In This Issue.

* Emerging Market currencies get clobbered…
* US data non-inspiring…
* Aussie dollar falls on RBA comments…
* Gold clears resistance and should book 5th weekly gain…

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

Emerging Market currency rout in danger of spreading…

Good day. And welcome to Friday.  Even though this has been a holiday shortened week, I am glad it is Friday!  While I enjoyed taking Monday off, it just seems like we invariably try to squeeze that extra day's worth of work into the remaining 4 workdays.  Throw in a few un-planned interviews and I have had a pretty busy week.  The interviews went well, and I was quoted in both MarketWatch and the Wall Street Journal yesterday. 

The WSJ reporter called yesterday morning to ask if the dramatic sell off in the Argentine peso was perhaps causing the rest of the markets to head lower.  I had read about the problems with the Argentine currency but thought it was a bit of a stretch to interpolate these problems to a general stock market sell-off.  But after the Argentine policy makers devalued the peso, allowing it to drop the most in 12 years, other emerging market currencies started selling off also.  The Turkish lira plunged to a record low while Russia's ruble fell to a 5 year low and the South African rand moved above 11 rand/$.  It definitely turned into an emerging markets rout, as currency traders seemed to be losing confidence in the global outlook.  Even some of the less 'emerging' market currencies got caught up in the selling with both the Mexican peso and Australian dollar moving lower.  This slide in the EM currencies was almost as dramatic as the dip these currencies took back in June after the 'Taper Talk' started in earnest.

But yesterday's EM rout was not caused by a reduction in the US bond buying, but instead began when the Argentine government decided to stop supporting their currency and allowed it to 'devalue'.  While the Argentine peso may have sparked the sell-off, the rout was primarily fueled by the Chinese PMI numbers and the lower growth outlook which I spoke about yesterday.  The Chinese economy is still predicted to be the growth engine of the global economy, so any questions about the strength of that engine causes concerns across the globe.  China is still heavily dependent on the manufacturing sector so yesterday's disappointing PMI reading caused some concerns of slower growth. And in addition to the economic worries, officials in Beijing continue to deal with a renewed credit crisis and other problems in the banking sector.  The Chinese banking system came under additional scrutiny yesterday as a report stated the China Banking Regulatory Commission was increasing scrutiny of credit risks in the coal-mining industry. 

The benefactors of all of this 'risk aversion' have been the euro, yen, and Swiss franc all of which are again viewed as safe haven currencies.  The euro jumped up and brought the Swiss franc with it, but the biggest gainer vs. the US$ overnight was the Japanese yen which is up .79% over the past 24 hours.  The euro rallied on the back of Germany's current account surplus and successful bond auctions in both Spain and Portugal.  I read a story on Reuters this morning which reminded readers that Germany actually has a larger current account surplus in dollar terms than that of China.  When currency investors get nervous, they look toward countries with large current account surpluses, as these surpluses serve as a good support for the currency.  Data released yesterday showed the eurozone current account surplus widened to 23.5 billion which is the highest level since records have been kept.

The Swiss franc also strengthened against the US dollar as the Swiss government agreed to the SNB's request to raise the capital requirements for banks.  This caused currency investors to predict these large Swiss international banks will need to repatriate funds back into Switzerland in order to meet the new capital requirements.  But any repatriation will not have a long term impact on the currency, which instead will continue to follow the euro to which it is pegged. 

Over the past few years the US$ was also seen as a safe haven whenever investors were worried about global growth, but the dollar has not been the benefactor of this latest round of risk aversion.  Perhaps that is because the data released Thursday were not overly inspiring.  The weekly jobless claims remained at 326k, the same level which they were reported at last week.  But continuing claims remained above 3mm at 3,056,000 which was higher than economists had predicted.  This number is even more worrying when you factor in all of the individuals who lost their extended benefits. 

The Market US PMI number for January showed a slight slowdown in US manufacturing while the House Price Index reported prices increased just .1% in November compared to a .5% increase in the previous month.  Finally the Existing home sales figures were positive with sales increasing 1% MOM, but the previous month's sales were adjusted 1.6% lower for an overall decrease of -5.9%.  And the final piece of data released yesterday showed the leading index increased .1% in December vs. an expected increase of .2%.  As I said earlier, this data was largely uninspiring – mostly positive but failing to meet expectations.  There is no new data releases here in the US today, so the markets will continue to digest yesterday's figures.   

With its economy dependent on the Chinese manufacturing sector, the Australian dollar participated in the general currency selloff yesterday, tumbling to a 3 ½ year low of .866.  Reserve Bank of Australia board member Heather Ridout added to the Aussie dollar's downward momentum when she was reported as saying the currency had not fallen enough and that the currency at 80 cents would be closer to a 'fair deal' for the economy.  Do the math – that is another 8.75% drop from where we are now!  Not good news for the Aussie dollar. 

However, the New Zealand dollar was able to hold its ground during yesterday's selling.  The kiwi remained well bid as investors speculate the Reserve Bank of New Zealand my hike interest rates as early as next week.  Most currency traders think the next hike will come during the March meeting, but a poll released yesterday indicated that the probability of a rate increase at January 30ths meeting is now approaching 50%. 

Gold surged more than 2 percent on Thursday, notching its biggest one day rally in over three months as global worries saw investors flocking back to the shiny metal as a 'safe haven'.  The dollar drop along with equity selling contributed to the nice rally in precious metals.  A move above key technical resistance at $1,260 helped accelerate gold's move.  Gold has settled into a range in overnight trading but looks like it will hold on to these gains to finish with its 5th consecutive gain.  After a very tough 2013, the primary precious metal has booked a 5.42% gain thus far in 2014.  But two separate polls released yesterday suggest these gains may be shortlived.  A London Bullion Market Association survey of traders and analysts showed they believe gold will average $1,219 per ounce this year while a Reuters poll had a consensus estimate for gold of $1,250.  But all is not lost, as the LBMA poll also predicted it would hit a high of $1,379 at some point during the year.  Obviously we could be in for another volatile year in the precious metals markets; which makes our Metals Purchase Plan even more appealing.  I am a big fan of dollar cost averaging; buying more of an asset or investment when prices are down and less when they are higher.   In this way you can accumulate your desired asset with an overall lower cost basis. 

Platinum continues to bounce higher as the South African strike continues, and palladium prices have also moved up.  But both of these metals have less 'investment' demand and are used more for industrial purposes so the Chinese manufacturing slowdown has thrown a cold blanket on their recent price appreciations.  Silver on the other hand is matching Gold's march higher as investors move into both of these precious metals as safe haven investments.

Recap. The EM currencies got clobbered and the sell off even carried over into some of the more developed country currencies.  Investors seeking safe havens rushed into the currencies of countries with positive current accounts including the euro, swiss franc, and Japanese yen.  Us data was largely uninspiring, pushing the US equity markets lower and adding to the concerns on global growth.  The AUD booked a dramatic loss after RBA member suggested the current price was still too high.  And gold surged higher, and should end up the week with a 5th straight weekly gain.

Currencies today 1/24/13. American Style: A$ .8699, kiwi .8261, C$ .9027, euro 1.3693, sterling 1.6598, Swiss $1.1179. European Style: rand 11.11, krone 6.1381, SEK 6.4464, forint 223.09, zloty 3.0744, koruna 20.096, RUB 34.44, yen 102.45, sing 1.2796, HKD 7.7629, INR 62.66, China 6.1035, pesos 13.49, BRL 2.4153, Dollar Index 80.373, Oil $96.93, 10-year 2.73%, Silver $20.20, Platinum $1,447.99, Palladium $740.40, and Gold. $1,268.80

That's it for today…  Another cold morning, with single digit temps.  Chuck sent me a note yesterday, and while he wasn't wanting to rub it in he did mention that he was writing me while wearing shorts and a Hawaiian shirt.  We have another busy weekend in the Gaffney household as both of my children have high school dances (the first time they will both be at the same one!) and my son and I have our annual Father Son banquet.  Should be fun.  Hope you all have a wonderful weekend, and thanks for reading the Pfennig!!

Chris Gaffney, CFA
Vice President
EverBank World Markets