A Pfennig For Your Thoughts

In This Issue…

  • Germany’s recovery in full swing!
  • China’s GDP for 2005 hits 9.9%!
  • Canada hikes rates 25 BPS!
  • MPC votes 8-1 to keep rates on hold…

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And Now… Today’s Pfennig!

German Business Confidence Soars!

Good day… Well… What have we here? Two big pieces of news this morning, that has the dollar taking another trip to the woodshed… The World Economic Forum in Davos, Switzerland, has kicked off, too, so there should be plenty of snippets from the likes of Buffett, Soros, Gates, and as I saw on TV last night, Brad Pitt! HA!

Right out of the starters’ blocks this morning we see that German Business Confidence, as measured by the think tank IFO, rose to a 5-year high this month, surpassing last month’s lofty number! Well, let’s see, the 102 level of the index is the highest level since May of 2000, so really almost 6 years! A strong recovery for Germany is now on everyone’s hit parade, which means the ECB can get back to the rate hike table… I suspect the month of March will bring us the next rate hike…

This news pushed the euro up to 1.2320, the highest level it has seen in some time! Of course there were some computer / black box trades that took profits once this trigger was hit… But the single unit is hanging tough at 1.23 right now… That crooked number sure looks better than the 1.1650 it was trading at back in November, when all the technical people were writing me and telling me the euro was going to see 110 before it turned around… I was sick having to write that information, but I did, and a lot of ex-readers turned nasty with me… But, that’s water under the bridge now, because that was 6.5 cents ago!

The other piece of Big News comes to us from China, where Chinese officials announced that China’s economy grew 9.9% in 2005… WOW! So much for slowing that runaway train down, eh? That moves China ahead of the U.K. as the world’s fourth-largest economy… With growth rates like that, and if they can be sustained, China is set to move even higher in 2006… The reason I think this is Big News is that Chinese officials have to realize that inflation is right around the corner with growth rates like that, and an excellent measure that has been used for hundreds of years to combat inflation is a strong currency…

The well-respected economist (and a Davos attendee) Nouriel Roubini had this to say recently regarding China… “I have already presented in November my arguments on why the U.S. dollar will stop defying gravity and will fall this year. And indeed, as I predicted, in the last few weeks the dollar has kept on falling relative to the Euro and Yen, as expectations of relative short-term interest rate differentials and growth rates are turning against the U.S. . . And just wait for the Chinese currency shoe to drop….”

What he means there is simply that the dollar is back to the underlying weak dollar trend, and it will really be punished when China announces another revaluation… Which brings me to a point that I always make in my presentations… The likes of John Snow may go around telling people that the U.S. has a “strong dollar policy”… And then go down the street and tell another group of people that he wants China to allow their currency to float freely in the currency markets…

Well… Since people like the IMF believe that the renminbi is at least 25-40% undervalued vs. the dollar… And John Snow is well aware of that… What he’s saying, when he tells people that he wants China to allow their currency to float freely… Is his way of saying indirectly that… He wants the dollar to be weaker!

We’re getting closer and closer to Big Al’s going-away party next week… I’ll already be on the road when the last FOMC meeting of Big Al’s Chairmanship comes and goes… So, Chris will have to bring you all the accolades that will be bestowed on Mr. Greenspan… (Actually, I’m glad I’ll be on the road, because I’m afraid that stuff would turn my stomach!)

Ashish Advani, our new Corporate FX guy, which reminds me… I’ve written about our new Corporate / Business FX ability, and asked anyone with FX needs in their Corporate / Business side to give him a call… He’s beginning to feel like the Maytag man! OK, I’m kidding, but still, not the response I would have expected from the Corporate / Business people that read the Pfennig!

OK… Sorry, I got off on another tangent there… So, what I was going to say is that Ashish sent me a quote yesterday that I have read a few times over the years, but since Big Al is going away next week, I thought it apropos to recycle this one…

The words of Ludwig von Mises, an Austrian economist of the early 20th century, nicely sums up the illusion that all is well with the U.S. Economy…

“It may sometimes be expedient for a man to heat the stove with furniture. But he should not delude himself by believing that he has discovered a wonderful new way of heating his premises.”

The data cupboard here in the U.S. has been bare all week, and doesn’t look to be restocked until next week… We will see some minor stuff like Existing Home Sales, recall that last week it was reported that New Home Sales fell 8.9%… And tomorrow, Durable Goods for December should show us that we’re still in the muddle through economy… Friday we’ll see the 4th QTR annualized GDP, which is expected to drop from 4.1% the last quarter to 2.8%… That’s not going to win any teddy bears at the state fair… So, if that forecast is reality on Friday… The dollar should see plenty of sellers…

The Bank of Canada did raise interest rates 25 BPS yesterday… But they came across in their follow-up statement not as hawkish as previous statements… The Bank said that based on its base case assumptions and current assessment of risks, some modest further increase in interest rates would be required. That statement just doesn’t sound very hawkish to me… So, now we’ll have to wait for the minutes of the meeting to see if the Bank of Canada was just trying to keep a lid on the loonie for now…

You know… central banks like to play those games, when their base currency begins to become very popular with investors, and they fear that besides investment, speculators will drive the price of the currency up way past fair value… So… They put dovish tones in their statements to try and fool the speculators… Nothing changes as far as I can tell… Rates will continue to go up to combat inflation from domestic growth, and energy prices… The loonie should continue to be well bid…

Pound sterling got a lift this morning along with the rise in the euro, sterling pushed higher on the news that the Bank of England’s Monetary Policy Committee voted 8-1 at the last meeting to keep rates on hold…

Currencies today: A$ .7550, kiwi .6860, C$ .8710, euro 1.2305, sterling 1.7925, Swiss .7950, ISK 61.04, rand 6.03, krone 6.5275, forint 202.60, zloty 3.0950, koruna 23.077, yen 114.70, baht 38.93, sing 1.6180, China 8.0619, pesos 10.49, dollar index 88.03, and gold… $563.40

That’s it for today… Pretty wordy today… Sorry… The stream of conciseness just kept telling my fingers to type! We closed out our January MarketSafe Gold CD yesterday… And now have a new one for February! This CD just continues to shine! Our co-worker, Cheryl Lee, has been in the hospital, and is hoping to return today… So we’ll get to see her smiling face again! It’s a Wired Wednesday… I think I’m already there! Have a great Wednesday…

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

PFENNIG DISCLOSURE