A Pfennig For Your Thoughts

Chris Gaffney is temporarily filling-in for Chuck Butler

In this issue…

  • ECB comes through (sort of)
  • Jobs data in US
  • Commodity Currencies lead the way
  • Gold shines through $500

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And Now… Today’s Pfennig!

ECB Comes Through (sort of)

Good day… As I reported in the closing paragraph of yesterday’s Pfennig, the ECB raised rates by .25%. This was the first increase in rates by the European Central Bank in 5 years. While this rate increase was widely expected, the accompanying statement by Jean-Claude Trichet is what the markets focused on. In it, he stated that policy maker’s aren’t planning a series of rate increases but will be watching future economic data. So, instead of rallying the Euro vs. the US$, the markets sold the Euro back off to end the day around 1.17. I believe the ECB will continue to raise rates, and Trichet’s statement was simply aimed at keeping the Euro from rising too quickly. The important point is that rates in Europe are finally beginning to increase, while rates here in the US are getting near the top.

We will get the US employment data released for the month of November this morning. Economists are expecting a large increase in Nonfarm Payrolls from 56k in October to 210k in November. The Unemployment rate is expected to be unchanged at 5%, and the change in manufacturing payrolls is expected to drop slightly. I think the risk in the market right now is for these numbers to come in better than expected. Strong employment data on top of the good economic data we have seen all week would probably drive the Fed to maintain its policy of increasing rates for the foreseeable future.

I have been expecting the FOMC to continue to raise rates until Bernanke takes over in January of next year. He will then have the opportunity to pause the rate increases, giving the economy a boost if needed. So, with the ECB and the FOMC both raising rates at a .25% clip, I don’t see where interest rate differentials will have much effect on the currency markets. We could see the Euro range trade for the rest of the year between 1.16 and 1.18. But, when the FOMC does decide to pause rates, the markets will realize that the ECB has many more increases left than the FOMC and the Euro should increase in the 1st or 2nd quarter of next year.

The Yen continued to fall yesterday as the Bank of Japan now stands alone in the Super Easy Money camp. Finance Minister Sadakazu Tanigaki told reporters in Tokyo the currency is “moving mostly in line with fundamentals,” raising speculation officials favor a weaker currency. Losses in the Yen will probably be limited after a government report yesterday showed Japanese investors were net seller of overseas bonds for the first week in 10, suggesting demand for foreign debt securities may be waning. We have been talking about this eventual move away from US debt by the Asian investors for years. As the Japanese economy continues to improve, investors will start keeping more of their investments in Japan instead of sending them all to the US. With the yen trading above 120, I would have to think investors will continue to bring their investments home and exchange their US$ back into Yen at these cheap rates. The Yen will not continue to be this undervalued.

The commodity currencies continue to outshine all others as metal prices increase. The South African Rand gained to its highest level in two months as the price of metals that make up a fifth of exports rose. Gold finally broke through the $500 level and traded at its highest level in 22 years. As long as gold continues to rise, the Rand should hold its value as gold is South Africa’s largest export.

Investors in our first two Gold MarketSafe CDs have to be smiling about the $500 gold. You still have two more weeks to get invested in December’s Gold CD so contact the desk if you need more information. THis is an excellent way to take advantage of the rising gold price but still maintain FDIC insurance and get a garuntee against loss!

The Canadian dollar will end the week on a strong note after a government report showed the economy generated more jobs last month than forecast. The Canadian Central bank will undoubtedly continue to raise rates, matching any interest rate increase by the FOMC. The jobless rate in Canada fell to 6.4% last month from 6.6%, the lowest in 30 years. With investments continuing to flow into the commodity rich land up north, we expect the loonie to hold it’s strength.

Both Aussie dollars and the Kiwi also are holding their own vs. the US$. Australian Dollars are now close to .7450 and the Kiwi is getting near .71 again. With all four currencies doing well, our Commodity Index CD will undoubtedly end the year as our top performer again. It’s just hard to beat the high interest rates and stable currencies which make up this index.

Currencies today: A$ .7442, kiwi .7073, C$ .8586, euro 1.1707, sterling 1.7274, Swiss .7580, ISK 63.77, rand 6.4078, krone 6.7659, forint 215.43, zloty 3.32, koruna 24.678, yen 120.84, baht 41.42, sing 1.6921, China 8.0806, pesos 10.48, and gold… $503.30

That’s it for today… Chuck will be returning later today, so he will be back in the saddle on Monday. Thanks to him for letting me sit in and share some of my thoughts. The big boss just emailed to let me know he is bringing in bagels and latte and for lunch we get to eat our favorite Chinese! (Chuck doesn’t like it so we only eat it when he is away) YAHOO!!! Hope everyone has a good weekend!

Chris Gaffney, CFA
Vice President
EverBank World Markets