A Pfennig For Your Thoughts

In this issue…

  • More rate hikes to come…
  • Manufacturing weakens…
  • A kiwi review…
  • EU inflation remains above target!

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And Now… Today’s Pfennig!

Further Hikes May Not Be Large

Good day… Well… As I signed off yesterday, I reminded everyone that the FOMC minutes held the key for the direction of currencies… And that it did! A very nice rally in the currencies began before the minutes were released, but the rally really got a follow through lift when the headline of the minutes said… “Further hikes may not be large”…

Euros rallied hard, taking all the other currencies off the porch to chase the dollar car down the street all the way to 1.2060 where it is trading this morning. Now… I think something needs to be made perfectly clear… That heading of their minutes does not mean they are “through” with rate hikes… In fact, I suspect the Fed has two more 25 BPS hikes up their collective sleeves before the dust settles on the rate hike cycle… So, those that are trading based on the thought that the heading is a green light to immediate dollar weakness may very well see that the green light was really flashing amber…

Don’t get me wrong either… The rally in euros and other currencies is long overdue… But there are still rate hikes to come, so be prepared… The thing I really think people should take from the minutes is the thought that the “end is near”… No, I’m not Chicken Little, and I’m not walking around with a sandwich board strapped to my shoulders pronouncing the end of the world (as we know it)… No… What I’m referring to is the fact that the Fed has given us a signal that the rate hike cycle is nearing an end… And that could be the window of opportunity the currencies have been waiting for!

The dollar began to wilt yesterday after the ISM Manufacturing Index showed a significant drop in December to 54.2 from 58.1 in November… Need I say that a stronger dollar is not what Manufacturing needs to get stronger, and to that end, I’ve been really surprised that previous months showed an increase to the index… But then again, I’ve been surprised by all the strong economic data recently… Except for the Twin Deficits data… No surprise there!

OK… I briefly mentioned kiwi yesterday and that the selling in the currency has subsided for now… I want to go back a couple of weeks ago to The December 15th Pfennig… Here’s a direct quote taken from the archives that can be found on the Pfennig’s web site: http://www.dailypfennig.com

“But, it’s something to really think about going forward… If you’ve owned kiwi for sometime, you’ve got a profit, and the next time your CD comes due, make certain that you call our Trading Desk, and make certain that this situation has not come to fruition before you let your CD automatically roll… I’m not saying that CD’s should be broken… I’m not saying that positions should be lifted on a whim… I’m saying, kiwi should be watched for signs of weakening demand… And should we see that exist, we’ll tell you to take your profit and move to another currency… OK?” (Taken from the December 15th Pfennig)

Now… I’m not sure what part of that was confusing… But we had investor after investor calling up to “Break” their CD’s in kiwi, and that’s not what I was trying to tell people! Now, kiwi is rallying again… I was reading some research from Deutsche Bank yesterday, and they believe it’s too soon to sell kiwi, they believe the interest rate differentials and the commodity prices will continue to underpin the currency… They also believe that the “carry trade” should be watched closely for signs that it is unwinding, and only then should kiwi be sold… But in the end, they believe there are more profits to be taken from kiwi…

Deutsche believes that it will be a long time before the Reserve Bank of New Zealand (RBNZ)reverses their interest rate policy… Their reasoning, which I totally agree with, is that the RBNZ has worked so hard for over two years to cool down domestic spending… The last thing they would want to happen is for domestic spending to ramp up again, because they began to cut interest rates! So… Some further thoughts on kiwi… Hope they help you…

Well… The first day of China’s new renminbi fixing saw the currency move to yet another record high VS the dollar (post revaluation) of 8.0675! Recall, yesterday I explained to you that China was now using designated banks as market makers and accepting quotes from them to determine the daily fixing for renminbi… Again… The first day’s results look great, and I continue to see China moving in the right direction…

And this just came across the screen… Inflation in the Eurozone continues to exceed the ECB’s target of 2%… This should give the ECB more fuel to raise rates again, when they are ready… And that’s a good thing for the euro! Oh… And I also went back to the Pfennig archives to find my note on “starting the wave”… It appeared in the November 28th Pfennig… In it, I talked about how two large currency Banks Royal Bank of Canada, and HSBC had told their customers to begin scaling back into euros… Well… At that time the euro was trading at 1.1760… Today, it’s trading over 3-cents stronger… Imagine if they really get that “wave” going around the stadium!

Currencies today: A$ .7440, kiwi .6885, C$ .8690, euro 1.2090, sterling 1.7580, Swiss .78, ISK 61.85, rand 6.1725, krone 6.56, forint 207.70, zloty 3.177, koruna 24, yen 116, baht 40.45, sing 1.645, China 8.0675, pesos 10.61, dollar index 89.49, and Gold… $533.30 Howa about that rally in Gold yesterday? WOW!

That’s it for today… A heavy heart today… A tragic outcome for 12 miners in W. Va. We’ll see some Factory Orders data today, no biggie… The College Football National Championship Game is tonight… USC VS Texas… I’ll have to Tivo it because I’ll never be able to stay up to see the end! Should be a great game! Have a great Wednesday!

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

PFENNIG DISCLOSURE