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In This Issue.
* G(8-1) leaders step up pressure on Russia...
* Pound moves higher on UK inflation data...
* Aussie $ and Indian rupee both higher vs. US$...
* Gold off lows, but struggles to gain momentum...
And, Now, Today's Pfennig For Your Thoughts!
Leaders of the Group of Seven increase pressure on Putin...
Good day. I made it through the first day back, and the desk was relatively well staffed so it turned out to be a pretty good day. Currency traders were certainly busy selling dollars yesterday as weaker US manufacturing data disrupted heightened expectations of an early rate hike. And it seemed global investors were becoming more comfortable with the political stalemate in Crimea even as world leaders, including President Obama met in The Hague. The G7 leaders pledged further measures against Russia amid growing concerns that the Crimean peninsula is just the first step toward an expanded Russia. And the families of those unfortunate passengers of Flight MH370 were told that new evidence has led investigators to conclude the Boeing 777 crashed into the Indian ocean off the coast of Australia. A very busy start to the week, and with a plethora of data releases scheduled for later this morning, today could shape up to be just as volatile.
But before we get talking about today's data, I will recap the numbers released yesterday morning. The Markit 'flash' report on the US manufacturing sector showed a slip in the Purchasing Managers Index to 55.5 in March from a reading of 57.1 in February. The median estimate called for a reading of 56.5 and the poor number had some investors re-evaluating the consensus reached last week that rates would be heading higher in April of next year. All economic numbers will be watched closely for any signs that the US economy isn't performing quite as well as expected, with the thought that the '6 month' window laid out by Fed Chairwoman Janet Yellen would/could be extended if/when the US economy stumbles.
Funny how one piece of not so good data can switch the mood of the markets. Last week the taper of 10 billion at each of the remaining 2014 Fed meetings was all but guaranteed, and investors were counting on a rate increase 6 months after the last of the bond buying. But the lower than expected manufacturing number, combined with an even worse number out of China to cause some to question if the global recovery will have 'legs'. Investors took profits in the US currency which rose last week after many bet on a US interest rate hike in early 2015.
The safe haven bid for US$ seems to have dried up also, as global currency investors seem to have gotten comfortable with the fact that the Crimea region will become part of Russia. Ukraine has told its remaining troops to leave the region for their own safety, all but handing over the peninsula to the occupying Russian forces. G8 members, less Russia, met at The Hague and increased the number of Russian individuals subject to restrictions. Currency traders seemed to largely ignore the situation in Ukraine, and as long as Putin ends his expansion plans in Crimea the events will quickly become 'old news'. But a reported buildup of Russian troops along Ukraine's border has some fearing that the Russian leader has new designs on Moldova, another former Soviet republic. It is a bit sad to see just how helpless the Western leaders seem to be in standing up to Putin, not that I want to see bloodshed, but he certainly seems to be having his way right now. While the currency markets aren't focused on Ukraine, the equity markets seem to be spooked by these events along with the slowdown in China and an earlier than expected rate rise here in the US. Global equity markets have been trading lower all week but may have found a bottom overnight as the European markets are all trading higher this morning.
The Japanese yen continued to fall amid bets the Bank of Japan will need to boost stimulus measures in order to offset the impact of a planned tax increase. Japan's central bank has been desperately trying to encourage their citizens to begin spending in order to reverse decades of a deflationary spiral. A sales tax hike scheduled for April 1 has Japanese consumers rushing out to make purchases which should help boost the BOJ's quarterly TANKAN survey which is expected to show the headline index improved by two points during the first quarter of 2014. But the sales tax increase, combined with worries over the global economic recovery have many economists predicting the business sentiment could shift negative during the next 3 months.
Many global investors are expecting the BOJ will launch another round of Quantitative Easing later this summer as consumer inflation continues well below the central bank's target and the broader outlook weakens. The BOJ will hold its next monetary policy meeting on April 7-8, and the Tankan report will be released April 1st. I would expect Japan's economy to contract a bit following next month's tax hike, and that will likely spur another round of monetary stimulus by the BOJ.
Shifting the focus to Europe, the euro is drifting a bit lower vs. the US$ this morning after enjoying a full cent move higher yesterday. A report released this morning showed German business confidence dropped for the first time in five months, reversing yesterday's mini-rally. The Ifo Institute's German business climate index dropped to 110.7 in March from a reading of 111.3 during the previous month which was the highest level since July 2011. This drop broke a five month string of increases, but the number still shows European business conditions remain fairly robust. The Bundesbank said yesterday that German orders, production expectations and an improving assessment of current economic conditions "point to a very strong growth in the first quarter." But the economic outlook of Europe's major economy is certainly threatened by rising tensions in Ukraine. German / Russian trade is fairly substantial, which is one reason Chancellor Merkel has been a bit hesitant in supporting dramatic sanctions against Russia.
The pound sterling rose after a report showed UK inflation data for February were in line with expectations, increasing 1.7%. Recent 'color' in the markets had predicted a weaker number, which could have led to additional stimulus measures from the BOE. But with the number coming in as expected it helped push the pound sterling up vs. the US$ and euro.
Currency investors definitely seem to be ignoring events in Ukraine as they continue to pour back into 'risk on' trades. Both the Indian Rupee and Australian dollars high yearly highs vs. the US$ yesterday. India's Rupee hit a 7 month high as investors became more optimistic that the election of a new government will hasten the nation's economic recovery. Overseas investors are pouring funds into the Indian stock market in front of these new elections, helping to spur a record-setting rally in domestic shares this month.
The Australian dollar also traded to the highest level of the year vs. the US$ as investors continue to adjust to new rate expectations. As Mike wrote last week, the RBA has made it clear that there is no need for further rate cuts, and now investors are gearing up for rate increases in the 'land down under'. RBA Deputy Governor Philip Lowe will be speaking later today, followed by Governor Glenn Stevens tomorrow so I would expect to see even more fireworks from the Aussie dollar over the next few days. The markets will focus on Governor Stevens speech, as he is scheduled to talk about the economic outlook and will probably mention the Aussie's recent strength.
The Chinese leaders pushed the renminbi higher overnight after allowing it to fall to a 13 month low last week. The 2.8% YTD loss of the renminbi is being seen as engineered by the Peoples Bank of China who wanted to push speculators out of the market. Many felt the renminbi was a one-way bet, as the PBOC continually allowed it to appreciate since letting it float in 2005. A vice governor of the central bank, Yi Gang said over the weekend that the exchange rate will be more and more determined by the market and that the PBOC's decisive role on the exchange rate will weaken. Well I guess they will leave it up to the markets as soon as they get done 'punishing' the speculators! That is the thing about Chinese leaders - they are able to do one thing and then announce that they will be doing something totally different going forward pulling a jedi mind trick on the markets "these aren't the droids you are looking for".
I do expect the renminbi to continue to be a bit more volatile than it has in the past, with a widened trading band and more liquidity. But I continue to believe this currency should be one of the core currencies in an investor's asset allocation. The Chinese economy continues to grow, and the importance of the Chinese renminbi will continue to grow at an even faster pace than the economy. The Chinese currency will certainly one day be considered as a possible global reserve currency.
Precious metal prices fell further yesterday, with gold sinking to a one month low near $1,300 an ounce. Last week's hawkish comments by Janet Yellen continue to weigh on the precious metals markets, and forecasts of sharply lower prices by some of the large Wall Street banks have prompted institutional selling of bullion. Societe Generale and other bullion banks have made recent forecasts that the price of gold will drop below $1,200 as stimulus is removed by the major central banks. Silver traded below $20 for the first time since the beginning of February, dragged lower by gold sharp losses.
But both Platinum and Palladium held on to their recent gains on supply worries. The combination of the South African mining strike and tensions in Ukraine have supported the price of the 'platinum group' of metals. Palladium actually hit it highest price since August of 2011 and is now within easy striking distance of $800 per ounce.
The focus of investors will shift to the US data this morning as we will get an indication of how the Housing markets are performing in 2014. The S&P/Case Shiller home price index is expected to show an increase of .6% for January and a more impressive 13.34% increase in the YOY figure. We will also see the March consumer confidence index which is expected to have increased to 78.5 from February's reading of 78.1. And then we will get the New Home Sales figures for the month of February which are expected to show a drop of 4.9% compared to January's impressive 9.6% increase. The housing numbers could still be impacted by the winter weather during the first two months of 2014, so traders will have to consider just how much of a 'weather impact' they want to read into these reports. Unfortunately we won't be clear of the 'weather effect' for some time, and it is interesting to see just how the numbers are received by investors. When sentiment is positive, it seems any bad data is immediately dismissed due to 'weather' but I'm not sure sentiment is so positive after last week's statement by Yellen. It will certainly be interesting to see just how the markets react to today's start of what will be a very busy week of data here in the US!
To recap. G7 leaders met and agreed to increase pressure on Putin in hope of preventing any further 'land grabs'. The yen traded lower on expectations that the BOJ will need to institute additional stimulus to offset a tax rate increase scheduled for April 1. The euro is range bound after moving higher yesterday, and the pound sterling rebounded on UK inflation data which came in right where expected. It was a 'risk on' day for currency traders as both the INR and AUD benefitted from new investors buying into these higher yielding currencies. And the Chinese renminbi appreciated overnight, reversing the sharp fall orchestrated by the PBOC last week. Finally, gold fell further on interest rate concerns, but Palladium hit a fresh high on supply concerns.
Currencies today 3/25/14. American Style: A$ .9145, kiwi .8549, C$ .8926, euro 1.3812, sterling 1.6495, Swiss $1.1326. European Style: rand 10.78, krone 6.0372, SEK 6.4156, forint 225.62, zloty 3.0342, koruna 19.855, RUB 35.694, yen 102.22, sing 1.2693, HKD 7.7572, INR 60.50, China 6.1426, pesos 13.1677, BRL 2.3230, Dollar Index 80.058, Oil $99.92, 10-year 2.7281%, Silver $20.15, Platinum $1.430.25, Palladium $784.97, and Gold. $1,314.80.
That's it for today. We got a dusting of snow this morning, a reminder that winter is still not quite over. It looks like it is going to be a busy day today, as I have an interview later this morning and then have to work on wrapping things up and getting back out of town. I am speaking at the 16th Annual IU Investment Conference in Carlsbad CA later this week, so Mike Meyer will be bringing you the Pfennig for the next 3 days. Chuck will be headed back home from spring break, and should be back in the saddle next Monday. Thanks again for reading the Pfenning, and I hope all of you go out and have a Terrific Tuesday!!
Chris Gaffney, CFA
EverBank World Markets
03-25-2014 12:33 PM