In This Issue.

* Dollar stays in a fairly narrow range. . .
* Euro dips but then recovers. . .
* BOE policy makers are split. . .
* Physical demand for gold drops as Indian jewelers close in protest. . .

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

Dollar remains in a narrow trading range vs. most currencies . . .

Good day… And welcome to Spring. I should have used that opening yesterday, as the vernal equinox was yesterday. It feels like we missed spring totally and just went right to Summer with temperatures remaining in the 80’s here in St. Louis. With the days growing longer I was actually able to get home and enjoy some of this warm weather last night. But these warm temps during spring always seem to bring thunderstorms with them, and we are expected to see some roll in tonight and tomorrow.

The currency markets were fairly calm yesterday, with the dollar pretty much unchanged from the levels I reported in yesterday’s Pfennig. There really wasn’t much new information to push the dollar one way or the other, and the news scrolling on the currency trading screens mainly rehashed concerns over China’s slowdown.

As I reported yesterday, a couple of the big raw material suppliers to China warned the markets that they were reducing their projections of demand as China’s economy slows. This had an especially dramatic impact on the currencies of commodity exporters such as Australia, Canada, and Brazil. Concerns over China also spilled over to the high yielding currencies such as the New Zealand dollar and South African rand as traders worried global growth would slow. But the initial sell off of these commodity based currencies reversed later in the day and this reversal continued overnight bringing all of them back to levels they were trading at before the Chinese growth worries hit the markets.

The euro traded lower yesterday morning, losing against both the US$ and Pound Sterling as data showed European economic growth is continuing to slow. The German Statistics Office said Producer Prices climbed just .4% in February compared to a .6% rise the month before. The median estimate from analysts taken by Bloomberg predicted a .5% increase, so the drop was greater than expected. The European economies are struggling to stay in a growth mode, and economists are almost unanimous in their opinion that Europe will slip back into a recession later this year.

The euro recovered overnight, and reached the highest level in almost two weeks against the greenback as Greece won approval for their new bailout. Traders are also expecting reports to be released tomorrow to show German services and factory output expanded last month. Economists predict the German Purchasing Manager’s Manufacturing index will increase from 50.2 to 51 and the Services index increased from 52.8 to 53.1. Any reading above 50 indicates expansion.

Numbers released in the US yesterday painted a more positive picture as housing starts stayed near a 3 year high. Builders broke ground on just under 700k new homes in February, in line with forecasts. Another report showed building permits, a more forward looking piece of data, climbed to the highest level since October of 2008. Permits increased an impressive 5.1% in February to 717k. In addition to the good numbers from February, January’s data was also adjusted higher. I’m sure the warmer weather which has gripped the nation helped push these numbers higher, and we will still need to see these permits turn into actual construction, but the data are definitely a positive sign for the housing industry.

While the new home construction looks to be moving in a positive direction, there is still a huge overhang of existing homes for sale. Today we will see if the existing home sales can match the impressive pace of new home construction. Existing home sales were up 4.3% in January, but are only expected to rise .9% this month. Consumers who want to purchase all of these homes need to be able to get financed, and the cost of those loans have been rising. Another report released this morning showed Mortgage applications fell 7.4% during last week, a direct reflection of the rising interest rates which could put an abrupt halt on any housing recovery.

Interest rates have moved higher as investors have moved their money out of the treasury markets and back into equities. The gains in the equity markets have been at the cost of higher rates. Maybe that is why all of the Fed Heads have been sounding a more cautious tone lately. While they like to see the equity markets moving higher, they can’t have interest rates shoot skyward as higher rates would definitely crimp our nascent recovery.

Barclays Capital sent a note to clients which said US growth will keep pushing the dollar higher in the short term. “US growth has surprised on the upside and the recovery seems to be on its way, suggesting structural issues that linger on its horizon are likely not as badly perceived by markets.” The note also notes that the recent increase in the price of oil will not have as dramatic impact on growth in the US because of a decrease in our dependence on foreign supplies. Another report by RBS Securities suggested investors should sell Swiss francs and purchase the US$ as US economic data will continue to push the dollar higher. RBS expects interest rates in the US to move higher, combining with stronger than forecast employment and manufacturing data to help move the dollar higher. While I don’t necessarily agree with these dollar bulls over the longer term, I can see where the dollar may climb higher on the short term.

The minutes of the BOE meeting held earlier this month were released today and showed some BOE policy makers were pushing for another increase in stimulus measures. Two policy makers pushed for a 25 billion pound increase in the target for bond purchases which the UK Central bank is using to pump liquidity into the markets. The seven remaining members voted to keep the bond purchase program unchanged. The pound dropped after the release of the minutes, as currency traders are worried that some policy makers feel additional stimulus is necessary to keep the UK economy from back pedaling. UK Chancellor of the Exchequer George Osborne will release his annual budget today which could cause some additional volatility for the pound sterling. A report released yesterday showed Britain’s budget deficit almost doubled in February as spending surged and tax revenue fell. Osborne is clinging to his goal to erase UK’s structural deficit by 2017, citing the ratings agencies threats to strip Britain’s top credit rating if they don’t lower the deficits.

Investors took advantage of the recent drop in the price of the Brazilian real, making it the best performing currency vs. the US$ yesterday (albeit with a gain of just .33%). The currency has lost over 5.5% in the past month as government officials continue to implement measures designed to reduce the value of the real. This currency has traditionally been one of the most volatile currencies, and the tug of war between the Brazilian government and currency investors certainly seems like it will keep the volatility high.

I haven’t written much about the precious metals, mainly because there really hasn’t been much to talk about. Gold has stuck within a fairly narrow $30 trading range over the past 5 days, and doesn’t seem to have any real direction. I would have expected yesterday’s worries over Chinese growth to push gold higher as it is typically sees ‘safe haven’ purchases. But we didn’t see any push into the metals, and as I reported the market sentiment turned around as the day progressed. A report which was shared by our metals traders indicated there was no physical demand in the markets leaving them to trade in this tight range. One reason may be that gold jewelers in India have been closed for the past 5 days in an organized protest to demand the withdrawal of increased taxes announced last week by the Indian finance minister. India is one of the world’s largest buyers of physical gold, so this shutdown definitely could have caused this drop in demand. It will certainly be interesting to see what their reopening will do to the price of gold tomorrow.

Then there was this…

Chuck sent me a story which someone forwarded to him while he is enjoying Spring Training down in Jupiter FL. It talks about an upcoming summit of the BRIC nations on March 28 in New Delhi. Apparently the host country, India, is going to try and set up a joint bank similar to other existing supranational authorities (IMF, World Bank, …) in order to give the group more power in global decision-making.

What I find interesting is that the IMF and WorldBank were set up by the powerful Western nations in part to help finance emerging nations such as the BRIC countries. But the tables have now turned, with these same Western nations looking to countries like China for their financing needs. So these BRIC nations are looking to set up their own bank, using the joint funds to help finance projects within their countries or in other developing nations.

“Basically India, China and perhaps Russia are trying to show off their economic clout; they are trying to demonstrate to the west that they can do without them. Above all they need freedom from western financial influence.”

This is just another sign that a financial power shift in underway. You can read the entire article which was authored by Kester Kenn Klomegah at the following link: .

To recap… The dollar traded in a fairly narrow range, increasing yesterday morning only to drop back down towards the end of the day. The housing data was positive, showing a dramatic increase in the number of housing permits. But higher rates have decreased mortgage apps. BOE policy makers were split, with 2 voting for an increase in stimulus. The UK budget will be released today, and cuts will be needed to reduce their rising deficits. Gold has been range trading but the return of Indian jewelers could make an impact in the markets as they have been closed in protest for the past 5 days.

Currencies today 3/21/2012. American Style: A$ $1.0472, kiwi .8170, C$ $1.0106, euro 1.3258, sterling 1.5878, Swiss $1.0994. European Style: rand 7.6163, krone 5.7396, SEK 6.7131, forint 219.59, zloty 3.1279, koruna 18.5248, RUB 29.1995, yen 83.94, sing 1.2634, HKD 7.7644, INR 50.5462, China 6.3225, pesos 12.6537, BRL 1.8147, Dollar Index 79.485, Oil $106.54, 10-year 2.37%, Silver $32.14, and Gold $1,654.02.

That’s it for today… As I said in the opening, I was able to get out and enjoy some of our warm weather last night. The air in my backyard was full of wonderful smells as the Bradford pear, Redbud, and Cherry trees are in full bloom and combine with our Lilac bushes to create some pretty amazing scents. I sure love the spring time! Hopefully everyone will have a Wonderful Wednesday, and take some time to get out and smell the flowers! Thanks for reading the Pfennig!!

Chris Gaffney, CFA
Vice President
EverBank World Markets