The Return Of The Carry Trade.
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In This Issue.

* Dollar slips a bit.

* Aussie slips through parity.

* Moodys goes after AUD & NZD.

* Riksbank Gov. sounds good.

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

The Return Of The Carry Trade.

Good day. And a Wonderful Wednesday to you! This is a "home edition" of the Pfennig this morning, as I have doctor's appointment front & center this morning. Tomorrow, I head to Miami, but it won't be fun & games, like most people I work with, think, when they hear me traveling to here & there. they always ask, if I had fun. yeah, as much fun as getting dental work without Novocain! HA!

So. as you all know, when I write from home, the letter is short-n-sweet, so let's get to it, eh? Well... Yesterday, I told you that the euro had been on a roller coaster ride overnight, going up and down, Ok... maybe that should be an elevator ride instead! Either way, the single unit continued on its ride up and down going through the 1.35 figure each time, but then finally in the afternoon, the single unit found some terra firma above the 1.35 figure, and as I checked it last night before I went to bed, and after my beloved Missouri Tigers beat Texas Tech, the euro was holding strong above 1.35. That makes some sense in that it was a full day of no beatings from peripheral countries, and no beatings from ECB Presidency questions, just a good strong ZEW report...

And not much changed in the overnight sessions. So, we're starting this morning with the currencies in a better mood than they have been lately.

The Aussie dollar (A$) lost its hold on parity yesterday... but, in the overnight sessions, parity was gained once again. Kiwi (New Zealand dollar) also rallied. Both seemed to catch some wind in their sails on the thoughts that China is gaining control of their rising inflation, which would mean the rate hikes would end soon, thus keeping the Chinese economy floating, which is just what the doctor ordered for Australia and New Zealand.

Oil bounced back after a week of falling out of bed, when a report showed U.S. oil supplies falling... And that was enough to push the Canadian dollar/ loonie higher VS the U.S. dollar/ green/peachback. The Canadian economy will see their version of CPI (consumer inflation) tomorrow or Friday. This will be an important data piece with regards to whether or not the Bank of Canada (BOC) comes back to the rate hike table. I would personally like to see them hike rates again, to begin to put a 100 miles of desert between their rates and the U.S. rates. but I doubt that will happen, and the BOC will depend on a strong currency (loonie) to do their inflation fighting.

I've been talking quite a bit about Sweden's krona lately, and with good reason I might add! Well, here's another chance to beat the drum for the krona, as it reached its strongest level "ever" against the euro this morning. I told you yesterday, that the Riksbank (Sweden's Central Bank) had sounded quite hawkish after hiking their interest rate on Tuesday morning. In fact, Riksbank Gov. Stefan Ingves said that he's, "not worried that continued low interest rates in Europe and the U.S. will limit the scope for tightening. " He went on to say, "the whole point of a flexible exchange rate is to have the option, through monetary policy, to set rates according to Swedish conditions."

I have to say that I'm duly impressed with Mr. Ingves. If he continues to display this kind of Central Bank leadership, he might get to go on the wall of the best Central Bank Governors. people like: Don Brash, Hans Tietmeyer, Wm Duisenberg, Paul Volcker, and the list goes on, but the point is, that there aren't many Central Bank Gov.'s that get to be held in high esteem, and Mr. Ingves is "getting there" . not there yet, but "getting there".

Well. I suspect the Pfennig is being read by writers all over, for I find stuff all the time that sounds like I wrote it! So. Pfennig disciples eh? HAHAHAHAHA! The reason I say this, is I saw a story last night that was like déjà-vu for me. if I had ever been here before I would probably know just what to do, don't you? Wait! I don't need to sing the song déjà-vu. I need to tell you that all my talk recently about the return of the Carry Trade, is showing up elsewhere, so it's nice to see I'm not the only person seeing this happening.

Last night, Japanese yen dropped to its lowest level in almost two months VS the dollar, as Japanese investors used Japan's currency to buy assets in countries with higher interest rates. That's the lead line in a story I saw on Bloomberg this morning. So. it's officially "game on" for the Carry Trade once again, which means, that risk aversion is taking a back seat, not just behind the driver, but in the "way back"!

So. what would cause risk aversion to jump from the "way back" to the front seat again? I hear you asking me. Well. a meltdown. Now. I've sounded much like the boy who cried wolf, with the economy that I believe is nothing but a house of cards, that's artificially pumped up by QE fueling the stock market. That all comes to a head in June, folks. Remember, that's the self-imposed end date of Treasury purchases by the CABAL. Since we've had two rounds of QE from our friendly neighborhood CABAL. NOT! I can see this all crashing with more force than the sub-prime or the tech bubbles.

OK. enough of that! Germany's Central Bank, the Bundesbank, has a new President. German Chancellor Merkel announced the appointment of Jens Weidman as Bundesbank president. Weidman - currently Markel's Chief Economic Advisor - is a respected economist and former head of Bundesbank monetary policy analysis. The appointment was in line with media speculation in recent days.

That's good to see. the Bundesbank helped guide the European Central Bank (ECB) in the early days of the ECB, when the ECB's credibility, because of its newness, was in question. I don't know this to be fact, but, I would think that the Bundesbank still guides the ECB.

Australia and New Zealand were both told by Moodys that both countries were being put on review for possible downgrade. OK. I see this is possible in New Zealand, but not Australia..

Then there was this. from the Economist.. "Any politically acceptable approach to reforming Social Security would mean cutting benefits for future retirees while leaving current recipients unaffected, which is a "generational injustice," according to The Economist. Unfair as it probably is, the U.S. might as well get on with it now. "If the political constraint is as it seems -- that the people who are the current beneficiaries are going to balk like mules -- then the generational injustice is inevitable, and it's better to take that hit sooner rather than later," the magazine said."

Chuck again. you know. most people my age, have always said that we doubted we would ever get back what we paid into Social Security. So, I'm not surprised that this would be discussed. And if it means my kid and grandkids won't be subjected to soaring taxes, and a devastated purchasing power, then yes, the U.S. might as well get on with it now, so I can prepare accordingly!

And then one more thing before I head to the Big Finish. a reader, and friend (thanks Dennis!) sent me a note yesterday with a quote in it that made me laugh, and then cry. The quote was something like this. "if we want to see the unemployment rate continue to go down, we need to talk more unemployed people into stopping to look for a job".

Yes, that's the way it works folks.

To recap. the elevator ride for the euro finally stopped at a higher floor yesterday afternoon, and remained stuck there all night and early European session times. The price of Oil rebounded on news that U.S. supplies are falling, and that Oil price rebound helped boost the Canadian dollar. The Aussie dollar slipped below parity for the first time in a while yesterday. Seems that Moodys has announced that both Australia & New Zealand are going to be reviewed for a possible downgrade. I think that New Zealand probably fits that bill to be downgraded, but not Australia.

Currencies today 2/16/11. American Style: A$ $1.00, kiwi .7525, C$ $1.0130, euro 1.3515, sterling 1.6050, Swiss $1.0340, . European Style: rand 7.2790, krone 5.7990, SEK 6.4775, forint 200.30, zloty 2.8950, koruna 17.9950, RUB 29.30, yen 83.75, sing 1.28, HKD 7.7910, INR 45.51, China 6.5875, pesos 12.13, BRL 1.6675, dollar index 78.52, Oil $84.65, 10-year 3.60%, Silver $30.72, and Gold.. $1,372.80

That's it for today. Well. did you see Stan Musial, along with others including one of my fave basketball players as a kid, Bill Russell, receive their Presidential Medals of Freedom yesterday? Too bad they waited until Stan was 90 years old. 10 years ago, he would have pulled out his harmonica and played them a song or two! Better late than never! And my mind was put at ease a bit yesterday, when I saw Cardinals players warming up in the sun of Florida with the Palm Trees all around! It won't be long now, yeah, yeah, yeah! OK. time to get ready to go to the doctor. No worries, just a blood check. then off to work! Chris Gaffney will have the conn on the Pfennig for the next two days, so you have that going for you! I hope you have a Wonderful Wednesday

Chuck Butler


EverBank World Markets



Posted 02-16-2011 11:15 AM by Chuck Butler
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