A hot but happy 4th of July to everyone...
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In This Issue.

* News from Chuck...

* ECB to cut rates...

* Australia to discuss currency swaps with China...

* Canadian dollar trades higher...

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

A hot but happy 4th of July to everyone...

Good day. The traffic was non-existent on my drive in this morning, and I'm sure there are many extending their celebration of the 4th of July through the weekend. As Chuck mentioned on Tuesday, he is one of those taking the next two days off, so I get the opportunity to share my thoughts will all of you over the next couple of days. But before I get to it Chuck asked me to share some news with all of you this morning:

Dear readers... Well, it was June a few days ago, and the 5 year anniversary of my first experience with cancer... I had my left kidney removed, my right hip and femur removed, my left eye removed, and now 3 teeth, because my jaw has been eaten away with cancer. I've had chemo, I've had radiation, and still the "spots" of cancer keep showing up. I used to say that my nickname was "Lucky"... I truly believe that the Good Lord has only allowed me to get cancer in places that I have two of... so far...

Well, it's with this latest news that I have to tell you that cancer is once again a part of my life, and my family's life... Not only did the cancer return to my jaw that received radiation last fall, but now there's a small mass in my chest that had not grown since its discovery 2 years ago... But it has now... and so... I once again ask for your thoughts and prayers to get me through this next round of Chemo.

I know there are tons of alternative ways to combat growing tumors that Big Pharma hasn't approved... Over the years, not only have many of you sent them to me, but I have researched them to the max... And if this round doesn't work, then I will begin to look elsewhere. But I have no doubt this will work, I will beat this, just like the other episodes of cancer, because I have too strong of a will to live and see my kids and grandkids grow.. up. I have the thoughts and prayers of thousands of people. I have the support of a loving beautiful bride, and wonderful children... I'll always have a good attitude, and work ethic to pull me through. So... I'm at the fork in the road, dear reader... I'm going to stop, pick it up, and travel down this next road, all I ask is that you continue to shine the light for me...

I'll be back in the saddle next week... I hope you have a great day, and remember to hug your family...

Wow, kind of hard to get focused on the markets after that! I've known and worked with Chuck for nearly 25 years now and over those years I have grown very close to both he and his family. From an 'insiders' view I can tell you I am convinced Chuck will again beat back this cancer. He just has an absolutely incredible attitude about the ongoing battle. I also know he is strengthened by his amazing family's support; he lights up when he talks about the latest exploits of his grandkids, and beams with pride when sharing the latest news about his youngest son Alex. Chuck also considers all of you Pfennig readers as part of his extended family, so he really appreciates all of your thoughts and prayers.

Like I said earlier, it is going to be hard to get focused on the markets this morning, but as usual Chuck has bailed me out by leaving me something in addition to his 'big news' to get the Pfennig started this morning, so I'll let Chuck start things out this morning with some thoughts on Tuesday's manufacturing data.

The tale of two manufacturing indexes...

On Tom Terrific Tuesday, before we enjoyed our Indpendence Day Holiday, with cold drinks, the aroma of charcoal everwhere in the neighborhood, and fireworks (that is, wherever it hasn't been 100 for 6 days in row, without any significant rain, in other words not in St. Louis County!) I told you about how the U.S. Manufacturing Index (ISM) had plunged below the line in the sand of 50 for the first time in 3 years... Well, on that same Tom Terrific Tuesday, Canada, printed their version of a Manufacturing Index (PMI) and lo and behold, their June index outpaced the strong May results! 54.8 was their index reading...

All four Canadian regions indicated strengthening business conditions in June, helping the index reach its highest reading since last September! Indications of robus gainsin business conditions suggests to me that domestic demand is strong and helping to aleviate the problems eminating from the Eurozone debt crisis..

So... I guess it's just the U.S. that's being affected by the Eurozone debt crisis, eh?

Chris again.. Yes the manufacturing index here in the US dropped a bit and stayed below 50 during the month of June. But this negative news was partially offset by another piece of data released on Tuesday which showed Factory Orders increased slightly in May. Vehicle sales also increased last month which helped alleviate some of the worry caused by the manufacturing number.

Today we will get the weekly jobs numbers along with the ISM reading of the service sector. The weekly jobs numbers are expected to be unchanged from last week with 385,000 workers filing for unemployment and 3.3 million continuing claims. The ISM non-manufacturing index is supposed to have weakened slightly but will remain above 50 with a predicted reading of 53. The US economy is no longer propelled by manufacturing, and has instead shifted to be more dependent on this 'service' sector, so the markets should react favorably to another reading above 50.

With much of the US taking an extended holiday, the currency traders will be closely watching events in the Euro area. The ECB will be announcing the results of their meeting this morning, with most expecting to see another rate cut by the European central bank. The markets are expecting a .25% cut bringing the benchmark rate down to .75%. We could also see some additional talk about other simulative measures available to the ECB, including another round of bond buying.

The debt crisis continues to be a dark cloud over Europe, with traders closely watching each bond auction. Spain successfully sold 3 billion euros of bonds today, meeting the maximum target for the sale, but yields did creep higher. Bond investors demanded additional yield on the 10 year debt, with rates climbing to 6.43% from 6.04% when the securities were last sold on June 7. But the currency markets just seemed to be relieved that the debt auction was successful, and the euro didn't seem to be effected by the tick higher in Spanish yields.

The news just came across the Bloomberg that the ECB did in fact cut rates by .25%. In addition, they have moved its deposit rate to zero from .25% and its marginal lending rate to 1.5% from 1.75%. They are obviously trying to get as much liquidity into the markets as possible. A zero deposit rate means the ECB is no longer paying banks anything for funds which they have 'parked' with the central bank. The ECB is basically forcing these banks to put these excess funds back out into the markets instead of just sitting on them. The cut in the marginal lending rate will reduce the borrowing costs for struggling banks.

In more news out of Europe, the BOE today raised its target for bond purchases by 50 billion pounds. Pfennig readers will recall that the BOE was one of the first to begin Quantitative Easing with an aggressive program of buying back their sovereign debt. These bond buying programs have become another popular tool for central banks to inject liquidity into the markets.

The ECB news has forced the euro lower, pushing it below the $1.25 handle with a drop of nearly a full cent from its overnight high.

Sticking to Europe, the best performing currency in Europe vs. the US$ has been the Swedish Krona. The krona is up 4.1% vs. the US$ over the past month and looks to continue to perform well according to the leaders of Sweden's central bank. Riksbank Governor Stefan Ingves said yesterday in an interview that "It's most probable that the krona will strengthen a bit" in the near term. While the Swiss and Norwegian central banks have been trying to keep their currencies from appreciating, the Swedish central bank is letting the markets set the price of the krona. The Riksbank left their benchmark rate on hold for a second consecutive meeting, as it raised its forecast for economic growth in 2012. The bank now estimates the krona will strengthen 4.5% against the rest of the currencies over the next 12 months.

The Chinese central bank also announced a rate cut today, so the equity markets will have plenty of reasons to move higher. The Chinese market is of vital importance to the global economy, but is even more important to the countries who supply China with commodities. Australia is one of the largest commodity producers, and has established very close trading ties with China. And that trading relationship is growing even stronger with the recent news that Australian Treasurer Swan is seeking to deepen trading between the Aussie dollar and Chinese Renminbi.

Swan will be co-hosting a forum in Hong Kong next week, and both countries want to see an increase in trade using a direct exchange between the Australian dollar and Chinese Renminbi. This is just another indication of the move away from the importance of the US$ as the primary currency for international trade. Chuck has mentioned the Renminbi as the eventual replacement for the dollar, and next week's meeting between the leaders of Australia and China certainly seems like another nail in the dollars coffin.

The Australian dollar had climbed to a two month high yesterday, but is moving lower in this morning's trading. The RBA left rates unchanged on Tuesday, but indicated it would cut borrowing costs to a record low later this year. The Aussie had risen after a report showed building approvals surged by a record 27.3 percent in May after a revised 7.6% decline in April. Today a report released showed the Australian trade deficit widened, with imports outpacing exports by 285 million A$. This has put pressure on the Aussie dollar this morning.

The Canadian dollar gained to a six week high as oil moved higher and data suggested manufacturing is improving. As Chuck pointed out earlier, the manufacturing index numbers out of Canada were much better than those here in the US, and the Canadian economy looks like it is in much better shape than the US. Crude oil moved over 5% higher yesterday, pushing close to $89 a barrel which helped propel the Canadian dollar higher.

I read two differing opinions on the future of the commodity currencies last night. BNP Paribas is looking for the USD to fall, especially vs. the commodity currencies. The email from BNP stated that while global outlook remains weak, they expect additional QE from the world's central banks, which will cause a further rally for the commodities and those commodity currencies.

Morgan Stanley sees it differently, as they cut their forecasts for the Australian, Canadian, and New Zealand dollars. Morgan is predicting the Aussie dollar will fall to 95 cents by year end, and they believe the kiwi will trade at .75 cents by the end of 2012. According to the note from the head of European strategy, weakening global growth will continue to hurt commodity prices forcing the commodity currencies lower.

So both agree that the global economy will be slowing, but they do not agree on what the results of this slowdown will be on the commodity currencies. BNP believes the slowdown has already been reflected in prices, while Morgan Stanley thinks there is still more room for these currencies to fall.

Ty just shouted over to me that the weekly jobs numbers were better than expected, with only 374k new claims. This has the dollar rallying this morning, so it could be a tough day holders of foreign currencies.

To recap... Chuck shared his latest news but will continue his battle. The ECB cut rates by a quarter, and lowered the rate it pays banks to zero forcing additional liquidity into the markets. Sweden's central bank is going to allow the krona to appreciate. Australia and China will discuss a major currency swap agreement next week, shifting more trade away from the US$. The RBA kept rates unchanged, with positive impact on both the Aussie and Canadian dollars. And two different currency desks both predict a slowing global economy but with very different consequences for the commodity currencies.

Currencies today 7/5/12... American Style: A$ $1.0280, kiwi .8040, C$ .9868, euro 1.2510, sterling 1.5565, Swiss $1.0414..., European Style: rand 8.1577, krone 6.008, SEK 6.9286, forint 229.18, zloty 3.3749, koruna 20.43, RUB 32.41, yen 79.67, sing 1.2635, HKD 7.7546, INR 55.11, China 6.3560, pesos 13.3381, BRL 2.0285, Oil $88.11, 10-year 1.59%, Silver $28.3125, and Gold... $1,619.62

That's it for today... Christine is back this morning! After spending the past few months with her new baby boy, our little Christine hit the desk like the Tasmanian devil. Things will definitely be a bit more exciting with her back, as she brings her own special energy back to the desk! I spent yesterday morning skating in the big VP parade downtown. The big boss Frank and I have made it a tradition to don Elvis costumes and participate in St. Louis' big celebration as part of the 'Skating Elvi'. It was a fun time, but rather hot with temps in the triple digits. Running late as usual, and I can't concentrate with Christine back, so I will just get this out the door now. Have a great Thursday, and say a prayer for Chuck!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 07-05-2012 10:36 AM by Chuck Butler
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