In This Issue.

*  Cyprus reaches a bail out agreement with the IMF…
*  Obama administration pushes for riskier lending…
*  Scandinavian currencies look attractive.
*  Commodity currencies recover.

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

The IMF adds 1 billion euros to the Cyprus rescue fund.

Good day.  Chuck is headed out to California, and I will be following him tomorrow afternoon in order to attend the Global Currency Expo at the end of this week.  I am looking forward to getting the opportunity to rub shoulders with all of the ‘currency experts’ which will be in attendance, and also look forward to meeting a few of our EverBank clients and Pfennig readers!  Mike will be taking on the Pfennig Friday while both Chuck and I are out, but I will have the conn today and tomorrow.  Now on to today’s Pfennig.

The euro recovered a bit in overnight trading as a bailout agreement was announced between the IMF and Cyprus officials.  IMF managing director Christine Lagarde said the fund had reached an agreement to contribute up to 1 billion euros to the rescue program which aims to stabilize Cyprus’s banks.  But details of the agreement were not available, and money from the IMF typically comes with some strings attached, so it will be interesting just how much pain the IMF is going to want the citizens of Cyprus to endure in order to gain access to these additional funds.

I was quoted in the Wall Street Journal last week regarding the crisis in Cyprus, and shared my thoughts that the events would likely be contained within the tiny island nation and would not spread to the rest of Europe.  This agreement, and the markets reaction to the reopening of the banks last week would certainly seem to bolster my argument. 

The announcement of the IMF deal sent the euro up a bit, reversing yesterday’s decline which resulted from two separate reports which worried investors in the single currency.  A report on unemployment in the euro-zone released yesterday showed the European labor markets continue to struggle to recover.    Unemployment in the euro region remained at 12 percent in February, matching the revised January level which is the highest unemployment rate recorded for the region since the data series started in 1995.  Another report released yesterday showed the purchasing-manager’s index of manufacturing slid to 46.8 in March from a reading of 47.9 in the previous month.    The poor economic data continue to support further stimulus efforts by the ECB which would be bad for the euro.

The pound sterling was a bit weaker after a report showed UK factory output contracted in March by more than economists had forecast.  The best performing currency in Europe yesterday was the Swedish krona which gained after a purchasing managers index rose to 52.1 in March from 50.9 in the previous month.  This was the fastest pas of growth in manufacturing since June of 2011.   As with most of these indexes, a measure above 50 indicates expansion, so the jump was a good indication that the Swedish economy, which is heavily dependent on manufacturing, will continue to expand. 

A couple of major European banks certainly think Sweden’s krona has further to rise.  Strategists at both Deutsche Bank and HSBC Holdings Plc sent out emails yesterday suggesting the currency’s recent rise isn’t over yet.  Both point to accelerating economic growth and the AAA rating of Scandinavia’s largest economy as  key factors driving the currency higher.  And while officials of some countries with ‘hot’ currencies have been trying to jawbone their currencies lower, Swedish officials largely seem to be indifferent regarding their currency’s recent strength.   Officials at the Riksbank (Sweden’s  central bank) left rates unchanged at their last meeting, and don’t seem to have any need nor intention of cutting rates in the near future.  

The only thing working against the Swedish krona is a worry that the recent gains have left it a bit overvalued, but the strength of the Swedish economy would seem to support this ‘overvaluation’ for now.  Another currency which shares many of the outstanding fundamentals of the SEK is the Norwegian krone. Readers of the Pfennig know we have been touting Norway’s outstanding fundamentals for a long time, and currency investors who are worried about maybe being ‘late to the party’ regarding the Swedish currency should look at the Norwegian krone as another alternative.  Heck, I would suggest having positions in both of these AAA rated countries.

The news was not as positive for a couple of  ‘euro wannabes’.  Poland’s currency fell to the lowest level in more than a week vs. the euro after a PMI release showed a deeper than expected slowdown in polish manufacturing.  The purchasing manager’s index released by Market Economics yesterday fell to 48 from 48.9 in February.  The drop was much larger than the 48.7 reading expected by economists, and increases the chances of further rate cuts  which would not be a good thing for the Polish zloty. 

All of the bad PMI reports in Europe caused investors to sell the Czech kronua, fearing a stalled European recovery would negatively impact the Czech economy.  The Czech economy is dependent on manufacturing and the export of goods into the Euro region; so the bad employment numbers combined with the negative PMI reports caused many investors to lower their expectations for the koruna.  Worries about the Italian elections, and Cyprus banking crisis have only added to the selling pressure facing the Czech currency. 

I saw an article in the Washington Post yesterday which scared me a bit.  The story said the Obama administration was pushing banks to make home loans available to a wider range of applicants, not just those with strong credit.  Wait a minute, isn’t that EXACTLY what got us into the whole credit crisis in the first place?  Banks extending TOO MUCH credit to home owners who really couldn’t afford it??  The story says the administration believes too many Americans are being left out of the housing market’s recovery, and that the banks shouldn’t worry about taking on the additional credit risk since they can use the federal programs available to protect lenders in the case of borrower defaults.  

I heard on the radio during the drive in this morning that Fannie Mae booked a record profit last quarter, so I guess our leaders in Washington figure the taxpayers should take on a bit more risk in order to continue to stimulate the housing market.  But again, isn’t this exactly what turned Fannie Mae and Freddie Mac into  ‘federal programs’ ??  They got into so much trouble the tax payers had to take them over!  Now the administration is wanting us to march right back down the same path we ran down in the mid 2000’s. 

Of course the officials said they don’t want banks to lend irresponsibly, but the article included a quote from John Taylor who is the president of the National Community Reinvestment Coalition which I think sums up the administration’s position quite nicely: “It is very difficult for people of low and moderate incomes to refinance or buy homes.”  Another ‘government official’ quoted in the story speaks about how borrowers who had their credit scores impacted by the recession are finding it hard to get loans.  Again, is that so bad?  Banks are not allowing people to borrow more than they can afford, and are no longer making loans to those borrowers who are less likely to pay these loans back.  Sounds like the banks have it right, but that is getting in the way of a quicker housing recovery.

Ok, I will get off the soapbox now and return to the currency markets, but it really boils my blood when we don’t learn from past mistakes! 

New Zealand’s kiwi rose after data released showed export prices in the island nation increased the most in 3 years.  Commodity export prices rose 7.4% in March, boosting the demand for the kiwi.  The Aussie dollar continued to rally on the comments made by RBA Governor Stevens.  Chuck shared the RBA leader’s comments with everyone yesterday, and the currency markets seemed to agree with Chuck’s take on things and continued to push the Aussie dollar higher.

The Mexican peso rose to its strongest level in 19 months yesterday on positive sentiment regarding foreign investment into our neighbors to the south.  Apparently a bill is making its way through the Mexican senate which will boost competition in the telecommunications industry, hopefully increasing the demand for the Mexican peso as foreign investors move into the Mexican phone markets. 

Then There Was This.  As is typical, Chuck left me with some thoughts on the way out the door yesterday, and I thought they were well suited to the TTWT section of today’s Pfennig.  Chuck talks about the dollar index and a slightly different currency index which was put together by our friends over at Shadow Stats.  Take it away Chuck:

Yesterday, I talked about the pre-1994 method of calculating unemployment here in the U.S. Then when I was doing the currency roundup I stopped for a minute when reporting the Dollar Index. As you recall, I’ve long told you that the Dollar Index isn’t a good way to tell the direction of the dollar, unless you interested in euros. Because the index is so overweight euros (from the legacy currencies that converted to euros).  I’ve long wanted to create my own dollar index. Of course I would have to call it something else..  Then I noticed that John Williams over at Shadow Stats, does do his own dollar index, and it is quite different from the dollar index that the market uses.

The market dollar index is comprised of: euros (57.6%), yen (13.6%), sterling (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%), and Swiss francs (3.6%)

However, when you use this index, you don’t get a real picture of the dollar’s overall performance, for what happens if you only own Aussie dollars and Chinese renminbi?  You certainly can’t track the dollar’s performance against those currencies by looking at the dollar index, for they are not components of that index. John Williams uses: an even weighting of: euros, yen, sterling, francs, Aussie and Canada. 

The current Dollar Index shows a level of 82.88. But when you change the way it’s done you get a different picture with the index at a level of 50.  Doing it that way, you certainly don’t think the dollar is such a hot commodity do you?

Granted, the dollar has regained some of its luster against the euro, yen, and other European currencies, but not against all. So. the point I’m making here, is don’t put all your eggs in the dollar index basket.

You can view the Shadow stats dollar index and all of the other great information tracking the ‘real’ numbers behind the global economy at .

To recap. The IMF provided Cyprus with an additional 1 billion euros in rescue funds, helping to boost the euro.  PMI data showed manufacturing across the euro region is slowing, and additional data put pressure on the Pound sterling.  The Swedish krona should continue to outperform according to two different currency strategists.  But the story was not so positive for the currencies of the Czech Republic and Poland which sold off after bad PMI data.  The Obama administration is pushing banks to increase ‘riskier’ home loans – DÉJÀ VU all over again!!!  Commodity currencies rallied yesterday, and Chuck points out a new dollar index.

Currencies today 4/3/13. American Style: A$ $1.0474, kiwi .84326, C$ .98647, euro 1.2821, sterling 1.5113, Swiss $1.0541. European Style: rand 9.2421, krone 5.8116, SEK 6.4937, forint 234.27, zloty 3.2682, koruna 20.1610, RUB 31.54, yen 93.49, sing 1.2379, HKD 7.7623, INR 54.44, China 6.2609, pesos 12.2693, BRL 2.0194, Dollar Index 82.90, Oil $96.71, 10-year 1.86%, Silver $27.245, Gold. $1,571.56, and Platinum $1,566.75.

That’s it for today.  Tickets sold out within minutes for the big soccer game coming to Busch Stadium next month.  A couple of the folks on the desk were able to log in and snag a few, but I wasn’t able to so I will have to start shopping in the ‘secondary market’ for some seats.  If you hadn’t heard, Manchester United will be taking on Chelsea on May 23rd right here in St. Louis.  It was nice to see how quickly the 40k plus tickets were sold out – just goes to show you how much of a ‘soccer town’ St. Louis is!   Christine just walked in and delivered a vanilla latte to my desk YAHOO FOR ME!!  It is certainly starting out to be a great day!  I hope everyone has a Wonderful Wednesday and thanks for reading the Pfennig. 

Chris Gaffney, CFA
Vice President
EverBank World Markets