In This Issue.

*  Happy Birthday Chuck!!!
*  Euro holds steady with no new news on Cyprus…
*  Chinese economy is predicted to expand…
*  Commodity currencies post good gains in 2013…

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

The currency markets stay in a fairly narrow range…

Good day…Happy Birthday to my good friend and boss Chuck Butler!  Chuck is enjoying his birthday down in Florida hopefully getting to spend the day watching the Cardinals, but looking at the schedule he will have to make the drive to Kissimmee as they aren’t playing at Roger Dean stadium today.  Chuck and I have worked together since the late 1980’s, so I have enjoyed his wit and humor for almost 25 years now.  Over the years I have learned a lot from Chuck, sitting next to him and using him as a sounding board whenever I had a question on almost anything.  But watching Chuck battle his illness over the past several years has impacted my life in a completely different way.  With what he has been through, Chuck says that every day is a blessing, and each birthday brings with it another victory.  Chuck has truly become a inspiration for all of us here on the desk, and from reading your emails I know he has become an inspiration for several of you readers also.  So I’m pretty sure everyone will join me in wishing Chuck a Happy Birthday this morning (singing is optional).  I can just hear Chuck saying ‘Enough of the sappy stuff Gaff, get to the markets!’ so let me do just that.

The currency markets stayed within the fairly narrow range we have established over the past week, but we are seeing some dollar weakness as we start our Friday.  Cyprus continues to be the key driver of the market, and we are certainly seeing some uncertainty with what is going to happen. Officials over at the ECB are taking a hard line against the tiny island’s government, demanding they raise some funds without adding to their debt before the ECB will release additional rescue funds.  I am still sticking by my thoughts that Cyprus will raise the necessary funds from either Russia or China by selling off a stake in the gas field which sits just off their coast. 

The euro may come under some additional selling pressure after a report released by the Ifo showed the business climate index dropped to 106.7 in February from 107.4.  I have got to say that I am a bit surprised at how resilient the euro has been.  I know it has dropped about 1% over the past week, but with the bad news out of Cyprus and the really good news around the US economic recovery, a 1% drop vs the US$ is really nothing at all.  It just gets back to just how unconvinced international investors are regarding the US$ and all of the debt which we have accumulated.  It is still a story of the ‘prettiest ugly’ currency in a search for where to put your money.  Neither the euro nor the US$ are looking great to investors, and with the BOJ continuing to keep the printing presses rolling and the UK in danger of a triple dip, there just isn’t a good alternative.  The US$ is currently the ‘best of the worst’ but that could change quickly, as investors aren’t showing much conviction in their currency choices. The feeling right now is more of a ‘wait and see’ attitude with everyone trying to figure out who the eventual winners will be.

I still think the commodity based economies will be the ones who come out in front over the next several years. The Australian dollar continued to climb higher vs. the US$ as currency traders pared bets the Reserve Bank of Australia would be cutting rates in the coming months.  The RBA released minutes of their March 5 meeting yesterday, and they suggested the central bank’s policy makers are feeling comfortable with the current level of interest rates. “Interest-sensitive parts of the economy continued to show signs of responding to these low rates,” according to the minutes. “It was appropriate to hold rates steady, and to assess further developments.”  The Australian dollar is one of the top performing currencies vs. the US$ during the month of March, increasing over 2% vs. the greenback.

The New Zealand dollar is also ticking higher this morning after a report showed the number of ‘help wanted’ ads increased 1% last month. 

Both of these ‘down under’ countries’ economies are reliant on a strong and growing Chinese economy.  A report by the Paris based Organization for Economic Cooperation and Development (OECD) predicted China’s growth is likely to accelerate this year and next.  The OECD report predicts Chinese growth will reach 8.5% this year and 8.9% in 2016 based on their research.  This would be a nice increase from the 7.9% growth rate posted by China in the final quarter of last year.  The officials at the OECD would like to see Chinese leaders lower interest rates in response to any ‘worse-than-expected developments’.  The Chinese economy continues to stay on track to overtake the US to become the world’s largest economy in 2016 a measured by purchasing power parity according to the report. 

The People’s Bank of China boosted the ‘official fixing rate’ to 6.2711 this morning which is the strongest level since January 15.  I want to alert Pfennig readers of a change we have made to the quote for Chinese renminbi on our system and here in the Pfennig.  We will now post the ‘official fixing rate’ for CNY on the system and here in the Pfennig, replacing the quote we were using which was based off of the CNH (deliverable) currency.  The deliverable Chinese currency is still not widely used, and is therefore much more expensive than the official renminbi.  Pricing of your currency trades has always been based off of the ‘official fixing rate’ since that is the rate which we are quoted off of in the markets, so the move should better reflect the true value of your holdings. 

The Chinese continue to work toward gaining a wider global acceptance of the Chinese renminbi in the international markets.  This morning a government spokesman in Beijing announced an agreement on 190 billion renminbi worth of swap agreements between China and Brazil.  Chuck has been alerting readers about these swap agreements for the past couple of years.  These swaps take the US dollar out of the transactions, with governments agreeing to denominate their trade in their own local currencies instead of using the US$ in the conversion.  This is just another step China is taking toward challenging the ‘reserve currency’ status of the US$. 

I mentioned earlier that the AUD and NZD are two of the best performing currencies vs. the US$ during the month of March, but the pest performer is the Mexican peso.  The peso has appreciated 3% vs. the US$ in the 22 days since the beginning of March, and remains at the top of the return chart for 2013.  Mexico’s Finance Minister Luis Videgaray reiterated his pledge to ‘stay out’ of the currency markets, refraining from intervening in the currency markets to stem the appreciation of the peso.  While regional peers throughout Latin America across the globe seem to be in a ‘race to the bottom’ with their currencies, the Mexican officials have decided to let the exchange rate of their currency to be ‘freely determined by the market’.  The market is apparently happy to oblige, and as long as Mexican official continue to stay out of the way, the currency looks set to continue to rise.

The Japanese yen continues to be among the worst performing currencies this year, dropping just under 9% vs. the US$.  A report showed exports dropped 2.9% from a year earlier, creating another trade deficit in what has become the longest run of deficits in three decades.  BOJ Governor Kuroda is scheduled to give his first press conference today and he is expected to announce an even more aggressive monetary easing in his efforts to revive the Japanese economy.  These stimulus efforts will definitely put more downward pressure on the Japanese yen. 

Gold continues to hold on to the $1,600 level, and reports show that bullish sentiment is returning into the precious metals markets.  A Bloomberg survey of 25 analysts showed 16 of them felt prices for gold will gain next week, while seven were bearish and two were neutral.  The turmoil in Cyprus has caused some investors back into the precious metals which are typically seen as a ‘safe haven’ during times of global crisis.  But positive news regarding the US economy has capped golds rise, with investors increasing expectations of the possibility of an early exit from QE.  Stronger growth in China, and the emergence of a Chinese middle class should help boost prices of precious metals; so the latest OECD report should be good news for the holders of both gold and silver.

The data releases yesterday here in the US were a bit of a mixed bag. Jobless claims showed the weekly number of individuals filing for unemployment increased a bit last week to 336k, but the figure was below economists projections of 340k.  Continuing claims ticked higher, increasing to 3.053 million.  Other data released showed existing home sales increased by .8% matching the previous month’s rise, but these numbers failed to reach economist’s expectations of a 1% increase.

Then there was..Chuck sent me a note from down in Florida yesterday, wanting to call my attention to an article he spotted in the ‘Drudge Report’.  Apparently there is a bill working its way through the Arizona House which would recognize gold and silver as legal tender.  The bill has already made it through the State Senate, and there seems to be a good chance it will win passage in the House. 

Arizona would become the second state to recognize the precious metals as legal tender, Utah has already passed similar legislation.  And there are 3 other states which are also considering similar measures.  This is just another indication of the loss in confidence in the ‘paper’ which is being printed in bulk by our leaders in Washington. 

You can read the entire article at the following link.

To recap. Happy Birthday Chuck!  The currency markets stayed in a fairly tight range but the euro could come under additional pressure if Cyprus fails to reach an agreement.  The NZD and AUD both are posting gains vs. the US$ and are among the best performers in 2013.  The PBOC raised the official value of the Chinese Renminbi to the highest level yet after an OECD report showed growth should continue in China.  Happy Birthday Chuck!

Currencies today 3/22/13. American Style: A$ $1.0429, kiwi .8315, C$ $.9757, euro 1.2960, sterling 1.52, Swiss $1.0606. European Style: rand 9.3061, krone 5.8249, SEK 6.5094, forint 237.02, zloty 3.2308, koruna 19.8940, RUB 30.89, yen 94.79, sing 1.2494, HKD 7.7629, INR 54.3413, China 6.2711, pesos 12.3912, BRL 2.0082 (back above 2), Dollar Index 82.566, Oil $92.93, 10-year 1.92%, Silver $29.0412, Gold $1,608.98, and Platinum $1,584.42.

That’s it for today, and for me for a while.  Mike Meyer will be sharing all of his knowledge with you readers next week as I will be out east with my son.  Sounds like I am getting out of town just in time as the St. Louis area is supposed to receive over 6 inches of snow this weekend!  And I thought the snow was done when we turned the page over to spring.  How did the first round of games treat your brackets?   A few upsets with #14 Harvard beating #3 New Mexico and #12 California beating #5 UNLV, but the closest call was Gonzaga’s close call with Southern.  We won’t have a Mizzou/SLU elite 8 showdown as Mizzou just couldn’t pull off the upset vs. Colorado St. So all of my energy will now switch over to the St. Louis U. Billikens who have to get by Oregon and then will face the tough Louisville team.  One more Happy Birthday wish to Chuck and I will close this out.  Have a Fantastic Friday and Wonderful Weekend!

Chris Gaffney, CFA
Vice President
EverBank World Markets