We've come to an agreement...
Daily Pfennig

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In This Issue.

* Weaker dollar ends the week

* Cyprus still at the top of the list

* The jobs market

* Britain on the hot seat

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

We've come to an agreement...

Good day...and welcome not only to Monday morning but also the last week in March. I still can't believe the end of the first quarter is already in our sights, not to mention spring is nearly a week old. Anyway, Chris mentioned on Friday that I'll be bringing it to you bright and early each morning while both he and Chuck are away this week, so it should shape up to be a busy week for yours truly. If I'm not mistaken, I believe Chuck will be back with us next week so I'm sure you're looking forward to that.

Well, moving on, the dollar on Friday ended a bit lower as most currencies saw a slight rise. As Chris pointed out, the currency market has been trading in a fairly tight range over the past several days so there hasn't been much news on an individual currency basis. Instead, the financial markets have continued trading on the stronger US economic data that we've seen lately as well as any developments from Europe, primarily in regard to Cyprus and Italy. I would say that investors are on the edge of their seats waiting for a resolution in Cyprus, but I think most are at least paying attention.

It's kind of like some these March Madness games. There's more than a handful of games in the first two rounds that many don't want to watch, but they still want to know the outcome to see how their bracket has been affected. In the broad scope of the eurozone economy, Cyprus is a low impact situation, but the markets are still interested to know the final score. Investors still want to know the box score in order to gain some perspective of precedence and execution. Both the euro and the equity markets gained on Friday as news of an imminent resolution in Cyprus had picked up steam.

The euro ended the day as the best performing currency on optimism that a deal could be coming soon. It looks as though a government official may have fanned the flames after he said that lawmakers could strike a deal very soon. There is certainly a high degree of urgency to get something done by Monday, otherwise, the ECB said it would cut emergency funds. So, as we closed up shop for the weekend on Friday afternoon, Cypriot leaders and the troika (the ECB, European Commission, and the IMF) were reportedly in productive talks. As a result, the euro finished the week trading right around 1.30. News of a possible agreement probably forced some out of short positions before the weekend, so I'm sure that helped the price of the euro as well.

As Chris mentioned on Friday, German business confidence unexpectedly fell for the first time in five months and was tossed aside by the markets as they patiently wait and see what comes of the Cyprus deal. It seems the results, or lack thereof, in the Italian election several weeks ago have been quietly flying under the radar. We did see one of the candidates get the nod to try and get parliamentary support for a new government, but it doesn't appear likely he'll get the necessary support. With the question marks still hanging in Italy, I'm surprised their bond yields haven't taken off. I guess that just goes to show you how complacent we've become.

Since we didn't have any data reports here in the US, all eyes were squarely focused on Europe. It's a short week in the US economic data department with Good Friday, so a week's worth of info is crammed into four days. Actually, it's a pretty quiet week since we don't really have any reports that carry a ton of weight. We begin the week slow as we'll only see a couple of regional manufacturing reports from the Chicago and Dallas areas. Both of them are expected to show modest growth, but again, nothing earth shattering.

It picks up steam as we progress through the week but durable goods and housing numbers round out the first half and then the final revision to 4th quarter GDP with personal income and spending will take care of the second half of the week. Speaking of housing, I have noticed more foundations being poured where previous developments have been untouched for several years. Since the sun in still shining on my way home at night, thank you day light savings, I have been able to see firsthand the results on some of those housing reports. I still question the ability for many to even be in a position to purchase a home or move, but that's a different story.

I saw an interview with Fed Reserve governor Sarah Bloom Raskin that caught my eye. She was talking about how record low interest rates led to increased job growth, which I'm not totally on board with, but some of her general points I did find some common ground. For example, she said that about 66% of all job losses during the crisis consisted of moderate wage positions such as manufacturing and construction, but those fields only account for less than 25% of job gains since. On the other hand, lower wage jobs such as retail and food service accounted for about 20% of the job losses but now accounts for about 50% of the job growth.

I think that's the point we've been making for a while. It's nice to see that positive headline job growth figure, but its composition could be as important, if not more, than the actual payroll number itself. In other words, the Fed policy has little effect on the type of jobs created. She also went on to say wage growth hasn't taken off as what's typical in an economic recovery due to the low paying nature of many jobs that have been recently created.

Could this be one of the reasons why policy makers show no intention of slow the stimulus. Maybe they're looking at the current numbers and thinking they look good on paper but upon further review its still very fragile. That scenario would support their recent growth forecast reductions. Anyway, just thought I would share the story.

As we already mentioned, the currency market was somewhat subdued on Friday. While early trading gave us a mixed bag on currency returns, we finished the day with most of the majors in positive territory. Again, hints of successful talks about measures needed to get a bailout in Cyprus gave the currency market some steam as we headed into late morning and throughout the afternoon. We already talked about the euro being the best performing currency on the day, but it did rise about 0.75% and broke through 1.30.

There were only two currencies, albeit marginally, that finished in negative territory. The Swedish krona and Indian rupee finished on the wrong side of the ledger, but political instability and low maneuverability with interest rates drove the rupee lower on the day. Indian policy makers have their hands full as persistent inflation could handcuff the central bank's ability for policy easing going forward. They did, however, cut rates twice so far this year so currency traders have been growing more skeptical about the future.

The euro's rise pulled most of the other currencies along for a ride. One of the currencies benefitting from the better European news was the pound sterling, considering we saw some not so good news about the UK. Fitch placed Britain on a negative rating watch, which indicates a higher possibility of a downgrade at some point. Fitch still maintains its top rating, but Moody's did cut Britain's rating down one notch last month. Fitch justified the outlook by saying the persistently weak performance of UK growth has increased uncertainty around potential output and the larger trend growth rate. It'll be interesting to see whether they keep the negative outlook if they decide to cut.

One of the better performing currencies, the Norwegian krone got a boost after policy makers proposed raising banking capital requirements as an added layer of protection to the economy. Moody's just reiterated its top rating and Norway's credit default swap spread on debt is the lowest of any nation. As if having the largest budget surplus of any AAA rated nation and no net debt wasn't enough. Anyway, the krone finished the day just north of a 0.50% gain.

Speaking of north, the Canadian dollar got closer to the .99 handle after the finance minister released a plan that eliminates the deficit in two years. The list of nations is very short that would be in type of position, but they plan to limit spending growth and assume a continued economic recovery in order to get them where they want to be. A good portion of Canada's expansion over the next year hinges on increased business investment since consumer spending has done a lot of the heavy lifting recently.

Unfortunately, gold and silver suffered at the hands of the European optimism. Gold did hold onto $1,600 as we entered the weekend but lost about $5.00 on the day. Silver took it on the chin a bit more as it lost about 1.5% and traded at $28.75 by the end of the day. Both metals have been range bound lately so it might take a bigger jolt for them to break free. Either way, silver trading below $30 is an opportunity for those who have been sitting on the sidelines to test the waters.

As I came in this morning, the currencies have remained in that tight range even though we saw an agreement between the Cypriot and European leaders. They ended up getting their 10 billion euro bailout, but under certain conditions. The second largest bank in Cyprus is being wound down and depositors with balances under 100,000 euros seem to be spared as their accounts will be insured. Those with balances over that threshold would incur losses that EU officials said would be no more than 40%. The Bank of Cyprus, the largest bank, will assume the assets of Cyprus Popular Bank, which is the second largest bank. The ECB will now need to make sure enough funds are going to those banks who survived. I'm sure we'll see more details coming out today.

Then there was.According to the Organization for Economic Cooperation and Development, China will emerge as the world's largest economy by 2016. They said China's rapid growth will spur its economy past the U.S. "There is significant scope for further catch-up in China; China has a strong record with respect to several of the key factors for sustaining growth and is well positioned to emulate the record of earlier stellar Asian performers," the OECD said.

To recap.The currency market remained range bound for the better part of last week, but we did see some dollar weakness on Friday. Optimism was growing stronger on Friday that policy makers would put together some type of plan before the deadline on Monday. It's going to be a short week for US economic data in the US because of Good Friday, but we'll see durable goods, housing numbers, the final revision to 4th quarter GDP, along with personal income and spending. A fed member gives her thoughts on the jobs market and most currencies finished in positive territory on Friday afternoon. Fitch is considering a UK downgrade and Canada has a plan to resolve its budget deficit within two years.

Currencies today 3/25/13. American Style: A$ $1.0477, kiwi .8366, C$ $.9810, euro 1.2993, sterling 1.5216, Swiss $1.0633. European Style: rand 9.2616, krone 5.8102, SEK 6.4907, forint 235.75, zloty 3.2038, koruna 19.8410, RUB 30.7165, yen 94.80, sing 1.2429, HKD 7.7617, INR 54.18, China 6.2692, pesos 12.3313, BRL 2.0094, Dollar Index 82.36, Oil $94.21, 10-year 1.96%, Silver $28.72, Gold $1,599.35, and Platinum $1,577.75.

That's it for today.I enjoyed a weekend filled with basketball and sitting on the couch. I'm still nursing a broken ankle so I've been living a pretty sedentary lifestyle over the past few weeks. I'm hoping I get the green light next week when I go back to the doc for a checkup, but I can't wait to get back doing normal things. The weather folks were predicting a decent snow storm on Sunday, and for once, they got it right. The temp is supposed to be on the rise later this week so the snow shouldn't stick around too long. We're a little short handed on the desk this week so I should probably get a head start on everything. So on that note.Until tomorrow, Have Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 03-25-2013 11:41 AM by Chuck Butler