A Pfennig For Your Thoughts

In This Issue….

  • More Good Data from the Eurozone!
  • Base metals & raw materials soar!
  • China wants more!
  • Big 12 football rules!

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And Now… Today’s Pfennig!

China Looks To Optimize Reserves!

Good day… Well… Congratulations to the University of Texas… I can’t wait to get home and watch the second half that I recorded last night! The currencies had another strong performance yesterday, and at one point, the 2-day move looked a bit too much… And overnight we’ve seen the profit taking set in…

At one point yesterday afternoon, the euro was 1.2120, sterling was close to 1.77, kiwi had just hit 69 cents and so on… So… As I said, too fast… And when you’re running a marathon you need to remember that if you start fast, you can’t last! So… Major profit taking has set in and as you’ll see in the currency roundup below, the figures aren’t so lofty this morning! But! You have to like the way these currencies have taken the ball and run since we turned the calendar to 2006!

The good news from the Eurozone and Germany just keeps coming… German November Manufacturing Orders rose 1.7% vs. October’s reading, and a report out this morning says that European Consumer Confidence has reached a 3-year high! So… Both Manufacturing and Consumer Confidence is on the rebound and that’s a real strong sign that the economic recovery for the Eurozone as a whole is on terra firma… Take the news I gave you yesterday that German unemployment dropped the most in 15 years last month, and you can finally see why the ECB went out on the limb and raised rates last month… And don’t be surprised if they don’t come right back in January and hike rates again!

The rebound by the dollar overnight has profit taking written all over it… In addition, though… Here comes the talk about how the dollar’s interest rate will remain above Europe’s, thus maintaining the rate differential… I don’t see where that’s “news” and anyone would trade based on the thought… The dollar received all the accolades for that rate differential last year… Let’s not live in the past! The profit taking I can understand… This bunch of baloney needs to be thrown out!

The dollar move overnight has halted the recent meteoric rise in the price of gold… But that doesn’t mean the rise in gold is over… Was it over when the Germans bombed Pearl Harbor? (Ok, that’s a line from Animal House, I’ve actually received emails in the past when I’ve used that line, telling me “Chuck, it was the Japanese that bombed Pearl Harbor.”) The main thought here is that raw materials, base metals, and basically all commodities are on the rise again, with gold leading the way… Don’t stand in front of this bus…

Speaking of not stepping in front of a bus… There’s another bus I wouldn’t want to step in front of, and that’s copper… Yes… Copper reached an all-time high in yesterday’s trading, and is really taking no prisoners as it moves higher seemingly every day… All the moves in raw materials and base metals are a great foundation for further Aussie dollar strength. Recall last week I told you that Australia had increased its forecast for commodity export earnings by 2.6%? Well… They may have to go back to the drawing board, and revise that number up again, with these prices going to the moon!

Speaking of commodity prices… I don’t know if you’ve noticed or not, but the price of crude oil is creeping higher again, getting close to an 11-week high yesterday… Just when you thought it was safe to go back to the pump!

Well… After a day of talking to you about the kiwi, the New Zealand Gov’t released the November Trade Deficit number… Now, recall that I’ve been talking about this since September… New Zealand’s November Trade Deficit widened to a record of NZ$ 6.65 Billion (that’s approx. $4.6 Billion in U.S. terms) This report is the main culprit in causing the kiwi to fall from 1/2 cent overnight… This is the main bug-a-boo for New Zealand and the kiwi…

There was news overnight that China plans to “optimize” their foreign exchange reserves… In other words… They want higher returns from their dollar holdings! Do you read what I read? China is basically telling the markets that they are going to be less aggressive in the accumulation of dollar assets! Very interesting comment by China, I must say… And although the markets aren’t jumping all over this comment, it will be interesting to see if China comes back with a follow-up comment…

You know… I’ve always harped on this, so I’m not going to back down now… But, it always had to be in the back of investors’ minds that eventually, holders of dollar-based assets would demand more return in order to keep them buying… And if yields can’t be raised… Then the “clearing price” for the dollar assets has to be cheapened to make the purchase more appealing… The “clearing price” is the dollar, folks… The dollar will have to get cheaper to make our low yielding assets more appealing… I’ve harped and harped on this for years now, so I find China’s comment to be very, very interesting!

Currencies today: A$ .7470, kiwi .6845, C$ .8690, euro 1.2090, sterling 1.7550, Swiss .7815, ISK 61.84, rand 6.17, krone 6.565, forint 207.25, zloty 3.14, koruna 23.95, yen 116.20, baht 40.40, sing 1.6480, China 8.0657, pesos 10.58, dollar index 89.40, and gold… $529.10

That’s it for today… Chris will have the con with regard to the Pfennig tomorrow, as I’ll be away… Next week, I’ll be making a presentation to the St. Louis Chapter of the American Association of Individual Investors, this is the second consecutive year of them inviting me to their January meeting… I also talked to the Los Angeles Chapter back in July last summer… So… Big 12 football rules, eh? Have a great Thursday!

Chuck Butler
EverBank World Markets