Daily Pfennig : Renminbi, Norway, New Zealand

Germany's Merkel gets her way...

Chuck Butler — Thu, 25 Mar 2010 15:22:09 GMT

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In This Issue..

* Germany's Merkel gets her way...

* Confidence in the US ebbs lower...

* China to stick to renminbi policy...

* Gold stops sliding...

And Now... Today's Pfennig!

Germany's Merkel gets her way...

Good day, we had another strong day for the dollar yesterday, with the greenback gaining against all of the majors. But overnight, the Asians and then the Europeans sold the dollar and moved money back into the currencies. So after another rollercoaster ride, we are basically right back where we were at this time yesterday morning. These volatile markets are likely to continue, as investors try to figure out if the global economy will recover or if we will slide back into recession. With all of this uncertainty, you would think investors would be moving into 'hard assets': Gold and Silver. But the markets for these two precious metals have been surprisingly quiet this year. More on the metals a bit later, first I will try to figure out these currency markets.

The dollar moved higher yesterday after the durable goods data showed a third straight monthly increase. Orders rose .5% in February after a blistering 3.9% rise in January. Ex-transportation the orders were up even more, showing a .9% increase. These numbers were better than expected, and got economists talking about an early rise in US interest rates. Manufacturing continues to pull the US economy along, as companies restock inventory to meet an improving global demand.

But the housing data, released an hour and 1/2 later wasn't so rosy. New home sales failed to climb to economists projections, and fell to a record low of just 308,000 in February. This was a 2.2% year on year drop and followed a 8.7% drop in January. But the markets weren't going to let the poor housing data stand in the way of a dollar rally, and we continued to see dollar strength throughout the trading day. The dollar index even moved above 82 for the first time since May of last year. But the dollar couldn't hold its strength in the Asian markets, and the Europeans have sold it off even further this morning.

European leaders begin a two day summit today in Brussels, and the Greek crisis will be their focus. It has been interesting to watch how the EU has dealt with this crisis, and events have proven who is the real leader of the EU. German Chancellor Angela Merkel has emerged as the most influential leader in the EU. Last week it seemed an agreement had been reached, as it was announced the EU countries would back financial assistance to cash-strapped Greece. But Merkel said NEIN! She was not going to participate in a Greek bailout, and instead encouraged them to turn to the IMF for support. The markets took the euro lower after her refusal to go along with the program.

But now French President Nicolas Sarkozy has indicated he supports Merkel's plan. With the two big dogs of the EU singing from the same sheet of music, a Greek bailout by the EU is all but dead. Greece will have to turn to the IMF for funding, if and when it is needed. But right now, as Merkel has continued to point out, Greece has not asked for any financial support. I would expect the EU to make a statement of support for Greece, but leave any financial support to the IMF. This should be an acceptable plan for all parties, Greece will receive their support, and the EU will not be on the hook for future bailouts of the PIIGS.

And another bailout may be needed sooner rather than later. Fitch ratings agency downgraded the debt of Portugal yesterday, contributing to the euro's sell off yesterday. The news pushed the euro to below $1.33 before it moved back up this morning. The downgrade reminds everyone that Greece is not alone in their debt problems. It also reminded me of something which I meant to bring you late last week. Chuck had struggled with a name for the US states which are in need of a 'bailout', and several readers came up with the same acronym: MANIC (California, New York, Illinois, Michigan, & Arizona) and one other suggested replacing Michigan with Pennsylvania and changing it to PANIC. Funny stuff! I realize this is some serious stuff, but you have to insert a bit of humor or else the dire situation could become unbearable! But back to Europe.

So Merkel is probably going to end up getting her way. Ty Keough pointed out a story to me yesterday which backs my assertion last week that Merkel may have an alternative motive for deep sixing the EU led bailout. A weaker euro is absolutely in the best interest of Germany, which is a export driven economy. While everyone is beating up China for manipulating their currency, could Merkel be doing the same thing? Recent data shows the German manufacturing sector is expanding at the fastest pace in nearly 15 years, and export orders are also expanding at record speed. The drop in the value of the euro, combined with rising demand has helped accelerate the German recovery. I picture Merkel doing her best imitation George Peppard from the A-Team saying "I love it when a plan comes together" (thanks to Aaron for that reference).

I mentioned the other day that US debt is now trading at higher prices than the debt of some blue chip corporations. This is unusual, and could be a scary sign of things to come; investors now have less faith in the US government debt than the debt of Berkshire Hathaway. Another story in the WSJ caught my eye this morning. Credit Default Swaps - (the derivative insurance policies which helped bring down AIG) now show the US debt is riskier than that of the Euro zone. According to the story, "..a lot of market participants would see this as a bit of a shot across the bow, a bit of a wakeup" for anyone who's complacent about the US debt. With all of the attention focused on the European debt crisis, many have taken their eye off of the problems right her in the US. But with rising debt levels, and waning confidence in the ability for the US to meet our commitments, the US could be in store for their own credit shock. The debt rating agencies have to be watching this closely, and could move to put the US on a 'credit watch'.

Norway left rates unchanged, and the krone took a hit because of the non-move. Investors had positioned themselves for a bit of a surprise move by the Norges bank, and when the higher rates didn't materialize, the krone got sold. But higher rates will come, and Norway continues to have one of the strongest economies in all of Europe. Investors should take advantage of these prices to add to positions in the krone.

China continues to let investors know it won't be folding to external pressures to let the renminbi appreciate. Vice Minister of Commerce Zhong Shan said "The Chinese government will not succumb to foreign pressure to adjust our exhange rate," during a trip to Washington to meet with lawmakers. "To force the appreciation of the renminbi will be counterproductive." Several lawmakers have proposed retaliatory tariffs for Chinese goods, sparking talk of a trade war. The Treasury Department is 'seriously considering' labeling China a currency manipulator in an April 15 report which would make it easier for companies to seek import duties according to Senator Charles Schumer. But China would likely dig in their heels if Schumer and his colleagues are successful according to those who know and understand the Chinese leadership. "You can kiss goodbye any notion of China letting the currency to begin to float upward, once it is labeled a currency manipulator." one Chinese expert was quoted in a report.

The New Zealand economy grew at the fastest pace in two years in the 4th quarter as reported overnight. GDP in New Zealand rose .8% from the previous three months as consumer spending, manufacturing, and housing all saw increases. Growth will probably accelerate this year, forcing Reserve Bank Governor Alan Bollard to raise interest rates. Higher rates should help support the kiwi, as interest rate differentials attract investors. All good news for the New Zealand dollar.

Gold gained a bit yesterday as investors took advantage of low prices. The recent dollar strength has beaten down the price of gold to levels we haven't in a month. All of the uncertainty in the markets has increased demand for a stable asset, and gold certainly fits the bill. There is a risk that all of the monetary stimulus measures will remain longer than necessary, and force global inflation rates higher. Gold is an excellent hedge against higher inflation, and prices are relatively low. Investors began moving back into gold to take advantage of these low prices, which I think is a smart move.

The only data due to be released this morning is the weekly jobs numbers, which aren't expected to show any real change in the employment picture. Looks like it will be a 'wait and see' kind of trading day, as the markets focus on tomorrow's 4th quarter GDP numbers. Now on to the currency scorecard:

Currencies today 3/25/10: American Style: A$ .9127, kiwi .7067, C$ .9807, euro 1.3365, sterling 1.4981, Swiss .9361, European Style: rand 7.369, krone 6.041, SEK 7.2404, forint 197.44, zloty 2.9099, koruna 18.9855, RUB 29.5975, yen 91.97, sing 1.4052, HKD 7.7619, INR 45.535, China 6.8271, pesos 12.5498, BRL 1.8012, dollar index 81.701, Oil $80.94, 10-year 3.84%, Silver $16.76, and Gold... $1,093.70

That's it for today... The Blues lost any hope of making the playoffs last night in Detroit. I guess there is always 'next year'. The NCAA March Madness rolls into town tomorrow, as St. Louis plays hosts to college basketball's Midwest regional finals. Northern Iowa will probably be a big fan favorite with the local crowd after they brought down the KU Jayhawks. There was a light spring rain falling on my drive in this morning, and with the fickle St. Louis weather, the storms could strengthen. We may end up with a Thundering Thursday! Hope you have a good one, no matter what the weather.

Chris Gaffney, CFA

Vice President

EverBank World Markets

1-800-926-4922

1-314-647-3837

"Somewhat Receded"?

Chuck Butler — Thu, 26 Jun 2008 15:39:00 GMT

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In This Issue..

* Fed leaves rates unchanged...

* A dovish tone to the Fed...

* Dollar Bulls run for the hills!

* Norway raises rates...

And Now... Today's Pfennig!

"Somewhat Receded"?

Good day... And a Tub Thumpin' Thursday to you! Well... If you are a non-dollar owner, you might want to quickly go to the currency round-up to check on your currency / currencies... The Fed left rates unchanged and were quite dovish in their statement, and the dollar has been sent to the woodshed...

Welcome back! Front and Center this morning, we have a currency rally going on, with the euro leading the dogs off the porch to chase the dollar down the street. The single unit has pushed past the 1.57 handle this morning, and the high yielders of Aussie, kiwi, and Brazil are all dancing in the streets because their positive rate differentials are even more in the face of traders now.

Well, the Fed DID leave rates unchanged yesterday, and there are differing views of what they had to say afterward... However, the markets heard what they believed to be dovish comments from the Fed... And lo and behold, we had that scenario that I presented to you yesterday morning, of the dollar bulls running for the hills, and their currency being dropped into one of those fryers they use at my local fish fry.

So... Here's what the Fed had to say. The statement said that the economy is expanding and is expected to continue to grow at a moderate pace. However, policymakers listed weakening labor markets, high energy prices, the housing market recession and financial market stress as "likely to weigh on economic growth" in the quarters ahead. The Fed sees downside risks to the economic outlook but said that these risks are deemed to have receded "somewhat" since the last statement on April 30.

OK... Whom among us really believe that the "economy is expanding"? And what's with the vague statement that downside risks have "somewhat" receded? What the heck is that? What data have these knuckleheads been looking at? What in that data gives them any reason to believe the downside risks have "somewhat" receded?

And... That deal with one of the Fed Heads (Fisher) voting for a rate hike, to me is simply a "smoke screen" to keep the threat of a rate hike in the minds of the markets... I'm not buying it! There are still some that believe the Fed will pull the dust covers off the rate hike machine in August... I say... HOGWASH! With the housing market still melting down and the financial sector under pressure, and remember, I still think there's another risk event out there, and the jobless rate going higher, and the Fed threatening to hike rates only chokes off growth... Add all that together, and there's no rate hike coming... Correct all that? Sure, correct all that, and we'll see a rate hike... What are the odds of that happening this year? Slim and none, and Slim left town!

Alright, already, that's enough of all that! The CEO of the largest U.S. steelmaker was interviewed yesterday and he believes that "we haven't seen the worst impact on the economy yet"... He was speaking about the Credit Crisis... That plays well with my thought that I presented last week that we haven't seen the worst of all the losses yet...

That certainly doesn't sound like a situation that would allow the Fed to raise rates now does it?

OK... Someone sent me a note and wanted me to talk about renminbi... I thought that I was sounding like a broken record, regarding China and renminbi, but apparently not... So here goes... The renminbi continues to climb VS the dollar, reaching yet another new record level since the peg was dropped in July 2005. China is finally learning that a strong currency can go a long way toward helping fight inflation, and they have allowed the renminbi to appreciate on a faster scale than in the past. However, the Chinese don't want investors to believe this is a one-way bet, and every now and then they throw a spanner in the works to deter investment... But like I said, yesterday, the Chinese don't ever keep their finger on the deter button long enough...

Investing in China is a tricky situation... You can't believe just how expensive it is to deal there... It's painful! However, EverBank does offer a savings account that's liquid, that has a minimum of $10,000. This balance pays no interest, because all the interest is eaten up by the dealers and speculators that make dealing here so painful! You see, renminbi is traded on what's called a "Non-Deliverable Forward", which means it's not ready for prime time, and can only be settled in dollars... So... The dealers know that when you buy renminbi, you can only do one thing a the end of the forward, and that's... Convert back to dollars... And you have to pay dearly to do so!

That's the reason there is no CD in renminbi, as the CD's balances wouldn't be eligible for rolling...

I received a few emails yesterday about the thought that I had regarding the "academic" that said, the economy was set to recover in the 2nd half of this year... One guy said... "We need more academics like Custer needed more Indians" HAHAHAHAHAHA! Another guy said... "I liked your comment from an academic saying "recovery 2nd Half" of this year. Sure sounds like 2000 to me. How many times did we hear Q3 recovery of 2000,,, then was Q3 2001 etc etc.

Another thing I've found funny is the yield curve. Our Fed Cheerleaders from 2006, 2007 said how it wasn't pointing to a slowdown because it was different this time. Now in 2008 those same Fed Head Cheerleaders are saying we will not see 70s style inflation because, "its different" this time.

Well they have been wrong so far and if history of Fed actions is anything to go on, will probably be wrong again.

Sure feels like though our Fed policy is similar to that of 1970s Fed policy of growth VS inflation fight."

I've created thousands of "Pfennig writers"! But that's good! Get everyone thinking again! Even if you disagree with me, as long as you do it civil, we'll be fine...

I keep receiving forwards from people of an email that quotes former Chrysler Chairman, Lee Iacocca... Apparently, Lee Iacocca has written a book, and in it he goes "postal" on the current situation in this country... I haven't read the book, but I've read the forward that is supposed to have his thoughts in it... And... He's bang on!

OK... U.S. Home Sales in the U.S. fell 2.5% in May. Apparently, not even price chopping is helping right now... And Durable Goods Orders were unchanged in May, unable to correct a revised 1% drop in April. There was nothing in the Durable Goods Orders report that indicated the economy is "expanding" as the Fed suggests!

Did you hear about the $800 Billion package to help home owners that are being foreclosed? When will this all stop? We, as a country, can not, continue to bail people out for making mistakes. I don't care who's mistake it was, this package would bail them both out! Let's just hope that the President vetoes this bill, because I just don't see how these past mistakes end up being MINE and other Taxpayers' problem!

Today, we'll see the FINAL print of 1st Qtr GDP, which is expected to show a 1% gain... Think about that for a minute folks... With inflation over 4%, even using the current methodology, that's real growth of more than negative -3%!

So... With the huge gains in the euro and other currencies the past two days, one would expect to see some profit taking some time today or tomorrow... I see where one chartists at a Big Bank, says that the euro's rise will stop at 1.5726 according to his charts... I would love for the single unit to blast through that and not look back, proving the chartists wrong!

New Zealand printed a larger than expected Current Account Deficit last night of NZ$ 2.160 Billion... Look for this to place a strain on GDP, which will be printed today. I think we'll see GDP take a hit here for the first time in a month of Sundays... The Reserve Bank of New Zealand (RBNZ) will be somewhat proud of this, as this has been their goal for a few years now... To slow the economy and keep it from overheating. That's the reason their interest rates are so high! However, look for the RBNZ to begin cutting rates later this summer, as they don't want to bring the economy to a complete halt! And once the rate cutting begins, the pimples on the New Zealand fundamentals will be exposed... Clearasil won't even help at that point!

You know Ward... You were a little hard on the Beaver last night... I know, I know, I blasted the Bank of England (BOE) for cutting rates when inflation was above their ceiling target... And thought it would be knife in the heart of pound sterling, and it was for a while... But every day when I list the currencies, I notice that pound sterling has been quite resilient... Here's the thing that gets me... The BOE is now contemplating whether or not to raise rates to combat rising inflation... If they hadn't cut them in the first place, they wouldn't be here now! But that's water under the bridge, right? But, if the BOE is going to come back to the rate hike table, it will certainly give pound sterling a boost... But for how long? Ahhh grasshopper, that remains to be seen!

Canada sent a shot across the U.S.'s bow last night... Finance Minister Flaherty spoke last night, stating that the U.S. may lose its preferential access to Canadian energy should it try to renegotiate NAFTA. Oh, and looky there! The Canadian dollar / loonie is knocking on the door to parity again! Which has nothing to do with the NAFTA story... I didn't want people to think that the loonie was rallying based on that! No... It's rallying because it's a fundamentally strong currency that has seen the end of the rate cuts!

Gold, which sold off big time earlier this week, is still below $900... Wink, wink...

The Asian currencies all took a flyer on the Fed keeping rates unchanged, and rallied too... Nice to see the Asian currencies join in on the dollar's trip to the woodshed.

And finally... Norway's Norges Bank lifted rates 25 BPS yesterday... The move was somewhat a surprise, as I thought the last meeting would yield a rate hike, but didn't... Then they slip one by yesterday... Oh well, who cares when or how they do it, as long as they do it! The Norwegian krone rallied on the news, as their positive rate differential expanded!

Currencies today 6/26/08: A$ .9605, kiwi .7580, C$ .9905, euro 1.5712, sterling 1.9830, Swiss .9710, ISK 80.65, rand 7.8710, krone 5.0610, SEK 5.9875, forint 150.70, zloty 2.1375, koruna 15.36, yen 107.75, baht 33.55, sing 1.3640, HKD 7.8045, INR 42.71, China 6.8635, pesos 10.27, BRL 1.59, dollar index 72.77, Oil $135, Silver $16.88, and Gold... $892.50

That's it for today... It's raining here again... As I passed the river that flows past my little river town yesterday, it was still rising, and now more rain! UGH! We're putting a studio in our office here, all the equipment looks tre' cool. From now on, when we're asked to be on TV, we won't have to book time at the local TV station, we will be able to do it right here! Of course, now we have to learn how to use the equipment! I was helping my little buddy, Alex, change some strings on his guitar last night, and then listened to him play a little... He's getting quite good! Well... Off to our Tub Thumpin' Thursday now... Hope yours is Tub Thumpin' too!

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837