A Pfennig For Your Thoughts

In This Issue…

  • The dollar reverses direction…
  • The Gov’t says there’s very little inflation!
  • No Protectionism needed…
  • Currency reserves grow…

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And Now… Today’s Pfennig!

Here We Go Again!

Good day… Well, in back and forth trading yesterday and in the overnight sessions, the dollar has gained back some lost ground VS just about every currency… Some of the moves were very small, while some (New Zealand) were larger… There’s a story behind each move, but in the end, it really comes back to the fact that the dollar gained ground, when it looked as though it was headed to the woodshed!

That’s right, we began yesterday with CPI data that believe it or don’t, said that consumer inflation fell in December -.1%… Yes, the “core” number that takes out food and energy, as if we didn’t use those items on a daily basis, came in +.2%… The annual CPI came in at 3.4%…

Well, the dollar bears didn’t like those numbers, as they indicate once more that inflation is whipped and the Fed’s rate hikes are near the end… The euro shot up to 1.2160, the karma was flowing, the stars were in alignment, and all was right with the world… But then, the November Net Foreign Security Purchases (NFPS) hit the screens at $89.1 Billion… This mildly covers the Current Account Deficit, that includes net flows of foreign direct investment. So… The “Deficits Don’t Matter Campers” which happen to be dollar bulls came out of the woodwork, and supported the dollar… And I thought… Oh No! Here We Go Again!

This support for the dollar wiped out the gains for the euro, with the single unit actually showing a loss VS the dollar at the end of the day. Now… You know me, I’m not going to just sit idly while dollar bulls pronounce that “Deficits Don’t Matter”! So, I started snooping around the NFPS data, and this is what I found…

Once again, Asian Central Banks were the major contributors, as their Treasury purchases alone increased from $2.1 Billion in October to $5.7 Billion in November… Government Agency Bonds were purchased to the tune of $10.3 Billion… Now, this figure for Government Agency Bonds showed a notable decline from October’s lofty $16.8 Billion… So, Net… Asian Central Banks bought less Treasury and Government Agency bonds in November…

And that’s the point, I’ve been trying to make is that these Asian Central Banks can reduce their dollar assets just by reducing the amount they take in each month… Eventually, through attrition in maturities, they will own less…

I can hear these guys singing… There must be 50 ways to leave your dollar… Just sneak out the back Jack… Make a new plan Stan, just drop off the key Lee, and listen to me…

Oh… And this just in… China says that their Trade Surplus with the U.S. widened to $114 Billion in 2005 VS $80 Billion in 2004… You might recall a few months ago, when I told you that some number crunchers thought that the U.S’s trade deficit with China was much larger than what the Chinese were reporting… Hmmm… A much larger deficit that has to be financed… I’m not sure, if I were them, I would even mention that one!

Oh, and how about Schumer and Graham? I’m sure they will want to push through their bill that calls for hefty tariffs on Chinese imports… Of course I laugh at dolts like this that are always sticking out their chests and calling for protectionism, and how they are helping Joe Six Pack…. When in reality, they hurt! Imagine what will happen to the price of items imported from China should a 27.5% tariffs be smacked on the item as it comes off the ship?

And Speaking of currency reserves… Russian announced overnight that their foreign currency and gold reserves rose to a record $184.6 Billion… That’s a 46% surge VS the reserves at the end of 2004, and that’s not the end of it… Economists are forecasting a total of $255 Billion by the end of 2005! Now, that I’ve told you this news, you’re probably wondering… “What is Chuck leading into now?” Well… Let me take you back a month or so, when Russian President Putin, said that he wanted to increase his gold reserves… Well, he’s certainly going to get that chance isn’t he? You Betcha! And that should be very supportive of Gold prices going higher…

OK… I said at the very beginning that New Zealand had lost more ground than most of the other currencies yesterday and last night… There was a rumor going round, that Reserve Bank of New Zealand (RBNZ) officials and Japanese Bankers met to discuss the risks associated with the continuation of issuing the Uridashi bonds… Recall, this phenomenon that I’ve explained before, where low yielding countries, will find a high yielding country and issue their debt / bonds in the high yielding country’s currency, thus making the yield on the bond they issue higher, and thus attracting buyers… These were called Uridashi bonds, and I explained how as long as the demand to issue these remained strong, kiwi would be underpinned…

Well… If the rumor is true… Then the demand will begin to fade… However, if the rumor isn’t true, then the markets have cried wolf again… Either way, as I’ve said for over a month now, there are too many questions going forward with kiwi, and holders of CD’s need to call us when they receive their maturity notice to discuss options… I don’t think that breaking CD’s or doing trades on the whim will accomplish anything constructive… Now, that’s the third time in the last month that I’ve said those words, but yet, I have 2 or 3 CD breaks on my desk every day… So apparently, I’m not getting through to the masses!

The U.S. dollar has also received some traction from a couple of speeches yesterday by Fed Heads, Guynn and Yellen where they both sang from the same song sheet, and called for higher interest rates… No Duh! Really? Mr. and Mrs. Obvious, right there before our very eyes! Of course interest rates are going higher, I went through all that yesterday… I just don’t see why the markets continue to get all lathered up with any mention of higher rates… We all know they are coming… I shake my head in wonder of these mental giants!

Currencies today: A$ .7450, kiwi .6790, C$ .8490, euro 1.2085, sterling 1.7575, Swiss .7775, ISK 61.88, rand 6.0220, krone 6.7275, forint 207.93, zloty 3.177, koruna 23.7920, yen 115.20, baht 39.35, sing 1.63, China 8.0673, pesos 10.55, dollar index 89.53, and Gold… $548.40

That’s it for today… Crazy day yesterday… We had visitors from NY… I had a deadline to meet with the writing of the February Review & Focus, and fit in all the other things I normally do! We’re thinking of a new structured product, to go along with our MarketSafe Gold CD… I think a CD tied to energy, or commodities would be very interesting, and there’s also the possibility to issue one that takes the downside of the housing market… I’ve got to put my thinking cap on to make a decision, so any thoughts would be worth more than a pfennig to me! Have a great Thursday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

PFENNIG DISCLOSURE