Today's Pfennig!
Here We Go Again With Chinese Rumors!
Good day.... Well, yesterday's CPI data for December did confirm that inflation exists in our economy, to the tune of 3.3% more than the previous year! Of course, in my mind, inflation really stands around 5%, but let's not let that get in the way of the Government's announcement yesterday. So... Inflation is around us, and it's not just oil prices! But we can all sleep soundly at night knowing that our Fed Reserve has everything under control, and all will be right on the night. GET OUT OF HERE! My fingers didn't even want to type that last bit about the Fed.... LOL!
Immediately after the CPI data was announced, the dollar saw a reversal of fortune, and the euro shot up to 1.3120. Then the trap door sprung, and the single unit couldn't find a bid until it reached the 1.2970 level. I'm told that Japanese names came in an bought everything dollar related they could get their hands on. So, it's not only the Japanese Gov. that wants to keep yen from getting stronger, it's Japanese exporters too! OK, now you're wondering how I went from the euro/ dollar pair to the yen/ dollar pair and wound it all together... Of course those of you that have held their attention in class know that it's all tied together by the "cross trades" that exist in the currency markets. There are so many of them, that yen selling and dollar buying creates dollar strength that is then carried over to euro / dollar trades. Sort of like the old song about the thigh bone being connected to the knee bone, and so on.
Of course, I've tried to tell anyone in Japan that would listen that they have nothing to fear from a stronger currency, the proof is in the pudding! Look at yen's rise VS the dollar last year, and if you buy into the thought that the stronger currency is hurting their exports, then you would be broke, because Japan's Trade Surplus grew last year. And if you buy into the fact that Japan needs a weaker currency to attract investment flow, you would once again be asking your mother for a $20 to buy a Big Mac, because Net Equity Inflows to Japan have increased the last two month (.7 Trillion yen). This Net Equity Inflow data has remained positive since the 2nd QTR of 2003, except for a brief and modest outflow in May last year.
So... Will everyone in Japan please calm down? Your currency is going to get stronger and besides those little games you played yesterday, there's not a whole heck of a lot you can do about it. Besides, you should have been more influential with China and the talks to revalue.
Speaking of a Chinese revaluation, I hear this rumor yesterday, so take it with as many grains of salt that you wish but here it is... China could revalue its renminbi currency by as much as five percent against the dollar any time after the Chinese New Year in mid-February, according to a report by New York-based consultants Medley Global Advisors. Medley sent the report to clients on January 19. A source, reading from the report, told Reuters it said: "At this moment our information continues to be that Beijing is looking at a de facto one off revaluation of around five percent. It is also clear to us based on our conversation over this past weekend that while no specific time-table has been set out for the revaluation the move can come literally at any time after the Chinese New Year."
So, there you go! I'm going to probe further here, and say that I think I smell smoke because it just so happens that yesterday we saw news from Malaysia... This is very interesting...
Former prime minister Mahathir Mohamad, who fixed Malaysia's exchange rate in 1988, on Wednesday called for a review of the peg as the weak dollar has caused the ringgit to depreciate against other major currencies. "I feel the time has come for us to review because we have lost a lot as the value of our currency has fallen," Mahathir was quoted by the official Bernama news agency as telling reporters."
Hmmm, you don't think China called Malaysia and have them a heads up do you? I smell smoke here... And you know me... "Mr. Conspiracy" Where there's smoke... There's fire!
Back to reality here... Well, traders and speculators had tried to move the euro to the downside of the 1.30 level for a couple of weeks now, with no success, until yesterday. It's really not a fundamental thing that's driving this market right now, in fact, I'm not really sure who is at the wheel, but I do know one thing, the euro might even fall further, but it does not change the weak dollar trend, or my call for euro 1.40 this year one iota! Just like above, where the "crosses" pushed euro down because yen got sold, the euro will see the other side of that coin when yen gets back on the bus that takes it to below the 95 figure! Be careful, don't get caught in this "trap" of thinking the dollar is out of the woods...
You don't have to listen to just little ol' me on that point (yeah, little Chuck is like saying Texas is a "small state"!) Warren Buffett has this to say about the dollar yesterday on CNBC... Berkshire Hathaway Inc, Chairman Warren Buffett said he expects the U.S. dollar to continue to decline and is having a "hard time" finding stocks to buy. "Unless we have a major change in trade policies, I don't see how the dollar avoids going down. I don't know when it happen, I don't have any idea if it's going to be this month, next month or next year."
Well, my two-cents says it will be this year and next year!
Before I head to the big finish, I want to make this note to my Euro-based readers... Sterling may be down VS The dollar these days, but it is holding near a one-month high VS the euro on rate speculation. As I told you before, the U.K. enjoys a nice rate differential to the euro, and should outperform the euro going forward. This is for "euro based" customers.
Currencies today: A$ .7585, kiwi .7020, C$ .8120, euro 1.2950, sterling 1.87, Swiss .8390, rand 6.115, krone 6.33, forint 191.10, zloty 3.185, koruna 23.49, yen 102.85, baht 38.50, sing 1.634, pesos 11.24, and gold... $421.40
That's it for today... I don't get a good feeling toward euro pricing today, I think when U.S. traders come in and see it held below 1.30 overnight, they will sell it further... So just batten down the hatches! Things have not slowed down on our currency desk, long days indeed! But we carry on! Speaking of which, I've got to get to work! Have a great Thursday!
Chuck Butler
President
EverBank World Markets
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