The Bank of Japan puts money where their mouth was.
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In This Issue.

* BOJ intervenes...

* ECB & BOE announce rate decisions...

* US treasuries defy possible ratings downgrade...

* Commodities bull market to continue...

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

The Bank of Japan puts money where their mouth was.

Good day. I know Chuck would want me to start off today's Pfennig with a big Happy Birthday wish to President Obama, who turns 50 today. (Just checking to make sure Chuck is reading the Pfennig while he is on vacation!) I see where Obama traveled back to Chicago to celebrate his birthday, I'm sure he couldn't wait to get out of Washington DC! The Bank of Japan gave the President a bit of a birthday present overnight, boosting the US$ with a bit of currency intervention.

The Bank of Japan followed Switzerland with currency intervention during overnight trading. Japan injected over 10 trillion yen ($126 billion) into the markets and was able to halt the rise of the Japanese yen. The Bank of Japan followed up the intervention with monetary stimulus that totaled double the amount pledged after the March 11 earthquake. The intervention had the desired impact, as the yen weakened to 80 for the first time since mid July. This 4 percent move vs. the US$ was the largest one day drop since 2008. There is deepening concern out of Japan that the Federal Reserve will be forced into another round of QE, which would put additional pressure on the US$ and cause investors to continue to buy yen. The Japanese were looking to try and move the yen weaker prior to the Fed's meeting next week.

Both the ECB and BOE will be announcing their interest rate decision later this morning, and are expected to keep interest rates unchanged. The BOE is not in a position to increase rates, and will likely keep its quantitative easing program in place. I had expected the ECB to be looking to raise rates by now, but the debt debate in the US has put global growth into question, and will likely mean the ECB will wait on an increase for now. Many of the hawks on the ECB policy making council have been calling for an increase in rates in order to make sure inflation is kept at bay, but the lower growth expectations in the US and Asia have weakened their argument for higher rates. The euro and pound sterling are both drifting lower this morning.

Mike Meyer is in early again today, and we got into a discussion of the US treasury market this morning. The yield on the US 10 year bond has fallen over 110 basis points from a high of 3.7% in February of this year. And the downward slide in yields has accelerated in the past couple of weeks with an impressive 40 basis point move. I will remind readers that yields move in an inverse relation to the price of bonds, so these big moves lower in yields mean the prices of these securities are moving higher. Even with talk of a possible default, investors have continued to buy US treasuries. Obviously many investors feel there is just no good alternative to the US treasury market when it comes to safety and security.

Moody's Investors Services reiterated their stance that the US credit rating may be downgraded for the first time since the US received a Aaa rating back in 1917. Moody's placed the US debt on negative outlook and confirmed this rating after President Barak Obama signed the credit limit increase into law. Moody's said they are concerned that fiscal discipline may erode, further debt reduction measures won't be adopted and the economy will continue to weaken. The other big rating agency, S&P, has also suggested they would consider stripping the US of their AAA rating. S&P indicated last week that anything less than $4 trillion in deficit cuts would jeopardize its AAA rating for the US.

But as I said earlier, investors seem to be ignoring these warnings and continue to seek refuge in US treasuries. This is why many of the major Wall Street banks don't see the dollar selling off dramatically even if the US is downgraded. "If the US is downgraded, the dollar might sell off at the margins, but there isn't going to be a slam-dunk, cataclysmic selloff that is suddenly going to make everyone hate the dollar and love the euro," said David Bloom of HSBC. According to Bloom, there is just no alternative for investors, and therefore the US will continue to enjoy the benefits of being the world's reserve currency.

I watched an interview on Bloomberg TV the other day which confirms what the HSBC analysts are saying. John Taylor, founder of the world's largest currency hedge fund, said the dollar will remain the global currency even if the US loses its AAA credit rating. "There is absolutely no alternative to the dollar in the next five to 10 years," Taylor said during an interview on Bloomberg TV. Taylor said the euro looked to be a possible alternative a few years ago, but the recent sovereign debt crisis has taken it out of the running.

The key with both of these statements is that there is no alternative to the dollar 'right now'. Betty Liu, who was interviewing Taylor brought up the Chinese currency as another possible alternative, and Taylor brushed it off as not being a viable alternative. I agree with him in the short term, as the Renminbi just doesn't have the depth of trading and the Chinese financial markets are too nascent to support a reserve currency status. But the global markets are rapidly changing, and I do expect the Chinese currency to challenge the US$ for global reserve status sometime in the next 5 to 10 years.

Both China and Russia have been calling for an alternative reserve currency, and joined together to sharply criticize the US handling of the debt limit. The state run news agency in China blasted what it called the 'madcap' brinksmanship of American lawmakers, and Russian Prime Minister Vladimir Putin said the US is in a way 'leeching on the world economy'. I certainly don't agree with these strong words from Putin, but the US has been enjoying the benefits of having the world's reserve currency. China is the largest foreign investor in US government securities, and their continued purchases have helped keep US interest rates low. But recent rhetoric out of China seems to suggest there is a limit on the amount of US debt China will purchase, and People's Bank of China Governor Zhou recently stated that China will continue to seek to diversify their reserves. "China will seek diversification in the management of reserve assets, strengthen risk management, and minimize the negative impacts of the fluctuations in the international financial market on the Chinese economy" Zhou said.

The Chinese renminbi has been moving higher vs. the US$ at the fastest pace in three months. The People's Bank of China has raised interest rates three times this year and boosted lenders' reserve requirement ratios. This has caused the yield difference between China's five year notes and comparable US government debt to reach an all time high of 258 basis points, and Chinese debt is becoming more attractive for institutional investors.

The Russian ruble hasn't been performing as well, as worries over global growth have caused oil prices to drop. Russia held its main interest rate steady for a third month in a row as inflation in July fell faster than economists expected. Inflation is still fairly high in Russia, but fell to 9%. The ruble has a fairly close relationship to the price of crude oil, which is one of the largest pieces of the Russian economy. The Canadian dollar and Norwegian krone are also lower today, in part due to the lower oil prices.

The commodity markets should continue to be part of investor's portfolios according to reports by Goldman Sachs and JPMorgan Chase. Chuck and I have long told investors to maintain investments in the precious metals, but it is nice to see the 'big boys' agree. The analysts at JPMorgan are calling for gold to jump to a record $1,800 per ounce by yearend. They also believe copper will move back toward $10,000 per metric ton. And even a global slowdown shouldn't harm commodities "Even at a now slower pace, global growth in the second half should be enough to outpace still-constrained supply in the major commodity markets."

Our 'Timeless Metals' MarketSafe CD is an excellent way for investors to take advantage of a continued bull market in commodities. This CD, which has a funding deadline of August 18, combines Gold, Silver, Platinum, Copper, and Nickel in one convenient package. And best of all, the deposited principal of the MarketSafe CD is 100% protected. You can find all of the details on this latest offering on our website or by calling the desk at 800-926-4922.

To recap. The Bank of Japan followed the SNB in intervening, and had a dramatic impact on the value of the yen. The ECB and BOE will announce rate decisions today, but are expected to keep rates unchanged. The US treasury market continues to attract investors in spite of a possible rating downgrade for the US. Both China and Russia are calling for an alternative to the US$. And the Commodity bull market is expected to continue which should be good news for those looking to invest in our latest MarketSafe CD.

Currencies today 8/04/11 American Style: A$ $1.0591, kiwi .8497, C$ $1.0294, euro 1.4249, sterling 1.6339, Swiss $1.2899. European Style: rand 6.8441, krone 5.4328, SEK 6.4205, forint 191.11, zloty 2.8312, koruna 17.039, RUB 27.9413, yen 79.76, sing 1.2139, HKD 7.7999, INR 44.5525, China 6.438, pesos 11.8907, BRL 1.5603, dollar index 74.76, Oil $91.05, 10-year 2.59%, Silver $41.73, and Gold $1,667.05

That's it for today. I had a great dinner last night with some close friends, and ended up running into several more at the restaurant. It always amazes me just how small St. Louis is, as we invariably run into someone we know when we 'hit the town'. We are supposed to catch a break from all of the heat over the next few days, and there is actually the possibility of some rain this evening. My lawn can sure use some cooler temps and a bit of water. This is running late again this morning, so I will hit the send button now. Hope you all have a Tub Thumping Thursday!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 08-04-2011 12:17 PM by Chuck Butler