In This Issue.

*  Bernanke says the Fed will be ‘flexible’…
*  Markets realize the size of Cyprus…
*  Kiwi posts the biggest gains…
*  Data today may show US housing recovery continues…

And, Now, Today’s Pfennig For Your Thoughts!

Chairman Bernanke says the Fed will be ‘flexible’ with bond purchases…

Good day… Well CNBC filled the slot with another ‘currency expert’ so my national television debut is postponed for a while.  Probably a good thing as I am scheduled to get four hours of ‘media training’ today.  I guess they are going to try and make sure I won’t make a fool of myself, not a small task according to my wife and kids!  College basketball’s big tournament begins today; well actually there has already been 4 games played, but the majority of the games in the first round of March madness will be played today. 

We haven’t seen much madness in the currency markets as they are pretty much right where they were 24 hours ago.  I typically update the ‘Currencies today’ section of the Pfennig before I start writing it each morning.  This gives me an indication of just how much movement each currency has had over the past day, and makes those with dramatic moves jump off the page and demand some more attention.  This morning, I made no change to the price of the euro, and very little changes to most of the others.  Those that did require updates show the dollar was trending higher, and the price of the precious metals ticked up a bit also.

The FOMC decision was right in line with expectations yesterday, with no movement in the record low interest rates.  The statement which was released yesterday afternoon showed policy makers have lowered their expectations for top end expectations for growth from 3% to 2.8% in 2013.  Apparently policy makers felt all of the recent good data releases regarding the US economy weren’t enough to offset the negative impact of the spending cuts and tax increases which occurred during the first quarter.  The FOMC members also lowered their projections for the unemployment rate at the end of the year to a range of 7.3% to 7.5% from a previous forecast of 7.4% to 7.7%.  With the lower end of the range still well above 7%, it is pretty obvious that the QE efforts will continue through 2013.  13 of the 19 FOMC participants estimated that the first increase in the federal funds rate from its current range of zero to .25% won’t occur until sometime in 2015.

Chairman Bernanke reiterated their concern regarding the US labor market during his speech following the meeting, agreeing that the recent gains are encouraging, but wanting to make sure this is not just a temporary improvement.  As I wrote yesterday, the key indicator the markets are looking for from Chairman Bernanke is exactly when the Fed will start reducing their bond purchases.  Bernanke wasn’t expected to lay out a specific time table, but he did suggest that the amount of the purchases could be adjusted as needed.  “As we make progress toward our objective, we may adjust the flow rate of purchases from month to month to appropriately calibrate the amount of accommodation,” Bernanke said.  “We think it makes more sense to have our policy variable, which is to say the rate of the flow of purchases will respond in a more continuous or sensitive way to changes in the outlook.”

Reading between the lines, I think Bernanke is trying to make the case that even if they start to pull some of the stimulus back out of the markets, it won’t be a ‘one way street’.  He is leaving open the possibility that the Fed could reduce spending one month and then turn around and increase it again the following period.  Again, all indications are that the members of the FOMC are ready to continue ‘juicing’ the US economy with cheap money for the foreseeable future.

And the decision to start reducing the stimulus may not even involve Chairman Bernanke.  The current Chairman’s term expires next January, and he indicated that he has had discussions with President Obama regarding this but (of course) would not share any details.  So the very difficult job of unwinding all of the quantitative easing which Bernanke put into place will likely fall to Vice Chairman Janet Yellen who is the probable replacement for Chairman Bernanke. 

The equity markets liked what they heard, and moved a bit higher after the press conference.  As I stated earlier, the currency markets were largely unchanged, which was actually pretty impressive given all of the recent turmoil in Europe.

The Cyprus bank crisis is not solved yet, but you wouldn’t know that by looking at the currency markets.  The euro has stabilized and is actually starting to trend a bit higher in early US trading.  I think currency traders have realized that the size of the banking problems in Cyprus are small, and that all of the worries about ‘contagion risks’ were overblown.  Depositors in Spanish, Italian, and Portuguese banks have not made a mad dash to the ATMs, so the impact of the Cyprus banks looks to be contained to the tiny island nation. 

The banks were supposed to re-open today, but it looks like they will remain closed for a few more days until a resolution can be negotiated.  And when/if the banks are re-opened there will likely be capital controls implemented, limiting the amount of funds depositors can withdrawal.  The ECB has said it will cut Cypriot banks off from emergency funding after March 25 unless Cyprus agrees on a bailout with international creditors.  I’m still betting a deal is worked out with Russia who will end up taking a stake in the gas field project in exchange for providing additional capital for the Cyprus banks.

A report released this morning showed European services and manufacturing output contracted in March.  The composite index of services and manufacturing in the euro-region fell to 46.5 from 47.9 in February. Another report showed German manufacturing contracted this month, surprising economists.  Purchasing managers in Germany’s manufacturing industry unexpectedly fell to 48.9 this month from 50.3 in February.  This is bad news for the Europe, as Germany has been the driving force of the nascent recovery. 

UK retail sales rose more than forecast in February, surging 2.1% from the month before when they dropped .7%.  This was the biggest increase in almost a year, but the percentage climb was partially due to heavy snowfall which held back consumers in January.  The data sent the pound to a 3 week high against the dollar and to the strongest level vs. the euro in five weeks.  The UK economy is in danger of slipping back into recession, so the big jump in retail sales was met with enthusiasm by currency traders.  But the UK Chancellor of the Exchequer George Osborne isn’t necessarily in a ‘jolly’ mood.  Osborne said he will ‘hold firm’ to the austerity plan with government spending cuts continuing for three more years after the 2015 election.  Osborne was addressing Parliament yesterday seeking approval of his budget.  He announced tax cuts for low earners, but will finance these cuts with cuts to the departmental budgets and better collections of existing taxes. 

Traders over at UBS think the bounce in the pound sterling will be short lived, suggesting the bearish trend still remains.  In a note released to clients today, a UBS technical analyst says the $1.5199 reached March 5th will be the high, and that the pound will fall to $1.4850 if it breaches support at $1.5050.

The New Zealand dollar was the top performing currency over the past couple of days, rising over 1% vs. the US$.  The kiwi benefitted from a report released last night which showed the nation’s economy grew at the fastest pace in three years last quarter.  GDP rose 1.5% during the first quarter, exceeding economists projections of a .9% rise.  The figure even surprised officials at the Reserve Bank of New Zealand who had expected growth of just .8%.  These RBNZ policy makers may have to re-think their interest rate projections as the higher growth will probably ratchet up pressure on them to increase rates. 

Both the kiwi and the Australian dollar were also helped by a preliminary reading for Purchasing Managers Index in China which rose to 51.7 in March from 50.4 in February.  The figure bested economist’s predictions of a 50.8 reading and was another indication that the Chinese economy will continue to expand. 

The biggest loser vs. the US$ over the past 24 hours has been the South African rand which was down a little less than 1/2 %.  The fall is just another step in the slide which the rand has been on since the beginning of the year, losing a total of 8.8% of its value in 2013.  The only currency which has done worse is the Japanese yen which is down 8.91%.  The South African economy has been challenged by mining strikes and slower exports, and currency investors moved out of the rand in the recent ‘risk off’ trading days.  A rebound in China, along with an indication that rates will not be cut any further by the Reserve Bank may turn this drop around.  But I would urge currency investors to remain cautious when considering adding the South African currency to your portfolios. 

The markets will largely trade on the weekly jobs numbers released shortly and the existing home sales and leading indicators which will follow later this morning.  Initial jobless claims are predicted to have increased to 340k last week from a surprisingly low 332k the previous week.  Sales of previously owned homes are predicted to have risen 1.6% in February, the most since November 2009.  This would be another indication that the housing market in the US is continuing to recover.  Mortgage rates are being held down by the Feds QE efforts, and are certainly helping the housing market to rebound.  The data will end today with the release of the leading indicators which are predicted to have increased .4% in February.

No then there was this today, as I am running a bit late and the Pfennig is already a bit long.  I’ll promise to have one for you tomorrow!

To recap. Chairman Bernanke kept rates unchanged, and suggested the Fed would be ‘flexible’ with their bond purchasing in the future.  The currency markets largely shrugged off the banking crisis in Cyprus, figuring a solution would be worked out.  Data out of Europe showed German manufacturing is slowing, and a broader index also indicated the euro-region recovery could be stalling.  Retail sales in the UK surged higher, helping to boost the pound sterling.  But UBS technical analysts say the pound is still in for more of a drop. The kiwi was the best performer overnight and both the AUD and NZD could continue to gain after good news out of China. 

Currencies today 3/21/13. American Style: A$ $1.041, kiwi .8316, C$ $.97805, euro 1.2921, sterling 1.5193, Swiss $1.058. European Style: rand 9.2895, krone 5.8425, SEK 6.4857, forint 236.15, zloty 3.234, koruna 19.955, RUB 30.896, yen 95.42, sing 1.2505, HKD 7.7629, INR 54.288, China 6.2140, pesos 12.3303, BRL 1.9899, Dollar Index 82.773, Oil $93.12, 10-year 1.96%, Silver $28.9113, Gold $1,608.20, and Platinum $1,581.00.

That’s it for today.  Good luck to the St Louis Billikens and Missouri Tigers who begin their quests for the NCAA tournament title today.  We will have basketball on one of the monitors most of the day, giving us something other to watch than the constant coverage of the Cyprus bank crisis!  I am going to be packing my bags tonight in preparation for a week of college vists on the east coast.  We fly into Philadelphia tomorrow evening and then will make our way north over the next week ending our trip next Friday up in Maine.  We plan on attending 3 different NHL games in three different cities which will help add some fun to the trip.  Hope everyone has a great Thursday, and thanks a bunch for reading the Pfennig!

Chris Gaffney, CFA
Vice President
EverBank World Markets