A Pfennig For Your Thoughts

In This Issue…

  • How about that trade SURPLUS?
  • More from Martin Feldstein…
  • Good to have the heads up regarding Australia!
  • Congratulations Bruce Sutter!

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And Now… Today’s Pfennig!

China’s Trade SURPLUS Triples!

Good day… Well… Another “not-so-exciting” day in the currency markets… And for once, I kind of like it… Think of it this way, the dollar had its worst week in 3 years last week, and now it’s time to sit back and see what happens from here… Of course, it is my opinion that the dollar will continue to suffer weeks like the previous one, but in due course… And the best thing about a slow drip is that it allows people who just heard that they could buy foreign currency and put it on deposit in an FDIC-insured bank, the opportunity to buy at decent levels and not chase a screaming market… That’s my story and I’m sticking to it!

The news this morning is centered around China… You see, China’s trade SURPLUS tripled to a record $102 billion in 2005… What do you think Senators Schumer and Graham are going to do when they hear this news? I think they will get out their #2 pencils, legal pads, and calculators… They will start jotting down notes, and the more they think about this, the more steam that comes out of their ears, and they will no doubt be talking to the media, telling them that China’s currency policy is unfair, and that tariffs and trade protectionism measures are the only thing the Chinese will listen to!

Me? I think it simply illustrates the global imbalances that I’ve been harping on for some time now… And one has to ask the question… Can these imbalances continue forever? Well… I don’t think they can… And I’m joined in that thought by some of the most prominent economists and market observers… Now, we just have to get the world’s investors to line up behind us, and we’ll see some change!

OK… Enough of that! Well… I finally got to read the entire article by Martin Feldstein that I talked about yesterday. Recall that the Financial Times printed an article by this well-respected economist regarding the risk that central banks are taking with dollar asset purchases… Here’s a snippet from the article…

“The current small interest rate differences in favor of U.S. bonds are not nearly enough to compensate investors for the fall in the dollar that is likely over the next few years.” He went onto say… “Experts estimate that the real trade-weighted value of the dollar must fall by at least 30% just to shrink the trade deficit to a more sustainable level of 3% of GDP.”

Well… The Australian Trade Deficit that I talked about yesterday as something not to get all lathered up about due to a computer glitch in October, did come in wider than forecast at $2.54 billion for the 4th quarter… The currency did suffer a bit after the report was printed, but has held steadfast above the 75-cent level, and if it can ride this wave all the way in, A$’s should be ready to move higher again… I think the gov’t did a great job of pointing out the problem with the number, that if they hadn’t, I would be here today taking Aussie dollars to the woodshed… But I’m not, and that all comes back to the fact that we all knew what the problem was before it was a reality… Good show!

Yesterday, there was a report going around the circuit in Canada that lit a fire under the loonie… The report said that the Bank of Canada will raise interest rates 4 times in 2006… Of course, it wasn’t the Bank of Canada issuing the report, so this must be taken with a grain of salt… But hey! Anything to get the loonie going in the right direction again is fine with me, eh?

The data coming from the Asian region lately has been very encouraging… It’s nice to see all of these economies doing well at the same time… It adds strength to the region… I don’t know if you’ve noticed or not, but as the Chinese renminbi has been gaining in value vs. the dollar, so too has Japanese yen, Thai baht, and Singapore dollars… There are other minor Asian currencies doing well, too! I’m still betting that free undercoat that the renminbi will be around 7.50 to the dollar by the end of the year… OK, for those of you not in St. Louis, we have a car dealer who used to say, “I’ll bet you a free undercoat that I’ll beat any other deal”… Do they even “undercoat” cars any more?

Last week, I told you about a report that claimed China was about to demand higher returns from their reserves, which indicated they would not be investing in dollar assets… Well… Now there is a report going around the European Union that China will diversify their dollar holdings… But wait… To offset that report… Chinese researchers say that’s hogwash, and that China’s plans to diversify their reserves does not include selling any of their dollar holdings…

Remember this… Nobody wants to be the last one to hold dollar assets… So, even if China is thinking about selling some dollar assets, or even stopping the purchases of dollar assets, they do not want the rest of the region to get in line before them! If all these Asian central banks head to the exit door at the same time, it will get really ugly!

I’m becoming very uneasy with all the rhetoric regarding Iran…

Currencies today: A$ .7530, kiwi .6955, C$ .8595, euro 1.21, sterling 1.76, Swiss .7825, ISK 61.05, rand 6.111, krone 6.64, forint 206.72, zloty 3.112, koruna 23.77, yen 114.10, baht 39.78, sing 1.63, China 8.0682, pesos 10.60, dollar index 89.34, and gold… $544.10

That’s it for today… Great news! Bruce Sutter was named to the Baseball Hall of Fame! Talk about a closer! If you look up the word “closer” in a baseball dictionary, you’ll see a picture of Bruce Sutter! It’s “wired Wednesday” and I’m already pumped on this news! So, I’ve got that going for me, eh? Have a great Wednesday!

Chuck Butler
EverBank World Markets