A bit of verbal intervention seems to do the trick...
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In This Issue.

* Draghi's comments boost the euro...

* Chuck's thoughts from Vancouver...

* US data surprises on the upside, or does it???

* Aussie set for further appreciation...

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

A bit of verbal intervention seems to do the trick...

Good day. And good Friday morning to everyone. This has been a long week for me, as I seemed to be playing catch up for most of the past few days after taking last week off. Sometimes I wonder if taking a week off is really worth it, as I tend to increase my pace the days leading up to vacation and then it takes several days after you get back to finally get caught back up. I think the Europeans have something with their one month vacations!

The markets took a bit of a vacation from the European debt crisis this week as the euro looks like it is going to end the week with over a 1% gain. In fact, the Swiss franc, Euro, and Danish Krone are going to end the week as the best performing currencies vs. the US$, posting a 1.17% gain.

I wrote about Mario Draghi's comments yesterday morning, when he said the ECB stands ready to 'do what it takes' to support the common currency. We got an initial 'bounce' after his comments yesterday morning, and typically we would see these knee jerk reactions reverse as the trading day wears on. But Draghi's words really carried some weight with currency traders yesterday, and the euro rally held even after his thoughts had been fully digested by the markets. Chuck sent me a note late last night with his thoughts on yesterday's euro rally, so here is Chuck:

I watched the euro rally yesterday, that was fueled by the comments by European Central Bank (ECB) President Mario Draghi yesterday.

You know, as much as I would like to believe the dollar rally is over, I also know in my heart of hearts that this is what we call in the financial world as a dead cat bounce. For all you cat lovers out there, no cats were harmed, it's just a saying! I doubt seriously that the euro has the legs to run with the rally that began yesterday on the Draghi comments. The psychological gloom and doom hanging over the euro now is pretty heavy. and opposed to the Hollies. He ain't heavy, he's my brother. it will continue to weigh on the euro.

But at the same time, don't get caught up in the dollar index hype either. the dollar index, which we've explained many times in the past is so heavily weighted with the euro as one of the components of the index. It does not contain the Aussie dollar, New Zealand dollar, the Chinese renminbi, etc. So, to get caught up in the dollar index hype, is like turning down the wrong street. it's not going to get you where you want to go!

I can tell you that here in Vancouver, most of the analysts that have gotten up to talk about world economies, etc. believe that the dollar is set for a steep downward move, once we get past this bear market rally by the green/peach back. So. that's all from here. wheels are up on my plane Friday morning, as I head to my summer vacation. I won't be filing any reports next week, and hopefully, I don't even turn my laptop on. that's my challenge for next week!

The euro rally was helped by US data released yesterday which showed the US economy is doing a bit better than expected. Durable goods orders increased 1.6% during the month of June (economists had predicted a .% increase). And the weekly jobs numbers also came in better than expected, with 27,000 less first time claims last week than economists had expected.

But digging into the numbers shows things may not be as rosy as initially indicated. The durable goods orders increase were largely due to a surge in aircraft orders. The ex-transportation number showed business actually placed 1.1% fewer orders for long lasting manufacturing goods in June. And digging a bit deeper into the report uncovered even more worrying data. Orders for so-called core capital goods, which are a very good indication of business investment plans, dropped 1.4% during June, the third decline in four months.

And the weekly jobs number stayed above 350k for another week, coming in at 353,000. We have not seen initial jobless claims below 350k since March of 2008. And the pending home sales number which was the last piece of data released yesterday showed the housing market is almost having as tough a time recovering as the labor market. Pending home sales showed a 1.4% decrease during June after a 5.4% increase the month before.

Today the US will release its first of three estimates for second quarter growth. GDP is expected to have increased 1.4% during the second quarter, a slight decrease from the first quarter growth of 1.9%. But the disappointing durable goods numbers could indicate even the 1.4% estimate is optimistic. The weaker Euro has helped manufacturers in Germany, but perhaps at the cost of manufacturing here in the US. Europe has been winning the global race for weaker currencies during the first half of the year, and the manufacturing and export numbers will suffer here in the US because of the stronger dollar. Another report due out today here in the US is predicted to show consumer sentiment fell to the lowest level this year. The U of Michigan Confidence report will be released later this morning and is expected to have fallen to 72 in July from a level of 73.2 last month.

Bernanke and the Fed stand ready to take action if the US economy shows any more signs of weakness. The FOMC will announce its rate decision on August 1st, but there isn't much they can do as far as moving the rates lower. The markets are instead going to focus on what 'other' tools the Fed decides to use; QE III? TWIST III? Or will it be some new idea dreamed up to try and get things moving in the right direction? With this being an election year, I can guarantee the administration is going to be putting pressure on the members of the FOMC to try and do something to stimulate the US economy. The problem is that there just doesn't seem to be a lot of fuel left for the Fed to use to juice this anemic economic recovery here in the US. Interest rates remain at historic lows, and funds are flowing freely through the credit markets. Unfortunately there are a lot of similarities to where the US economy is sitting and where Japan is. Both of our economies seem to be mired in the muck of slow growth, weak investor confidence, and relatively strong currencies. Europe has taken much of the spotlight off of the US and Japan, but there are still real questions concerning the future of these two global powerhouses.

The commodity currencies had another good day yesterday as global investors seemed to be more confident on the recovery prospects. Currency traders have been moving funds out of the safe haven parking spot of US treasuries and back into higher yielding currencies of South Africa, New Zealand, and Australia. The New Zealand dollar built on yesterday's good performance and pushed back above 80 cents. The South African rand gained for a third day and is set for its first weekly advance. The Australian dollar remained higher than $1.04 for a second day in a row after rebounding from a low of $.9582 set back at the beginning of June. The technical charts indicate the Aussie dollar may not be done climbing. The head of fixed income strategy at UBS said the Aussie dollar may climb to $1.0558 in the coming days. Apparently the 'stochastic oscillator' which is a momentum indicator shows the Aussie dollar is set for further appreciation (I have absolutely no idea what a stochastic oscillator is, but I will take his word that it is a good thing!).

Another story I came across this morning said China's currency had advanced to a one week high on Draghi's verbal defense of the euro. The Renminbi also got a boost from stimulus measures enacted by local Chinese governments. The Chinese renminbi has been falling in value since the end of April, but recent trading indicates this downward trend may be reaching a bottom. Something I find even more interesting than the direction of the Chinese currency is that it is actually moving in both directions and that it seems to be reacting to global events. Just five years ago the currency was totally controlled by the Chinese government, and any movement was the result of Chinese officials moving the 'peg'. Now the renminbi is actually starting to react to global macro-economic events, which is a very positive change!

Then There Was This. Ty Keough sent the desk a note yesterday pointing out the fact that Chuck Butler got a mention in the 5 Minute Forecast yesterday. The 'Five' as it is known on the desk, is a favorite read of many of us here as it condenses much of what happened during the trading day into a smartly written summary. Here is what the 5 had to say about our fearless leader:

"What appears to be evident may not be imminent," cautions EverBank World Markets president Chuck Butler.

That is, just because something is bound to happen doesn't mean it'll happen right away. Mr. Butler noticed the U.S. government racking up debt at a precipitous rate starting in 2001. But it didn't show up in the form of a falling dollar index until the following year.

Now? The debts have become far larger, and even more unsustainable. But with fear abounding over Europe, it's not showing up in a weakening dollar. Not now. But it will.

That gives you time to carry out the most important diversification Chuck believes you need in your portfolio - currency diversification. Make sure you're exposed to currencies other than the U.S. dollar, while there's still time. EverBank offers a host of innovative products to that end.

You can read the entire 5 Min. Forecast by going here: http://5minforecast.agorafinancial.com/

To recap: Draghi's comments continued to keep the value of the euro higher, but Chuck warns us that this rally may not be a trend reversal. US data released yesterday looked good on the outside, but wasn't so positive after we dug a bit deeper into the numbers. Today we will get the GDP estimate for the 2nd quarter, and the markets are expecting a slowdown here in the US. If we do slowdown, the pressure will be increased on Bernanke and his team to do something about it at their meeting next week. Commodity currencies are posting their first positive week in a while, and the Chinese renminbi is beginning to look like it will reverse its recent slide.

Currencies today 7/27/12. American Style: A$ $1.0436, kiwi .8051, C$ .9923, euro 1.2302, sterling 1.5740, Swiss $1.0249, European Style: rand 8.2290, krone 6.0530, SEK 6.8862, forint 230.24, zloty 3.3617, koruna 20.564, RUB 32.235, yen 78.09, sing 1.2509, HKD 7.7571, INR 55.3463, China 6.3807, pesos 13.3913, BRL 2.0213, Dollar Index 82.793, Oil $89.67, 10-year 1.46%, Silver $27.77, Gold. $1,627.50, and Platinum $1,418.75.

That's it for today. I want to wish my Lucy good luck as she heads into the doctor for an operation today. Lucy is my 10 year old yellow lab and is having a couple of 'growths' removed. I know many of you readers are probably wondering why I would be writing a good luck wish to a dog, but my wife reads the Pfennig, and I'm sure she will pass along my good luck wishes to Lucy. My kids will tell you our two dogs, Lucy and Murphy get more attention than the rest of the family! Lucy is really a sweet girl, and I do hope she pulls through without any complications. We got a break from the 100 plus temps yesterday but didn't get any of the rain they promised. I hear the triple digits will be back today, so the relief was short lived. Hope everyone has a wonderful weekend, and thanks for reading the Pfennig!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 07-27-2012 12:34 PM by Chuck Butler
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