A Pfennig For Your Thoughts

In this issue…

  • The kiwi/Aussie spread is normal again!
  • The RBA keeps rates unchanged…
  • The Bank of Canada hikes rates 25 BPS!
  • A 24-year high for GOLD!

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And Now… Today’s Pfennig!

An S&P Current Account Deficit Warning… (But not who you think!)

Good day… Well, so much for that “healthy competition” I talked about yesterday between Aussie and kiwi… Bad news from the South Pacific this morning, as Standard & Poors warned New Zealand about the size of their Current Account Deficit, and that if not reduced could threaten the country’s debt rating… I know, I know, why pick on little old New Zealand, when there are bigger fish to fry, like the U.S.?

This debt rating is a big deal, because institutions that hold bonds/ debt, will have in their by-laws the absolute lowest rating they can hold, which is usually “investment grade”… Now… I believe all this hub-bub is nothing more than a tempest in a tea cup, because, New Zealand’s debt rating is the second-highest (AA+)rating that S&P hands out… So, there’s no way, even if S&P took New Zealand’s debt rating to the woodshed, that it would come out bruised and battered! Any way… If bond holders do need to sell because of their allocations / by-laws, this would mean kiwi selling… And to that end, kiwi got sold last night…

As Pfennig Readers, I’ve been telling you about this growing problem for New Zealand, but again, let’s keep this in perspective… Their Current Account Deficit in dollar terms is about $8.5 Billion… That’s one week’s worth of Deficits here in the U.S.! I don’t mean to make light of this warning by S&P, and I do believe that if New Zealand doesn’t do something about their deficit, that when the rate differential game is up, and it’s not anywhere close to being “up”, the demand for kiwi will slow, and then, the deficit will become the albatross on kiwi’s shoulder!

So… The spread VS the Aussie dollar is back to normal, just like that! I had a reader from New Zealand write me yesterday saying that every time kiwi got close to its kissin cousin across the Tasman, something happened and the spread returned to normal… And just like that, it happened… Crazy… I would look at this selling last night as a short term blue light special opportunity to buy at much cheaper levels, before the Reserve Bank of New Zealand ratchets up rates again tonight!

The kiwi selling last night did spill over to Aussie just a bit, so both are much cheaper today than they have been… And, just as I thought, the Reserve Bank of Australia (RBA) did keep interest rates on hold last night… The RBA doesn’t issue a statement on rates following meetings where no move was made, so we’re left to imagine that their tightening bias remains in place, especially with inflation hitting the top of their 1-3% target band… We’ll have to wait for the next scheduled Monetary Policy Statement for that confirmation…

The Bank of Canada (BOC) did raise rates, as I thought, 25 BPS yesterday, marking 3 consecutive meetings by the BOC with rate hikes… The BOC did issue a statement afterward, and while the words were softened a bit from the previous statement, they (the words) are definitely still Hawkish! Internal Central Bank rates there are now 3.25%, and I don’t see the BOC stopping this rate hike carousel until they reach the 4.25% level next spring! Loonies saw weakness following the statement, as at first, the markets believed the BOC was telling them that this statement was a horse of a different color… But not so, and here we are this morning with loonies a bit weaker than yesterday morning too!

Well… Good news from the U.S. data yesterday… 3rd QTR Productivity was revised up more than expected to 4.7% (consensus was 4.5%)… OK, I’m being facetious here… I totally despise this piece of data, because 1. Big Al used to claim it was the end all to fighting inflation, and 2. productivity means that you and I work harder and longer, that’s all… Sure, think about it… If you and I are working harder and longer, there’s no need to add employment, which doesn’t add to wage pressures… OK, this is a simplistic view of the data, but that’s how I see it adding up!

Gold traded at a 24-year high yesterday, before profit taking set in… The shiny metal climbed to around $513 after it was announced that Russia’s Central Bank is going to go through with their plans to double their Gold reserves… And like last year, when we saw Central Bank after Central Bank announce that they were lowering their dollar reserves… Now we see the Central Banks in Argentina and South Africa also announcing that they may add Gold to their reserves too!

This is interesting given the fact that since the mid-90’s Central Banks have been selling Gold… Now, it looks as though they are back on the Gold “love train”… Hmmm… I wonder what our friend Doug Casey from Casey Research (/) thinks about this latest development… As I’ve explained in the past Doug is a “true” believer in gold, and believes it has just started its move higher… I’ve got to see if I can get him to write a short piece for Pfennig Readers on Gold….

OK… About 2 months ago, I welcomed our newest addition to the World Markets Desk, Ashish Advani and told you all that we were starting a Corporate FX desk, and if you owned a business that had foreign currency needs, Ashish was your man… Well, Let me explain this again… We have always been able to help you with your Corporate FX needs, but now, we can do far more and with Ashish having years of experience as a Corporate Treasurer, you’ve got someone to talk to that knows how to structure trades for your needs… Just call the World Markets Desk at 1-800-926-4922, and ask for Ashish!

Currencies today: A$ .7475, kiwi .7055, C$ .8610, euro 1.1725, sterling 1.7340, Swiss .7610, ISK 64.70, rand 6.32, krone 6.79, forint 216.45, zloty 3.2775, koruna 24.70, yen 120.90, baht 41.35, sing 1.6870, China 8.0776, pesos 10.4150, dollar index 92.02, and Gold… $513.75

That’s it for today…. Except of course to mention that today is Pearl Harbor remembrance day… A very sad day in our history… It’s Wired Wednesday for us on the desk again, as everyone is back from their travels! And the office looks nice with tiny lit trees placed here and there… Yesterday was “meeting day”, glad that’s over with! Have a great Wednesday!

Chuck Butler
EverBank World Markets