In This Issue.

* Italy ends the euro rally…
* Data in the US aren’t so promising…
* High yielders enjoy some time in the sun…
* Precious metals continue to move higher…

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

Yields in Italy start to creep back up…

Good day. Friday the 13th, but I hope this morning goes a bit smoother than yesterday. Sorry for the late arrival of the Pfennig to most of you, and the duplicate Pfennig some of you received. I had all kinds of fun trying to get the Daily Pfennig out to everyone yesterday morning. If this occurs in the future (it always seems to happen to me when I take it over for Chuck) you can just go out to the website and read it there. But today is already shaping up a bit better as the roads were clear of ice and snow on my drive in this morning. Yesterday was a mess, and it took Jennifer a bit over two hours to drive what is typically a 10 to 15 minute commute into work.

The dollar is in the fast lane this morning pushing back higher vs. most of the major currencies after falling a bit yesterday. The euro has dominated the news again overnight, and enjoyed a nice move up yesterday after successful bond auctions by Spain and Italy were followed up with some good news from the ECB. ECB president Mario Draghi told reporters he saw ‘tentative signs’ of stabilization in the euro region after the ECB meeting yesterday. He credited the massive injection of cash into the European banking system last month with helping to calm debt markets. But Draghi still cautioned that ‘substantial downside risks’ remain. The calmer markets allowed the ECB to leave rates unchanged during their meeting yesterday, and they also left their bond purchase program unchanged.

One of the reasons for the 180 degree turn of the euro was a less than stellar debt auction in Italy. While both Spain and Italy were able to sell debt at lower yields yesterday, the Italian debt auction this morning wasn’t as well received and yields started creeping higher. This has investors a bit nervous about their purchases of euros yesterday, and the single currency is back below $1.28 this morning after moving as high as $1.2889 overnight.

The Bank of England also left rates unchanged yesterday, and left their Asset Purchase Target at 275B. As I wrote yesterday, some felt the BOE would be forced to step up their bond purchases as the UK economy falters a bit. A report released this morning showed UK factory output prices unexpectedly fell in December for the first time in 18 months. Most of this fall was due to lower gasoline prices. The BOE has forecast that consumer price growth will ease ‘sharply’ this year as the UK economy continues to sputter along.

As Chuck predicted, investors started off the year feeling confident, and some of the early data in the US seemed to support these good feelings. But yesterday’s data started to rain on this parade. Retail sales here in the US showed just a .1% increase vs. the estimate of a .3% increase. The weekly jobless numbers just missed 400k with an increase of 399,000 and an increase in continuing claims to 3,628,000. These job numbers are more in line with the stories both Chuck and Mike left me yesterday, and certainly seem to contradict the monthly numbers released last week.

All of the big talk about deficit reduction and spending decreases by congress and the president don’t seem to be having much of an impact as the Monthly Budget statement showed the US ran a larger than predicted $86 billion deficit during December. I heard the President will be pushing through another 1.3 trillion dollar debt ceiling raise in the next few days, but the agreement reached at the end of last year will avoid all debate. Yes, the agreement reached last year gave President Obama the ability just raise the debt ceiling again this year without having to get approval from congress. This enabled congress and the administration to avoid all of that ‘annoying’ debate about debt and deficits. Typical congress, avoid the tough debates and push any REAL decisions down the road for somebody in the future to deal with. Eventually we are going to have to face the music and deal with these debts, but not in an election year!

Chuck finally made it down to warmer climates late yesterday, and asked me to thank Addison Wiggin and Dave Gonigam over at the 5 who were kind enough to quote him 5 again yesterday. Here is what Chuck had to say about the Euro in yesterday’s 5 regarding the recent dollar strength:

“This happens almost every year,” says EverBank’s Chuck Butler of the dollar’s current strength, “due to renewed forecasts for economic vigor in the U.S., only to see those forecasts fade away by the time summer comes around. And I do believe this is where we are this year too.”
“I do believe that eventually the news from the eurozone will begin to stabilize,” he adds. “I don’t believe it behooves any eurozone member that has debt problems to leave the euro, and therefore I don’t believe that any will.”
“Eventually, the markets and media begin to lose interest in things they’ve focused on for so long, and when things begin to heat up with the election races going on, that’s when the focus will shift back to the U.S. and our debt problems.”

The high yielding currencies are enjoying some time in the sun during these first few weeks of 2012. As Chuck has mentioned, investors typically feel a bit more confident at the beginning of the year, and this confidence has led to a move back into ‘riskier’ currencies which have good yield differentials to the US$ and Japanese yen.

The Indian rupee has the highest interest rate of any of the currencies we offer, so it is no surprise that the rupee has enjoyed a nice rebound over the past few weeks.

The better news for the US economy has been good for the Mexican peso, which has been on a two week trek higher vs. the US$. According to data out yesterday, foreign holdings of local currency bonds rose to the highest level since February of 2000 as US investors look to their neighbors to the south for higher yields. The good economic data coming out of the US which is the destination for 80% of Mexico’s exports has helped fuel the moves to the peso. The Mexican peso is currently tied with the Indian rupee as the 2nd best performer vs. the US$ in 2012, moving up nearly 3% after falling almost 11% vs. the US$ last year.

The only currency which has performed better than the Mexican peso and Indian rupee during the past two weeks is the Brazilian real which is up an impressive 4.7% vs. the US$. This move is partially due to a yield differential play, with investors moving money from low or non interest bearing investments in Europe and the US into the higher yields found in Brazil.

Oil fell back below $100 as the proposed embargo of Iranian oil hit a snag. The embargo, which is being pushed by both the US and EU was set back earlier this week when China said they would not participate. And yesterday a rumor surfaced that the EU would delay any moves against Iranian oil for at least 6 months to let countries such as Greece, Italy, and Spain find alternative supplies. The move down in oil prices will probably put some selling pressure on the big oil exporting currencies including the Russian Ruble, Norwegian Krone, and Canadian dollar. All are down a bit this morning, most likely due to this drop in crude prices.

Precious metals rallied nicely overnight with both Gold and Silver moving higher yesterday. Both are up nearly 7% during the first two weeks of 2012, performing better than any of the currencies. But the dollar strength this morning has prices moving lower as I type.

The Singapore dollar has long been a favorite currency of the folks on the World Markets trade desk. We like the SGD because of the governments use of the currency price as their primary tool to fight inflation. Instead of raising interest rates, officials in Singapore simply allow their currency to appreciate in order to slow their economy which is primarily dependent on exports. But it looks like Singapore has been able to offset any export losses to Europe and the US with exports into their Asian neighbors and better internal demand. A report released this morning showed Singapore’s retail sales rose for a ninth month in November as consumers purchased more telecommunication products. Jobs growth and an expanding tourism industry is being credited with helping the tiny nation withstand the global slowdown.

Then there was this. Robert Shiller, the co-creator of the S&P/Case Shiller home price index is sending up warning flares regarding the Norwegian housing market. “The most important thing to me is home prices, and I find it quite amazing that in Norway they are still reaching record levels, and they’ve gone up more than they ever did in the US.” Shiller said in an interview yesterday. “In Norway it looks like a bubble to me, so the collapse of that bubble, that’s dangerous to any economy, to see such a major event unwind.” Norway’s oil wealth has helped shield their economy from much of the Global debt crisis, but according to Shiller they may have some tougher times ahead. My only question is where was Shiller’s warnings regarding the US housing market bubble?

To recap. Another auction in Italy wasn’t as well received as yesterday’s auctions, and yields started moving higher. The Euro rallied through most of Thursday, but is off this morning due to the higher Italian yields. Both the ECB and BOE left everything unchanged during their meetings yesterday. US data was disappointing, and the weekly job losses approached 400k. The high yielding currencies of India, Brazil, and Mexico are the best performers in 2012. Crude oil is back below $100 and the precious metals have been rallying. Finally, the creator of the Case SHiller housing index is warning investors of a housing bubble in Norway.

Currencies today 1/13/12. American Style: A$ $1.0338, kiwi .7939, C$ .9818, euro 1.2782, sterling 1.5340, Swiss $1.0564. European Style: rand 8.0453, krone 6.0161, SEK 6.9406, forint 242.28, zloty 3.4530, koruna 19.8972, RUB 31.6962, yen 76.74, sing 1.2896, HKD 7.7677, INR 51.5288, China 6.3065, pesos 13.5418, BRL 1.7789, Dollar Index 80.959, Oil $98.98, 10-year 1.89%, Silver $29.81, and Gold. $1,639.98

That’s it for today. And for the week. Chuck will be happy to hear the temperatures have plummeted here to the single digits, with wind chills in the negative territory. Jennifer, Tim, Antione, and Lori are all heading to LA this weekend to enjoy a Lakers/Clippers game, I’m sure the weather is a bit more bearable out west. The bank will be closed on Monday as we all celebrate the Martin Luther King holiday, but many of us on the desk will be coming in to do a bit of testing on the new computer system. Yes, the T24 project I have been working on for the past three years is finally getting close to being done. And with that I will wish everyone a Fantastic Friday the 13th, and hope you all have a wonderful weekend.

Chris Gaffney, CFA
Vice President
EverBank World Markets