A pause to remember...
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* A pause to remember...

* Traders wait on the German Court and the FOMC...

* China slows, but inflation creeps back up...

* Current Account data pushes some currencies higher but send others lower...

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

A pause to remember...

Good day. I will start today's Pfennig with a pause to remember all of those who perished 11 years ago today in the cowardly attacks against our nation. I know there will be a number of events remembering those that died in the planes and buildings; and we also need to remember those that have died in the wars which have followed the attacks.

Now let's get to the currency markets. The dollar was range bound through most of the trading day as currency investors were mostly in a holding pattern waiting for decisions by a German Court and the FOMC. Charts show the dollar index has been in a downward trend since it peaked at 84.10 on July 24th. And if the historical trading patterns hold true, the dollar index will continue to slide through the FOMC announcement this Thursday. A story which appeared on Bloomberg this morning shows the dollar index has fallen during the week of FOMC meetings four out of five times this year. When currency traders expect the Fed to be dovish (keep interest rates low) the currency traders sell the dollar, and since the Fed has taken a dovish tone during all of its meetings the dollar has been sold. The only time the dollar index rose during the week of a FOMC meeting was the week prior to the June 20 meeting when investors drove the dollar higher on European debt concerns.

I agree with the currency traders, the dollar should be sold as we prepare to hear about another stimulus program. The Fed bought $2.3 trillion (with a T) of assets in the last two rounds of quantitative easing. These purchases occurred between December 2008 and June 2011, and exactly what has all of this stimulus bought us? The US economy is still struggling along with the labor markets stuck in a funk and manufacturing starting to turn back down. Sure, if you measure the results by stock market returns the two rounds of QE have been a wild success with the Dow Jones average up about 105% since bottoming in March of 2009. But is the economy any better off? And what is another round of stimulus going to do for our economy? Will buying bonds from the Wall Street firms do anything for the unemployed workers?

I had a reader of the new Pfennig Blog post a suggestion that instead of spending another couple of trillion (with a T) dollars on bond purchases, we should invest that money into infrastructure projects. At least then we would have something to show for all of our spending. I responded that our roads and bridges sure could use the help, and that is exactly what the Chinese have done and look to do more of in the near future. A number of new spending projects have been dusted off by Chinese officials in order to try to get the Chinese economy growing again.

I have seen a number of news stories warning investors about the slowdown in the Chinese economy and the data confirm this. China's economy grew 7.6% in the three months through June from a month earlier, the slowest growth in three years and growth is expected to slow further to 7.4% during this quarter. Recent reports have shown drops in both manufacturing and imports. President Hu Jintao said yesterday that the Chinese economy faces 'notable downward pressure'. But the Chinese leaders orchestrated this slowdown in an attempt to cool an overheating property market. Many of those who are shouting warnings about a hard landing were the same people who wrote about the Chinese economy overheating when it was growing at double digit rates. Hu said yesterday that China will work to balance 'steady and robust growth, adjusting economic structure and managing inflation expectations'.

One of Hu's pledges during his speech was to ensure 'basic price stability' (a job made a bit easier when you can control the value of your currency). But inflation is beginning to accelerate again according to the latest reports. Consumer prices in China accelerated for the first time in five months in August, moving 2% from a year earlier. This compares to an increase of 1.8% gain in July and the report also showed producer prices fell 3.5% from a year earlier. President Hu Jintao is in the twilight of his decade of power, as the Chinese are expected to hand power over to a new President in the next few weeks. The outgoing President would certainly like to hand the new government an economy which is in a position to start growing again.

While inflation is increasing in China, a report released yesterday shows underlying inflation is slowing in Norway. The strength of the Norwegian krone is being credited for offsetting inflation pressures brought on by recent rises in the price of crude oil. Annual inflation in Norway slowed to just 1.2% last month compared to a 1.3% rise in prices during the month of July. Economists had expected inflation to accelerate to 1.5%, so the lower figure surprised the markets. With inflation well below the central bank's 2.5% target, policy makers at the central bank can consider another cut in rates if they feel the economy needs additional stimulus. The Norwegian central bank kept rates unchanged at their last meeting after cutting them twice since last December.

I have written about Norway's strong economic fundamentals, and the data continue to show a country with an economy built on rock solid footings. Unemployment remains just below 3% and 2nd quarter GDP was reported at 5%, by far the strongest of any of the European nations. And the figure which I constantly return to is Norway's budget balance as a % of GDP which is an impressive 15.4% according to the latest figures found in the back of this week's Economist magazine. If any of you get the economist, you can do a quick analysis of the countries using the data on the back couple of pages and you will see why we continue to look at Norway as one of the places you should be parking some of your money.

While inflation slowed in Norway, the opposite is true in at least one of their Nordic cousins. Denmark's annual consumer prices rose 2.6% in August, surpassing expectations of a 2.5% rise in prices. The inflation rates was 2.3% in July. Many of our WorldMarket clients have purchased 3 month Norwegian krone CDs on the advice of newsletter writer Steve Sjuggerud who made a rather convincing argument that Denmark would have to eventually break their peg to the Euro. So far the danes have been able to maintain their peg, and the Danish krone has matched the euros recent run higher.

Speaking of the Euro, it is up again this morning, trading above $1.28 for a third day in a row. The euro rose after Germany's constitutional court said it won't delay a ruling on Germany's participation in the ESM. There were some rumors that Germany's highest court, which is set to issue a ruling on the European Stability Mechanism tomorrow, would possibly delay a ruling in this case. If the court decides the ESM runs against the German constitution, the bailouts which have been promised would be in jeopardy, with serious consequences to the stability of the euro and the entire European Union. Most believe the court will uphold the ESM, but many worry they may put additional conditions on any future funding of these rescue mechanisms.

The black cloud of additional stimulus continues to hang over the US dollar, making some of the biggest currency traders adjust their calls for dollar strength. UBS AG said it was lowering its forecast for the dollar against the euro because of the expected announcement of an additional round of QE by the FOMC. In a note to clients, UBS predicted the dollar would trade in a range between $1.25 and $1.35 in the next one to three months. But in the longer term, this same analyst is sticking by his calls for the US$ to move back to a lower range of $1.20 to $1.25 against the euro.

While the markets are awaiting the Fed announcement on Thursday, we will get a bit of data here in the US today. The US trade deficit is expected to have widened to $44 billion during July from a previous gap just below $43 billion. This trade gap is important, as it is another factor leading to eventual weakness in the dollar. These trade gaps contribute to current account deficits and the US has one of the largest of all industrialized nations, at 3.2% of GDP. Tomorrow will be another light day for US data, with just the Import price index and Wholesale inventories.

South Africa is one of the nations with a wider current account deficit than the US. A report yesterday showed South Africa's Current account deficit widened to 6.4% of GDP in the second quarter as exports slumped. The Current account data comes on the back of a report which showed manufacturing production declined 1% in the second quarter and another government report which forecast GDP will slow to 2.7% this year from 3.1% in 2011. A big turnaround by the Chinese economy, creating a commodity rally, is what the South African rand needs to begin to rally again. Without a reversal by China, the rand is probably destined to continue to trade lower as mining strikes and a continued slump in global growth will keep a lid on the rand.

A currency which continues to be one which is favored by many of the EverBank World Market clients is the Singapore dollar. Like Norway, Singapore has very good economic fundamentals, leading all others in the measure of Current account balance vs. GDP at 16.5% (Norway is second with a Current account balance of 13.9% of GDP and Swiss is third at 13.4%). The Singapore dollar rallied to the highest level in a year as QE expectations boosted demand for the SGD.

Gold had another positive day as the outlook for more QE from the Fed spurred demand for this inflation hedge. The intrinsic value of Gold protects holders from the loss of value inflation exerts on holders of fiat currencies. A story on Bloomberg this morning showed the value of gold doubled during the first two rounds of quantitative easing by the Fed. Investors are now betting another round of QE should move the metals even higher. In the presentations I gave in San Francisco, I told attendees that the metals would probably rally back up to challenge their previous highs over the next few months.

Then there was this. I was remiss in reminding everyone yesterday that the funding deadline for our Emerging Markets MarketSafe CD is fast approaching. The funding deadline for our latest MarketSafe CD is tomorrow, September 12th. That means you only have today and tomorrow to place your MarketSafe orders. The return of this CD will be based off of the performance of 4 emerging markets currencies: The Colombian peso, South Korean won, Isreali shekel, and Turkish lira. We have never offered any products linked to these currencies and I am told this will be a 'one time only' issue, no second chances if you miss tomorrow's funding deadline. Find out more by visiting our website: https://www.everbank.com/personal/emerging-markets-cd.aspx .

To recap. We should all take a minute today to remember those that lost their lives due to terrorism, both on 9-11 and in the resulting wars which continue. The dollar was range bound yesterday as traders wait for the German court ruling and the FOMC. But history shows the dollar will probably trend lower as we wait for Bernanke's speech on Thursday. China inflation ticked higher, but the Chinese President has still vowed to try and provide additional stimulus to the economy which has been slowing. Both Norway and Singapore continue to post impressive economic fundamentals with double digit Current Account surpluses. On the other hand, both the US and South Africa have some of the largest current account deficits as measured against GDP. Gold had another impressive day on inflation concerns. And tomorrow is the funding deadline of our latest Emerging Markets MarketSafe CD.

Currencies today 9/11/12. American Style: A$ $1.0414, kiwi .8157, C$ $1.0288, euro 1.2826, sterling 1.6037, Swiss $1.0624. European Style: rand 8.177, krone 5.778, SEK 6.6255, forint 221.70, zloty 3.2021, koruna 19.157, RUB 31.6612, yen 77.8, sing 1.2305, HKD 7.7547, INR 55.345, China 6.3352, pesos 13.0253, BRL 2.0189, Dollar Index 79.994, Oil $97.18, 10-year 1.68%, Silver $33.7312, Gold $1,735.50, and Platinum $1,606

That's it for today. I did exchange emails with Chuck last night. He is still in some pain as the infection in his legs just doesn't seem to be reacting to the antibiotics. The doctors are going to try a different drug, but they won't operate on his jaw until the infection is cleared up. So Chuck is in a holding pattern right now. I mentioned all of the nice notes the readers have been leaving in the Pfennig box and he said he appreciates everyone keeping him in your prayers. I left work a bit early last night and got to my son's JV football game just in time to see him haul in a 65 yd TD pass. The defender slipped when Brendan made a cut to the outside, so there wasn't anyone within 20 yards of him when he caught the ball. I almost wish he had someone draped on him, as I was more than a bit nervous that he was going to drop it, but he came through and his team won decidedly. A bit late this morning, so I will wish everyone a Terrific Tuesday and thanks for reading the Pfennig!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 09-11-2012 10:52 AM by Chuck Butler