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Daily Pfennig: Still Waiting on an Agreement in Washington DC...
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In This Issue.
* Still waiting for an agreement...
* US manufacturing stumbles...
* Brazil imposes taxes to try and control the real...
* No intervention to stop the Yen’s rise...
And, Now, Today's Pfennig For Your Thoughts!
Still waiting on an agreement in Washington DC…
Good day. It looks like it is going to be another beautiful day here in the Midwest, as the sun is just starting to peak over the horizon. Problem is, we need a bit of rain to cool things off around here, but no relief is in sight as I heard the heat index is supposed to be around 111 degrees today. Chuck let me know the temperature in Vancouver is a wonderful 75 degrees, more from him a bit later in the letter but right now let me get you updated on the currency markets.
The debate in Washington continues to heat up as both sides continue to hold their ground. Rep. Boehner will likely try to get the House to vote on his debt ceiling bill today, but it faces certain defeat in the Senate and a definite veto from President Obama. Surprisingly it looks like Boehner may not even have enough votes from his own party as many don’t feel the cuts go deep enough. Meanwhile the Democrats continue to push for a longer term bill, wanting to kick this can past the 2012 elections. I still believe a deal will be reached, and it will probably be slanted toward the Boehner plan, as President Obama and the Democrats just don’t have any real bargaining chips. No one wants the US to default, and the only real chip the Democrats have is to push the blame of any default on the Republicans, but that may backfire with a democrat in the Oval office and a democratically controlled Senate.
The dollar traded lower most of the day on Wednesday, but started climbing back up just before the close. Asian trading has pushed the dollar even higher with investors apparently wanting to take refuge in the US treasury market. Many of you will probably be asking how in the world the US Treasury market could be seen as a ‘safe haven’ against a possible default of the US. It is a lot like seeking shelter from a tornado by running into a mobile home! (Not that I have anything against mobile homes). The only explanation I can fathom is that the US Treasury market is really the only place with enough liquidity to park big amounts of cash. On the drive home last night I heard that the US is responsible for the issuance of 59% of all sovereign debt in the world. Germany is in second place with just 10%. So the US Treasury market continues to be the most liquid choice for parking cash, and it still looks like investors trust the elected officials in Washington will reach some sort of compromise.
We had another round of disappointing economic data for the US yesterday, with Durable Goods Orders for June declining a surprising -2.1% compared with an expected increase of .3%. May’s numbers, which were left unchanged at +1.9%, had generated a lot of hype 30 days ago as manufacturing was touted as the one sector which would pull the US out of our slump. The Fed’s beige book which was released yesterday afternoon stated that Manufacturing was the one bright spot in the US economy; so that bright spot isn’t looking so shiny now! The beige book, which is a survey of the economic climate in the Fed’s 12 regions, stated “that while economic activity continued to grow the pace has moderated in many districts”. The statement that economic activity is growing is a bit of a stretch, as the survey showed growth slowed in 8 of the 12 regions. It is not a big surprise that the beige book conclusions followed the same script which has been laid out by Fed Chairman Ben Bernanke. The report underscored the Chairman’s message to congress earlier this month that monetary stimulus will need to continue to be necessary in order to bolster the economy. It sure bolsters Chuck’s call that we will see QE III sometime later this year.
Today we will get the weekly jobs data, with initial jobless claims expected to remain above 400k. Pending home sales numbers will also be released and the data is expected to show a drop in the number of contracts to buy previously owned homes. The Labor and Housing markets continue to be big problems here in the US, and any recovery just isn’t going to take hold until both of these show some improvement.
As I said in the opening paragraph, Chuck is enjoying a week away from sizzling St. Louis but remains ‘dialed into’ the markets. He sent me this note on
Here I am in a jewel of a city… Vancouver, I get to get out and enjoy it very little, and I mean, very little… but I was minding my own business when a currency dealer sent along a note advising me of a HUGE change in Brazil.. Talk about ruining my day!
Well… I totally dislike having to talk about this kind of stuff, but… because I told you all that you should only use your speculative money that you allocate in your investment portfolio to Brazil, then this shouldn’t come as any major surprise. All along, the Brazilian Gov’t has done everything but throw the kitchen sink at the Brazilian real in an attempt to keep the currency from appreciating… And it hasn’t worked… Well, I think they now have pulled the kitchen sink from the wall… Yesterday, Brazil announced that they were going to implement a tax on USD/ BRL derivatives… In simple language, if you go short dollars and buy real, that trade is going to be taxed… the tax at the beginning is going to be 1%... BUT… the Gov’t has the ability to move it to 25% and all points in between…
That means, that the dealers will begin to make up for the taxes by reducing the forward points on trades… that will mean that the interest rate that we pay on reals will begin to fade… as the tax goes up, the interest goes down, and the Gov’t’s hope that you’ll not want to own a non-yielding currency… thus you sell it, and the currency weakens, and voila! They finally get what they’ve craved for over 2 years!
What does this mean for real holders? It means that the multiple years of currency appreciation, may be nearing an end… and for sure the “high” interest rate will be wiped away… this is NOT an Iceland, folks… This is simply a Gov’t that has their heads on crooked, and doesn’t understand that a strong currency fights inflation…
OK… onto other things… The Reserve Bank of New Zealand (RBNZ) left rates unchanged yesterday afternoon… but… made a very telling statement about what’s going to happen to interest rates in the future… The RBNZ acknowledged a stronger domestic economy, and said, “we are now taking out the insurance cut, and see no point in multiple increases to erase the emergency cut…
I see this a and eye opening statement to say the least! The RBNZ has told the markets to get ready for a 50 Basis Points (1/2%) rate hike in September (their next meeting…) The Green light is on here folks… the RBNZ has so stated!
Chris again. The new attempt by Brazil’s government to control the appreciation of the real worked. The Brazilian currency dropped as much as 2% before coming back up to close down 1.1% vs. the US$ yesterday, the biggest decline in more than a month. But past efforts by Brazil’s government have only had a temporary impact, and there are still many factors which are going to keep investors flocking to this country. We will just have to see if this latest move has any staying power.
Chuck mentioned, RBNZ Governor Alan Bollard signaled they would be removing the 50 basis point ‘insurance’ cut they made following the February earthquake. I believe the only thing which kept the RBNZ from raising the rate yesterday was the uncertainty surrounding the US debt situation. A half point increase in September will be priced into the kiwi in the coming weeks, and should boost it further into record territory.
The Japanese yen is also climbing back up toward record territory, and was one of the best performers vs. the US$ yesterday. As I stated earlier, investors are seeking shelter from the potential economic storm caused by a US default; and the yen is still the second most liquid currency. Surprisingly, the Japanese officials haven’t been trying to intervene in order to stop the yen’s appreciation. The Japanese have a long history of trying to control their currency through intervention, and the strong moves made by the currency would typically cause officials to squirm. But according to a report by JPMorgan Chase this latest advance has not coincided with a sell-off in stocks like previous moves, so intervention isn’t as important. “Previous advances in the yen drove shares lower on concern the currency would curb exporters’ profits, boosting pressure on the government to intervene” a FX research report stated. “It’s difficult to see how Japan can intervene with the Nikkei remaining above 10,000.”
So it sounds like a new record for the yen isn’t out of the question as investors look for alternatives to parking funds in the US$. The Singapore dollar is another Asian currency which provides an excellent alternative for international diversification. A report earlier this week showed Singapore’s industrial production rose for the first time in three months during June. Manufacturing, which accounts for more than a fifth of Singapore’s economy, gained 10.5% from a year earlier. As we have pointed out several times in the past, Singapore controls inflation through their currency instead of interest rates, and steady growth should mean the government can allow the currency to appreciate further.
Another place investors have been flocking for shelter is the precious metals. Tim Smith, who trades our metals while Jen picks up the currency trading for Chuck, was here late last night processing all of the metals orders. He told me our customers are taking advantage of the tight spreads on our unallocated gold and silver accounts. In the past, investors seemed to want to purchase and take possession of the physical metals, but the latest round of buying is slanted toward the unallocated accounts. I guess investors realize these accounts are a much more efficient way to hold the metals, and allow you to take advantage of all of the appreciation potential of the precious metals at low costs.
Gold futures rose to a record $1,631.20 yesterday before selling back off to close unchanged on the day. It is easy to see why investors are interested in gold, as it is an excellent ‘uncertainty’ hedge. But a potential sell off in the equity markets could stop the shiny metal’s recent rise. Any dramatic downward move in equities can generate large margin calls, and investors have to sell their most liquid assets which still have gains to meet these margin calls. This is why we sometime see dramatic drops in the price of gold or silver following a fall in the stock markets. While I still believe the precious metals are a great place for diversification, taking some profits at these levels may be a wise thing to start thinking about.
To recap. The debt crisis continues in the US, as a compromise looks to be fading away. The dollar drifted higher vs. many of the major currencies on safe haven buying, in spite of another round of poor US data. Brazil instituted taxes to try and stop the real’s appreciation. The RBNZ kept rates unchanged but suggested we will see a 50 basis point rise in September. The Japanese yen continues to climb, and Japanese officials seem to be staying away from intervention. And finally, Gold futures hit another record, but investors should be careful as margin calls could force precious metals sales.
Currencies today 7/28/11 American Style: A$ $1.1039, kiwi .8729, C$ $1.0543, euro 1.4295, sterling 1.6321, Swiss $1.2490. European Style: rand 6.6731, krone 5.4069, SEK 6.3493, forint 187.55, zloty 2.8084, koruna 16.9543, RUB 27.607, yen 77.72, sing 1.2035, HKD 7.7928, INR 44.075, China 6.4424, pesos 11.6414, BRL 1.5555, dollar index 74.289, Oil $97.41, 10-year 2.97%, Silver $40.195, and Gold $1,615.10
That's it for today. The Cardinals made a big trade yesterday sending our young potential phenom centerfielder Colby Rasmus to the perennial baseball powerhouse Toronto Blue Jays. It has long been rumored that Colby and his father weren’t getting along with our skipper Tony LaRussa, and Tony always gets his way, so Colby has been sent from baseball heaven to baseball purgatory. He had a tremendous amount of potential, but just didn’t seem to click with the management here in St. Louis. Another long day of testing yesterday, and an early morning is going to make this a tough Thursday. But I am going to keep a positive attitude and make this a Tub-Thumpin Thursday! Thanks for reading the Pfennig, and have a great day.
Chris Gaffney, CFA on behalf of Chuck Butler
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837
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Two decades ago, Chuck Butler embarked on his extensive career in foreign investments as the Director of Operations for the Fixed Income Division of the Mark Twain Bank. He oversaw the clearing and custody of all bond department trades and Mark Twain portfolio transactions.
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