK's unemployment rate fell to 7.1% in November provided the fuel for sterling's latest rise. Analysts had been expecting the rate to fall to just 7.3% from last month's 7.4% reading; and the big improvement now has the rate very close to the BOE's 7% threshold for starting to tighten policy.

The Bank of England predicted this in minutes from its latest Monetary Policy Committee meeting. In those minutes, the members of the MPC said unemployment would likely reach its 7 percent threshold where it will start to consider rate rises 'materially earlier than previously expected'. But the BOE also said it saw 'no immediate need' to raise rates. The BOE hadn't expected unemployment to approach their threshold for 3 years, and some are now expecting them to lower this threshold instead of risking a pre-mature rate hike which could kill the UK recovery.

But with the US FOMC assuring the markets they will keep rates low well into next year, this latest data out of the UK suggests the BOE may be the first of the major developed economies to start out on a rate increase. This is exactly what has helped boost the pound sterling over the past 6 months, and could certainly continue to keep it well bid.

The Governor of the Bank of Japan dismissed the need for more monetary easing yesterday and kept monetary policy as inflation continues to creep back into the Japanese economy. The weaker yen has helped inflate import costs which have helped push the overall inflation rate in Japan back above 1%, nearly half way to their 2% goal. Some still think the BOJ will need to get more aggressive in their support of the Japanese economy in order to offset the expected drag created by a sales tax rise scheduled for April.

But the BOJ officials want to wait to see signs of a slowdown prior to pumping more money into their economy and maintained their forecast that core consumer inflation will hit 1.3% this year and 1.9% in the next. "Japan's economy is continuing to recover moderately with consumers recently front-loading spending ahead of the sales tax hike," the central bank said, adding it expects consumer inflation to move around 1.0-1.5 percent for the time being.

The South African rand continued to hold steady after what has been a 3% slump over the first three weeks of 2014. The slide has placed the rand at levels that most believe are oversold; surpassing even the most bearish of the 'expert' forecasts. Some brave speculators are now taking positions at these discounted levels, but there is still downside risk with further mining strikes being predicted for later in the week. While the current trading range of the rand probably has these strikes already priced in, any kind of violence would most likely send the South African currency into another slide.

The only currency which has performed worse than the rand during 2014 is the Canadian dollar which is down just over 3%. The 'loonie' as the Canadian dollar is commonly called has remained under selling pressures as investors continue to bet the central bank of Canada will be easing their monetary policy.

And while New Zealand is widely expected to raise rates later this year, most think this rate increase has already been priced in and therefore any signs of a delay in hiking by the RBNZ will cause the kiwi to fall. The recent moves in these commodity currencies are counter to the traditional thought that as the global economic activity picks up, commodity based currencies will move higher. But in spite of the IMF's prediction of higher global growth, these commodity currencies remain in a bit of a funk.

Weaker Chinese growth expectations have added to the negative sentiment surrounding the Australian dollar which hit a 3 ½ year low earlier this week. And with US rates starting to tick higher, the yield spread which helped support the Aussie dollar are beginning to evaporate. But data released overnight 'down under' showed prices had the largest rise in over two years. Prices increased 2.6% last quarter surprising most analysts who expected much tamer inflation data. Currency traders had been pricing in rate cuts, but the spike in inflation now has many of these investors shifting their positions to take advantage of a possible RBA hike during 2014.

Gold fell nearly 1 percent in trading yesterday, the biggest one day drop of the short year. The drop was rumored to be the result of speculation by investors and traders that the FOMC might announce an accelerated end to its bond buying program at next week's meeting. As Mike pointed out in yesterday's Pfennig, investors have largely shrugged off the poor jobs numbers of a couple of weeks ago and are now focusing on the more positive signs in the US economy. This, combined with a slightly more positive outlook for the global economy has led many to abandon their 'safe haven' trades which typically favor precious metals.

The price of all of the precious metals followed gold lower, with silver staying below $20 and platinum matching gold's 1% decline. The price of platinum does seem to have support near the current levels as fear of a mining strike in South Africa are underpinning the price. The world's three largest producers of platinum called the wage hikes sought by the union which is planning a strike as early as this week as 'unaffordable and unrealistic'. We will keep an eye on the negotiations as any halt to production could signal a rebound in the price of this precious metal.

And before I move to the 'TTWT' section, did you hear the news that Mohamed El-Erian has resigned from PIMCO? It was announced around noon yesterday that PIMCO's CEO and Co-CIO had resigned and will leave the company in mid-March as part of a leadership overhaul. I have always enjoyed reading El-Erian's comments, and while I don't always agree with his thoughts I will certainly miss his views on the markets.

Then there was this. Readers know I am a fan of the '5 Min. Forecast' and there is obviously some mutual admiration on both sides as Chuck is frequently mentioned in the free daily recap which hits my email box each afternoon. Yesterday Chuck made 'The 5' again as Dave Gonigam detailed some of the stories circulating about China's gold holdings. I think it is well known that China has been adding to their stockpiles of precious metals, but the central bank does not regularly report the total of these holdings keeping investors guessing on just how much they currently have. It is widely believed that China now holds the third largest amount of gold, behind the US and Germany. Here is what appeared in yesterday's 5:

"China may soon announce an increase in its official gold reserve from 1,054 tons to 2,710 tons," said a Friday story from the Shanghai Daily, citing Jeffrey Nichols, managing director of American Precious Metals Advisors.

Indeed, Mr. Nichols says just that on his own website: "It seems we will soon learn it bought a total of 654 tons in 2009 through 2011, another 388 tons in 2012 and more than 622 tons last year. Much of this has come from domestic mine production and secondary supply." Add those figures to the existing 1,054 stash and you get slightly over 2,710.

But where do these curiously precise figures come from? Alas, Mr. Nichols' rationale sits behind a paywall.

Still, we already know the answer...

"Andrew Cosgrove and Kenneth Hoffman of Bloomberg Industries estimate that Chinese central bank holdings are likely closer to 2,710 metric tonnes -- a significant increase over their disclosed amount."

That was Sprott's David Franklin in our own virtual pages back on Nov. 8. Evidently, he got an early read on the Bloomberg Industries report, because the numbers didn't show up in an actual Bloomberg News story until Jan. 10 of this year -- days before the flurry of stories all citing this precise 2,710 metric ton figure.

So we now have the Chinese media... citing a U.S. expert... making a prediction that the Chinese central bank will do its "big reveal" any day now. Stories like this don't show up in the Chinese media by chance.

Mr. Gonigan goes on to discuss Germany's gold holdings and their request to repatriate some of these holdings. You can read the entire 5 Min. Forecast at the following: .

Recap. A lack of data here in the US sent currency investors to focus on UK data which showed a big improvement in their labor markets. UK unemployment rates dangerously close to their 7% threshold has propelled the pound sterling higher. The BOJ maintained their monetary policy, avoiding calls for additional stimulus to offset the possible drag of a new sales tax in April. The South African rand held steady after a 3% drop which was matched by the Canadian dollar. The Aussie dollar caught a good bid after a surprise 2.6% increase in inflation had many reversing their calls for further rate cuts 'down under'. And finally, gold had the largest one day drop of 2014 after investors abandoned their safe haven trades.

Currencies today 1/22/13. American Style: A$ .8867, kiwi .8328, C$ .9120, euro 1.3551, sterling 1.6548, Swiss $1.0984. European Style: rand 10.788, krone 6.1702, SEK 6.4902, forint 222.80, zloty 3.0719, koruna 20.291, RUB 33.92, yen 104.34, sing 1.2781, HKD 7.7572, INR 61.815, China 6.1087, pesos 13.3018, BRL 2.3618, Dollar Index 81.08, Oil $95.38, 10-year 2.85%, Silver $19.81, Platinum $1,445.80, Palladium $740.30, and Gold. $1,240.70

That's it for today. I attended my son's final regular season high school hockey game last night, a loss to their arch rival. The loss was a tough one, but hopefully they will bounce back and make it far into the playoffs which begin next week. I still just can't believe his high school career is almost over; makes me feel old! But my daughter is just a freshman, so I still have a few more years of high school sports left. Boy it was a cold walk across the bridge to the office, and the temps are supposed to get even colder tomorrow - ugh! But on the positive side, we are having our chili cook off today here in the office, a perfect meal to offset those cold temperatures outside! Antione volunteered to make ours - hopefully bringing home a win for the World Markets desk. With that I will wish you all a Wonderful Wednesday, and thanks for reading the Pfennig.

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 01-22-2014 12:24 PM by Chuck Butler
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