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July 28, 2014 · by Chris Gaffney

Good Day.  I made it back from Canada late Saturday night and was greeted with some typical St. Louis July weather – hot and sticky.  I had a great work week in Quebec and Vancouver – meeting several existing clients and Pfennig readers and hopefully converting a few new ones.  So I will start today’s Pfennig with a quick shout out to all of the friends I met up north and a big welcome to all of the new Pfennig readers.  The markets are set to heat up a bit this week as we have an absolute ton of data releases this week along with the Federal Reserve’s policy meeting on Wednesday.  The highlights of the data will be the second-quarter GDP figures to be released on Wednesday and the non-farm payroll figures for July which will come out on Friday.  Should be a very busy week in the markets, so let’s get right to them.

The dollar ended the week near six month highs against a basket of major currencies after ending what was the strongest week for the greenback since March.  Readers will recall that most of the ‘big bank’ currency desks called 2014 the year of the US$; as the US economic recovery was set to propel the greenback to new heights vs. the rest of the industrialized world.  But a weak start to the year here in the US along with a solid recovery in some of the emerging market economies held the dollar down during the 1st half.  But  calls for more stimulus from the ECB had the euro moving lower over the past few weeks and the dollar bulls are now back out in full force.  The dollar index, which is dominated by the yen and euro is now trading back at levels we haven’t seen since the first week of February and the technical analysts are warning that a break above 81.25 could send it back to levels we haven’t seen since last summer.

What I find interesting about this latest rally by the US$ is that it is not based on ‘facts’;  traders have pushed the dollar higher on the ‘expectations’ of a strong 2nd half rebound in economic activity here in the US combined with the ‘possibility’ of further stimulus action by the leaders of Europe.  This divergence in policy direction between the US Federal Reserve and the ECB is what has dropped the euro by almost 2% during the past month.  These traders are calling for a further weakening of the Euro this week as we get a steady stream of Euro zone inflation data.  The ECB took the dramatic step of introducing negative interest rates earlier this year and ECB President Mario Draghi has continually suggested that he stands ready to enact further stimulus actions should the Euro zone economic recovery stumble.  Euro zone inflation rates are uncomfortably close to zero for ECB policy makers who will be watching Thursday’s release of the latest inflation figures for signs that additional stimulus will be needed.  Expectations are for inflation rate to have remained at .5% for a third straight month and a separate survey is expected to show the Euro unemployment rate remains unchanged at a stubbornly high 11.6% in June.  High unemployment is a worry for the ECB as they worry that without solid labor gains the inflation rate will remain well below their target level of 2%.  The euro will definitely remain under pressure until after the release of the latest inflation data.

Friday’s data here in the US showed orders for durable goods rose a better than expected .7% in June while the less volatile ‘ex-transportation’ number showed an even better .8% increase.  This reversed a drop in orders which were booked during the previous month and reflect a US economy which continues to slowly recover.  The busy data week will start off with the release of the Markit PMI numbers along with Pending Home Sales and the Dallas Manufacturing activity today.  The PMI number is predicted at 59.8 which would be a slight drop from last month’s figure of 61 but still the ninth consecutive month above 50 which indicates a manufacturing expansion.  The Pending home sales should be the most interesting piece of data following the big drop in New Home sales which we saw reported last week.  The US economy is still fairly dependent on a strong US housing sector, as home sales drive several other major retail sectors and also reflect consumer confidence in the future health of our economy.   Our FOMC has certainly done everything they can to make sure the housing sector recovers, focusing in keeping mortgage rates down by consistently being one of the largest purchasers of US debt in order to keep rates low.  But it will certainly be interesting to see if the housing sector can continue to stay on the recovery path after the FOMC ends their bond buying.  We will see another $10 billion reduction in the bond buying program announced this Wednesday, with the program set to end by October.

The Pound sterling continued to hold near a two year high vs. the Euro and near a six year high vs. the US$ over the weekend.  The story here is similar to the Euro/US story – opposite outlooks for monetary policies.  While the ECB is looking to add further stimulus the Bank of England is set to start pulling some of their past QE efforts back out of the markets.  Data on Friday showed UK GDP expanded at a .8% rated during the 2nd quarter, matching the pace of expansion during the first quarter of 2014.  UK mortgage data will be released on Tuesday, and could set the stage for further gains for the pound sterling.  But the upcoming FOMC meeting has ‘capped’ the pounds rise vs. US$ as traders wait for any indication of an accelerated exit from the latest QE efforts by the US FOMC.

The Chinese currency moved higher vs. the US$ overnight as better than expected economic data pushed the renminbi up after a slightly weaker fixing.  The preliminary PMI data released last week indicated that China’s factory sector turned in its best performance of the year during the month of May – further anchoring sentiment that the Chinese economy is again on solid ground.  But the PBOC continues to limit the appreciation of the renminbi through their daily fixings causing the Chinese currency to continue to book losses for investors.

While the Chinese currency is one of the worst performers during the year, the New Zealand dollar is one of the best performers of 2014.  And with a further rate increase by the RBNZ last week I figured the kiwi would continue to rally.  But comments by Reserve Bank Governor Graeme Wheeler sent the currency lower.  As Mike reported last week, Wheeler called the NZD $’s level ‘unjustified and unsustainable’ on July 24th and the RBNZ indicated that the latest increase in interest rates (the fourth this year) would be the last for a while.  The kiwi has tumbled nearly 3% in the past two weeks, mainly due to the aggressive language by Wheeler.  There seems to be support for the kiwi just above .85 cents, so any further pain for NZD$ holders may be limited.  And the pressure on the New Zealand currency also kept the other ‘antipodean’ currency in check as the Aussie dollar drifted lower.

Gold slipped in early European trading this morning due to a stronger US dollar but hung on to the $1,300 level as global tensions continue to encourage safe haven purchases.  Data releases expected later this week and Wednesday’s FOMC meeting will likely keep gold in a tight range today as investors look for clues to the strength of the US recovery.  Any indication that the Fed will look to hike interest rates sooner than currently expected could send gold lower.  But on the other hand, any increase in tensions in the Middle East or Ukraine or a bad data print here in the US could send the price back up.  Fridays unemployment data is especially important for gold as FOMC leader Janet Yellen said earlier this month that the central bank could raise rates sooner than initially expected I labor markets continued to improve.  Higher interest rates here in the US would increase the implied ‘carrying cost’ of precious metals and encourage investors to sell gold in favor of investments which earn interest.

To recap.   Dollar bulls were out in force last week as we start a week which will include an absolute ton of US data along with an FOMC meeting.  The data is expected to show the US economic recovery is starting to heat up in the 2nd half which has emboldened dollar bulls who went into hiding after the slow start to the year.  The Pound Sterling held onto the recent highs after data showed the UK economy continues to expand at a much faster rate than the Euro zone.  The Kiwi continued to slip after RBNZ head Wheeler jawboned it lower after the latest interest rate increase.  And gold slipped but is holding the $1,300 level as ‘safe haven’ buying offsets expectations of a faster than expected increase in US interest rates.

Currencies today 7/28/14. American Style: A$ .9402, kiwi .8557, C$ .9254, euro 1.3440, sterling 1.6982, Swiss $1.1064 . European Style: rand 10.5240, krone 6.2214, SEK 6.8140, forint 229.45, zloty 3.0837, koruna 20.435, RUB 35.36, yen 101.84, sing 1.2418, HKD 7.75, INR 60.14, China 6.1622, pesos 12.96, BRL 2.2301, Dollar Index 80.998, Oil $101.47, 10-year 2.4871%, Silver $20.60, Platinum $1,483.49, Palladium $882.75, and Gold. $1,304.86

That’s it for today.  As I said in the opening paragraph, I had a great week in Canada and enjoyed the time away from the office.  The investors I met in both Quebec and Vancouver were enthusiastic about the opportunities we offer here at EverBank, and were excited to get to meet us in person.  This weekend’s hot and humid weather here in St. Louis is supposed to cool off a bit and will be much more like the temps we experienced up in Canada which will be nice.  Chuck will be ‘back in the saddle’ tomorrow, after returning from a work shortened summer vacation.  I can’t believe July will be over this week – I’ll be taking Brendan off to college before you know it; but first I have a half Ironman which I will hopefully complete up in Michigan in two weeks.  Training has gone well, and I enjoyed getting to see the sights last week during my long runs (and DEFINITELY benefitted from the cooler Canadian temps!).  I’m late as usual, so I’ll hit the send button.  I hope everyone has a Marvelous Monday and a great start to their week – thanks for reading the Pfennig!

Chris Gaffney, CFA
SVP & Director of Sales
T. 314-951-1619
EverBank World Markets
8300 Eager Road, Ste. 700,

St. Louis, MO. 63144

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