China Throws Down Speed Bump!
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In This Issue.

* Currencies rally VS dollar.

* Gold & Silver get sold!

* Moody's issues the U.S. a warning.

* Japan & the U.S..

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

China Throws Down Speed Bump!

Good day... And a Happy Friday to one and all! I'm not even going to let the fact that I had to stop for gas this morning get in the way of trying to make this a Fantastico Friday! Well. what's up? It's been a long cold, snowy week, and at the back end of it, we've seen quite a currency rally. Quite strong indeed! So, let's take a look at what's fueling it, and if it will hit another speed bump this time. Ready, set. let's go!

Well, the euro has been buoyed the past two days by good periphery country bond auctions. Then yesterday, following the European Central Bank's (ECB) meeting, ECB President, Trichet made some hawkish comments about inflation rising, which, by mandate, would require the ECB to raise interest rates. And Trichet let everyone know that he's prepared to raise interest rates if needed. We watched the euro gain over 2-cents yesterday, and was heading to 1.34 when I left the office for home.

Overnight, the euro traded to a recent high of 1.3445, but then the speed bump was put down by the Chinese. And the euro fell back to 1.3350, in a NY Minute. The Commodity Currencies (the A$ traded very close to parity again yesterday), of Aussie, Canada, New Zealand, Norway, and the list goes on, have traded back even more on the Chinese news. So. If the currencies all got the rug pulled from the overnight by China, I guess I had better head to China to get the skinny, eh?

China hit the markets with another reserve requirement hike last night. China raised their largest banks' reserve requirements 50 Basis Points (1/2%) to 19%... China is doing everything they can to squash their rising inflation problem. So much so, that I have to believe that China will go so far as to raise interest rates at least 50 Basis Points (BPS), and maybe to 75 BPS (3/4%), this year. And all that, openness to depositors outside of China, that the Chinese have begun to make available, is going to be flooded with new money, and drive the renminbi to record levels VS the dollar.

But, that's not just good for the renminbi. The Singapore dollar, the Hong Kong dollar, and other minor Asian currencies will all follow the renminbi higher VS the dollar in 2011. So much for that so-called multi-year dollar rally beginning this year, eh? It won't be so good for the U.S. consumer though. because all that stuff that Wal-Mart, and Costco, and whomever else, sells from China, is going to cost a whole lot more. Oh, did someone say something about an inflation problem in the U.S.?

So. as I look out over the landscape of the currencies this morning, I have one thought in mind. Buy the Commodity Currencies on the dips, of which this is one! But, then that's just me, as I say. I could be as wrong as two left shoes!

The Precious metals though. Whoa, there partner! While the currencies were taking liberties with the dollar yesterday, Gold and Silver did not participate, and instead were sold, and sold in bunches! At one point in the day, I noticed that Silver was down over $1 on the day, which, for Silver, is a HUGE move! Now, I certainly understand that the "fringe precious metals investors, don't understand the "real reason" they bought the shiny metals. And I also certainly understand that the successful bond auctions in Portugal, Spain, and Italy this week, lessons the need to own a flight to safety investment. But. the Swiss franc is holding serve against the dollar, so why not Gold & Silver?

The Demand around the world, for Gold & Silver remains quite strong, so it's not a demand problem, as far as I can see. Stories like the one I saw this morning from India, where disposable incomes are rising, and with those new found rupees, consumers buy Gold, should underpin Gold. but not now. right now, we're seeing something that is quite surprising to me. But, since the Gov't bailed out Bear Stearns, GM, AIG, and you name it, and allowed Lehman Brothers to fail, nothing has made much sense to me with regards to the markets. I hope and pray every day that we will return to a market that is driven by fundamentals. and not media flag waving, and crazy thoughts.

The Brazilian Gov't and Central Bank (BCB) was at it again yesterday. In their never ending attempt to keep the Brazilian real from gaining value, they spent $1 Billion in a currency swap deal. Here's the skinny on this.

The BCB goes into the markets and gets bids to do a reverse currency swap, which means they sell reals for another currency, let's say dollars, with an agreed tenor and rate. This way, the BCB isn't selling the real and not ever getting it back, like most Central Banks do when they intervene. The BCB will get the reals back at the end of the swap. Today's reverse swap garnered $1 Billion. So, the real, was in reality sold for $1 Billion worth of dollars. OMG! Who are these guys? And what are they doing? Well, actually, this is a very shrewd move the BCB. but the question that comes to mind is, simply how many times will the BCB enter this arena?

So. the ECB is noticing inflation pressures. but the Fed / Cartel / Bernank are still chasing deflation ghosts? I'll tell you right now, I'll pin my colors to the ECB's mast, for they understand what all the stimulus, bail out, and bond buying can do to ignite inflation. Our guys? Well. let's say that they in the Japanese camp. They are hoping that they'll be just like Japan, and not suffer run-away inflation from all their economic cocaine they've supplied to the markets.

Speaking of Japan. What a sorrowful lot! They are beginning their 3rd decade under the no growth cloud that's been hanging over them since their stock market bubble burst in 1991. And I guess, when I think about them, what I picture most in my mind is their Gov't, going back to the stimulus well, over and over again, along with multiple implementations of Quantitative Easing, of them keeping interest rates at zero for a very long time, and their building up Gov't debt to unsustainable levels. Hmmm. Wait-a- minute here. Just who am I talking about here, Japan, or the U.S.?

The BIG difference here folks, is that Japanese consumers are savers, not spenders. and what are U.S. consumers? Spenders with a Capital "S"! And while here in the U.S. we'll be left with the malaise that clings to the Japanese economy, and the unsustainable Gov't Debt. we won't be left with their deflation. (except in housing!)

And speaking of debt. Moody's issued a warning to the US again - Moody's says the U.S. could be placed on negative outlook if a plan to stabilize the debt doesn't materialize. "We have become increasingly clear about the fact that if there are not off-setting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase, " said Moody's.

The U.S. Trade Deficit narrowed in December by $ 400 Million, not a huge amount, but far below the expectations for December. Hmmm. Doesn't bode well for next week's Retail Sales for December does it? If our imports weren't huge, and that's a good thing to me, then Retail Sales won't be huger either. It's just how I see it, folks.

Speaking of Trade Deficits. Canada's Trade Deficit dropped sharply in December. Canada's Trade Deficit unexpectedly narrowed in November on the combination of a sharp decline in imports of energy products and machinery and a modest increase in exports. The trade deficit in November declined to C$ 81 million ($81.8 million) from a revised C$1.48 billion... Now, that's a deficit reduction!

Then there was this. the story I told I contributed to for NewsMax finally came out. The story by Julie Crenshaw, is titled: Is Silver the New Gold? I'm sure it will be posted to their website soon, but since I contributed to the story, I was given a first look, if you will. Shoot Rudy, I sure thought I had spent a lot longer on the phone talking to the story writer, but then it was so long ago, that the story talks about Silver being below $25! But all in all, a very good story by Julie Crenshaw, with contributions from me, and James Turk! And. the story even has a picture of me! WOW! You'll have to read the story to find out the answer to the question: Is Silver the New Gold? HA!

To recap. the bias to sell dollars reached a fever pitch yesterday, with the euro gaining 2-cents at one point in the day. The dollar selling continued on through the night, until. China announced a 50 basis points (1/2 %) hike of the reserve requirements for their largest banks. This was done to cool down the Chinese economy and rising inflation. The euro, stopped its rise in its tracks and retreated. The biggest retreating was done by the Commodity Currencies though, as they are closely tied to the fortunes of China.

Currencies today 1/14/11. American Style: A$ .9875, kiwi .7655, C$ $1.0030, euro 1.3345, sterling 1.5850, Swiss $1.0350, . European Style: rand 6.93, krone 5.89, SEK 6.7315, forint 207.20, zloty 2.9070, koruna 18.28, RUB 30.06, yen 82.90, sing 1.29, HKD 7.7755, INR 45.36, China 6.5975, pesos 12.16, BRL 1.6850, dollar index 79.40, Oil $90.13, 10-year 3.32%, Silver $28.51, and Gold. $1,369.00

That's it for today. Well, Monday is a Federal Holiday, so it's a 3-day weekend! YAHOO! So. Pfennig on Monday. And Tuesday, I hope to twist Chris' arm to take the conn on the Pfennig, as I have a doctor's appt first thing Tuesday morning. And then on Wednesday I travel to Jacksonville for a BIG meeting. But, I'll be writing Wednesday on. so you won't miss me too much! HA! We'll finally have a "full desk" with everyone in their places with bright shining faces next week, can't wait to see what that looks like! I was really belting out the words to sing along with Beginnings by Chicago this morning. One of my all time faves! The next round of NFL playoffs are this weekend, some good games should be the result, with some very hard hitting and walking wounded expected in the Pittsburgh / Baltimore game. I'll be watching! And with that, I'll send you on your way! Now, go out there, and have a Fantastico Friday!

Chuck Butler


EverBank World Markets



Posted 01-14-2011 10:29 AM by Chuck Butler
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