BOE Governor Carney gives guidance for the pound...
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In This Issue.

* Carney provides some guidance for the pound...

* Both German and Chinese exports increase...

* BOJ keeps policy unchanged...

* Precious metals enjoy a positive day...

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

BOE Governor Carney gives guidance for the pound...

Good day. The storms which were threatening our area yesterday morning missed St. Louis but absolutely dumped water on areas south of us. They actually had to shut down the interstate highway which Chuck takes to and from work, and according to the radio the highway is still closed. But not to worry Chuck, the flooding was well south of where you live. There were pictures of all of the flash flooding on the news stations last night, with some small cities to the southwest of us receiving almost 10 inches of rain.

The markets continued to carry the dollar downstream, with the dollar index falling to a seven week low. The dollar index, which predominantly tracks the value of the US$ vs. the Euro, Japanese yen, and British pound dropped to levels last seen back in June just before Bernanke's now infamous 'tapering' speech. The taper talk shot the dollar higher, but then the Fed Chairman started to backtrack and the dollar has been on a 4 week slide ever since. Good data out of Europe and the UK along with expectations of a bit more neutral message from the Bank of Japan helped push the dollar index lower this week.

The pound sterling was helped by new BOE Governor Mark Carney who has made it a priority to try and give clear guidance to the markets in reference to the future direction of monetary policy. Carney said the Bank of England will continue to keep interest rates at a record low until unemployment falls to 7 percent. "Until the margin of slack within the economy has narrowed significantly, it will be appropriate to maintain the current exceptionally stimulative stance of monetary policy," the BOE said. Markets already bet UK interest rates would remain at their current .5% level until late 2015, but the 'taper' talk by the US Fed head had caused some traders to move up their expectations of a possible tightening by the BOE.

BOE Governor Carney also reiterated the BOE's commitment to meeting their 2 percent inflation target, which illustrates just how tough a job Carney has in front of him. This inflation talk is what drove the pound higher, as inflation is currently forecast to average 2.9 percent in the last three months of this year. The UK economy looks like it can withstand a higher currency right now, as growth forecasts were raised in this weeks data release. Currency traders are probably thinking Carney and the rest of the policy makers at the BOE will allow the currency to appreciate in order to keep a lid on inflation while they continue to keep interest rates low in order to stimulate growth and employment. I share Finance Minister George Osborne's admiration for the job Carney did in Canada, and will be watching closely to see if Carney is actually able to maneuver the UK economy to meet both the unemployment and inflation targets; a tall task indeed!

Speaking of employment levels, we will get the weekly jobs report this morning here in the US. It is expected to show initial jobless claims raised to 335k last week from the previous week's 326k level. Continuing claims are expected to remain unchanged just below 3 milliion. The US labor market is not improving. It is not getting worse either, but the Fed is wanting to see some clear improvements in the unemployment levels before they pull back on their stimulus. With the Fed so 'data driven' each and every report has taken on a bit more importance, and with a lack of any 'real' data this week here in the US, we could see some volatility this morning if the weekly jobs numbers come in outside of expectations. The markets are still thinking about last weeks monthly jobs report which really left a bad taste in dollar bulls mouths. If today's weekly numbers come in worse than expected, we could see further dollar weakness as investors move their expectations of a potential 'taper' further out the calendar.

Moving back across the pond to Europe, German exports came in a bit stronger than expectations, rising .6% in June from a drop of 2% in the previous month. The euro continued to climb higher after the report and has now increased just over 3.8% vs. the US$ in the past month.

Chinese exports also climbed, increasing 5.1% in July from a year earlier after sliding 3.1% in June. This more than doubled economists' expectations of a 2 percent growth in exports according to a Bloomberg survey. Chinese imports gained 10.9% in July compared with a year earlier, pushing the trade surplus lower to $17.8 billion from $27 billion in June. This is yet another indication that the Chinese economy continues to evolve from one dominated by exports to a more balanced one increasingly dependent on internal consumption. The PBOC let the value of the renminbi appreciate, lowering the fixing rate .04% to 6.1703.

The Chinese economy continues to be very resilient, surprising most economists with its ability to withstand the slowdown in growth without a full blown social crisis. Sentiment regarding the Chinese economy is improving again as the Chinese government has begun to roll out stimulus measures including an increase in infrastructure projects. The trade data released today confirms our view that the Chinese economy has turned a corner and Chinese GDP should start to show signs of improvement over the second half of the year.

Better sentiment on the growth in both China and Europe gave another boost to the Australian dollar which continued the journey higher which it began with the turn of the calendar to August. Traders seem to be paring bets that the TBA will lower the benchmark interest rates later this year. But I still worry that much of this latest strengthening of the aussie dollar has been due to a 'squeezing' of short positions and may not be sustained. Traders held record positions betting against the Aussie dollar going into the RBA meeting earlier this week. And when the currency rises, some of the traders holding these short positions are forced out, causing a further appreciation of the currency. We could see a further appreciation of the currency as more of these traders have to reverse their short positions, but the currency's rally could stall once the 'weaker' short holders have been flushed out. I still think the RBA will be making another .25% cut in 2013, with further weakness for the Aussie dollar over the short term.

Another commodity currency which had been beat down recently is the South African rand which has lost over 14% vs. the US$ since the beginning of the year. The rand edged higher yesterday for the first time in two weeks on the back of the positive news coming out of China. But don't get too excited about the rand just yet, as all of the emerging markets continue to remain under selling pressure.

Gold and the rest of the precious metals enjoyed a positive trading day, and seems to be holding on to these gains in early European trading. The good news out of two of the globe's leading countries certainly helped investor sentiment regarding commodity prices. But gold has been especially sensitive to the 'taper talk' by the Fed, so today's weekly jobs numbers will certainly set the tone in the precious metals markets. A reading of over 335k newly unemployed would increase the possibility of a delay in the 'taper' and should lead toward stronger precious metals prices. But a number below 335k could reverse the gain we saw over the past two days and set gold back on the slow downward spiral we have seen since the end of June.

Then there was this. Ty Keough shouted over to me yesterday to let me know the dollar index had just moved through a key support level. Ty is a voracious reader and had come across a warning by Toby Connor on his blog Gold Scents. Here are some of the highlights of what Toby had to say:

"THE NEXT CRISIS HAS BEGUN: AND THIS ONE IS GOING TO BE IN THE CURRENCY MARKETS Today the dollar broke through 81.40. This is a major development as it signals that the current daily cycle topped in only 2 days, thus confirming that the intermediate cycle has also topped.

I've been warning for months and months that this was coming. Anyone with a modicum of common sense knew that printing trillions of dollars was going to eventually have consequences. There is no escaping the inevitable; if you aggressively debase your currency eventually you are going to have a currency crisis. The first one has now begun.

Over the next 3-4 months the dollar is going to test the lower trend line of the megaphone topping pattern and ultimately break through. When it does we are going to witness a spectacular collapse in the dollar, probably testing the 2011 bottom by the next intermediate cycle low due in November."

Toby has some great charts illustrating his thoughts, you can see the full post at the following: And Thanks to Ty for sending that along!

To recap. New BOE Governor Carney tried to give the markets guidance on future policy, and the traders seemed to like what they heard and took the pound higher. Positive export data released in both Germany and China weighed on the dollar as investors took a more positive view of the global recovery. We will see the weekly jobless claims here in the US today in what has been a very slow data week. And gold finally caught a bid in the markets as the precious metals moved a bit higher.

Currencies today 8/08/13. American Style: A$ .9074, kiwi .7978, C$ .9608, euro 1.3359, sterling 1.5511, Swiss $1.0860. European Style: rand 9.8624, krone 5.9054, SEK 6.4975, forint 224.00, zloty 3.1460, koruna 19.3476, RUB 32.9189, yen 96.35, sing 1.2617, HKD 7.7564, INR 60.91, China 6.1703, pesos 12.667, BRL 2.3141, Dollar Index 81.149, Oil $104.41, 10-year 2.60%, Silver $19.747, Platinum $1,448.20, Palladium $730.40, and Gold. $1,290.02.

That's it for today. We had a busy day on the desk yesterday and today is also looking like it will be a busy one. I got a few readers concerned about Chuck since he hasn't written in a while, but no worries, he is set to be back in the office next week. I'm sure he will be full of P&V after spending a couple of weeks down in Florida with his family. The weekly jobs data just came out, so I am late. For those of you wondering they came in just below expectations at 333k, nothing market moving here. With that I will hit the send button. Thanks for reading the Pfennig!!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 08-08-2013 11:38 AM by Chuck Butler
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