Good day. The dollar continued to slide lower throughout most of the day as the last full trading week of 2013 began.  But from the number of out of office emails I get returned into the Pfennig box, it looks like a lot of you have decided to join Chuck in taking a ‘pre Christmas’ holiday. As somebody pointed out to me yesterday, there is still a full week left prior to Christmas, and the markets look to be pretty volatile as we close out the year – with the FOMC decision on tapering along with a plethora of data releases here in the US.

Investors in the euro were certainly in a holiday mood yesterday as the PMI data I told all of you about had investors pushing the euro up toward its yearly high vs. the US$.  The euro gained after the ‘Flash PMI’ survey on manufacturing and services expanded at a faster pace this month than economists had forecast.  Germany continues to lead the euro-zone out of the recession, but the data underlying the PMI report show the rest of Europe may be struggling to keep up with Germany’s recovery.  Angela Merkel took control of the new coalition government today, and pledged to keep Germany on a steady growth path.  The rest of Europe’s leaders are just hoping they can keep a hold on Germany’s coat-tails and remain on the growth path!

The focus of investors continues to be on the FOMC meeting which will begin today.  Bets on the possibility of a $10 billion ‘taper’ to be announced this week have increased with the recent labor market improvements and the possible Senate confirmation of a budget which could come later today.  One piece of data which the members of the FOMC will be discussing in depth is today’s reading of consumer inflation which is expected to show a .1% increase MoM and a 1.3% increase YoY.  In this topsy turvy economic environment, the FOMC is actually wanting to see a higher inflation number as they are worried about the US slipping into a deflationary spiral similar to Japan. October’s CPI figure was reported at -.1%, and a repeat of that number would likely cause the Fed to continue with their latest QE efforts in order to try and ‘create’ some inflation.  In addition to the CPI number we will get the November reading of our current account balance which is expected to show we ran slightly over a $100 billion deficit during the 3rd quarter.

Global inflation seems to be a non-issue as a government report showed UK consumer price inflation unexpectedly slowed in November to the lowest level in 4 years.  Consumer prices in the UK climbed 2.1% last month after increasing 2.2% during October.  The median forecasts of economists surveyed by Bloomberg called for the number to remain unchanged at 2.2%, so the drop was a bit of a surprise.  BOE Governor Mark Carney will address the House of Lords today for the first time and is expected to share his thoughts about the future of the banks QE efforts.  This drop in inflation rates certainly allows the BOE more room to keep pumping cash into the economy and to keep rates low for an extended period.  Exactly what I think their cohorts here in the US will also do.

The data released yesterday here in the US was a bit mixed, with the Markit PMI number coming in slightly lower than expected while the Industrial Production data for November showed a surprising increase of 1.1% vs. last month’s .1% increase and economists’ expectations of a .6% reading.  The Capacity utilization figure, which is a favorite indicator of the health of our manufacturing increased to 79% which is above expectations of a 78.4% reading.  This data was not strong enough to rally the dollar, which drifted lower in response to traders who seem to be hedging against the possibility that FOMC would not take action tomorrow.

The Swedish Riksbank cut interest rates by a quarter of a point, the first cut in a year.  This move was predicted by a majority of economists, and was apparently already priced into the Swedish krona which didn’t really react to the news.  While the krona did weaken slightly against most of the G7 currencies, the move was not dramatic.  The Swedish economy is one of the highlights of the European continent, relying on a strong manufacturing base to help keep them from joining some of their EU neighbors in a downward spiral.

The commodity currencies came under selling pressure as global inflationary pressures seem to be non-existent.  The South African rand weakened against the US$ for the first time in 3 days and the Aussie dollar continued to drop, trading near a 3 year low reached back in August.  It looks like the markets are going to grant RBA Governor Glen Stevens his wish for the currency to trade at .85 cents.  The story in New Zealand is very different as these two economies begin to diverge.  New Zealand finance minister Bill English let the markets know there would be an operating surplus of NZ$86 million in the year through June 2015 and rise to NZ$1.67 billion a year later.  The surplus is expected to grow to NZ$5.6 billion in 2018 according to new forecasts, good long term news for the kiwi!

Gold rallied as the drop in the value of the dollar boosted demand for precious metals as an alternative asset class.  Some of the movement was probably due to short covering as investors start to unwind wagers that the Fed will scale back bond purchases at their meeting later this week.  Some traders had placed short positions on the price of gold betting that the FOMC would start to taper their bond purchases this week.  The QE which the Fed has been involved in is ultimately inflationary, and should support purchases of precious metals.  But investors have started to price in the end of the bond purchases, causing many to sell gold short in order to try and profit if/when the taper begins.  Yesterdays weaker Empire Manufacturing number along with the weaker than expected US PMI number caused many of these short sellers to reverse their positions, pushing the price of gold higher.  Silver was also up on the day, moving back above $20 for the first time in 4 days.

Then There Was This.  As you all know, Chuck is taking his standard Christmas vacation, but even while he is out of the office he continues to feed good information to all of us on the desk.  Yesterday he pointed out a story he read on MarketWatch concerning the possibility of a December taper.  According to the article, the chances of a Fed taper during this week’s meeting are reduced because of the calendar.  “The Fed doesn’t like to begin engineering less-easy policies at the end of the year, said Robert DiClemente, head of the U.S. economics team for Citigroup. In fact, the Fed hasn’t done it in the last 40 years.

Over eight major interest-rate policy cycles dating back to the early 1970s, all have begun in either the first or second quarter, DiClemente said.

Chris Again.. I continue to believe the Fed will wait until the end of the 1st quarter to take action, as they will want to see further improvement in the labor picture and some positive action on the inflation front.  The article is a quick read, and you can read it in its entirety by clicking on this link:

http://blogs.marketwatch.com/capitolreport/2013/12/16/fed-never-grabs-punch-bowl-in-december-analyst-points-out

To recap. The euro continued to climb against the US$, nearing its yearly high after manufacturing in Germany improved.  Focus in the US will be on the CPI data which is set to be released this morning and will play into tomorrow’s FOMC decision.  The Swedish central bank cut rates but the krona held firm.  Commodity currencies came under pressure, but the kiwi seems to be breaking ranks and could rally.  Gold and silver pushed higher on the back of a falling US$ and Chuck shared some news on the Fed taper.

Currencies today 12/17/13. American Style: A$ .8922, kiwi .8272, C$ .9455, euro 1.3762, sterling 1.6287, Swiss $1.1275. European Style: rand 10.264, krone 6.1430, SEK 6.5725, forint 217.06, zloty 3.0368, koruna 20.053, RUB 32.9058, yen 102.93, sing 1.2573, HKD 7.7525, INR 61.928, China 6.1108, pesos 12.9398, BRL 2.3227, Dollar Index 80.076, Oil $97.25, 10-year 2.8646%, Silver $20.02, Platinum $1.356.50, Palladium $714.25, and Gold. $1,239.40

That’s it for today… Happy Birthday Jennifer! Our currency trader and my good friend Jennifer celebrates her birthday today.  I have been working with Jennifer for most of her career, and can count her as one of my good friends as well as a co-worker. I also heard it is Pope Francis’ birthday, so Jennifer shares her special day with the leader of the Catholic church (you got that going for you Jen!). Stayed up late watching the Ravens beat the Lions last night on a 61 yard field goal in the last minute.  I just wish the Rams team I saw Sunday would have consistently shown up this year; then I would be talking about the playoffs!  I hope everyone has a Terrific Tuesday, and 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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