market views

Review & Focus®

Chuck Butler | March 1, 2017 9 MIN READ

February was quite the month for strange news. We had the news out of Greece that it was looking at leaving the euro, and going to the dollar. We had the news that Japan now holds 40% of all issued Japanese Government Bonds (JGBs), and we had the head of the U.S. National Trade Council talking trash about Germany. What gives there? These and a few more ditties will be discussed this month, so grab a chair, a cup of coffee, and let's do some Reviewing and Focusing!


Janet Greases The Tracks

In the middle of February, Fed Chair Janet Yellen gave her semiannual two days of speeches to lawmakers on Capitol Hill. There had been some chatter among the Fed members who are known to be “doves” that the March meeting would not necessarily bring about a rate hike. And Fed Fund Futures were only at 20% odds of a March meeting rate hike.

But Janet Yellen put all that to bed during her first day of speeches to lawmakers, although she did leave on a small night-lite for no rate hike. Yellen had this to say, “If job gains and rising inflation continue to progress as the Fed expects, an increase in the benchmark federal funds rate would likely be appropriate at our upcoming meetings.”

Job gains can't get any better, as far as the number of jobs created is concerned. However, should one want to contest whether or not the majority of those jobs are breadwinner jobs, that could shed a different light on the subject. But I don't think Yellen is concerned with whether or not there are breadwinner jobs versus just jobs. And as far as inflation is concerned, last month we breached the 2% target that the Fed has been looking for, for what seems to be a month of Sundays. So, anybody with a working knowledge of these things would know that she may have just signaled a rate hike in March!

So, the rate hike tracks have been greased, and that means the dollar is back on currency traders' list of currencies du jour. I understand why a currency would be bought ahead of a rate hike, but haven't these thoughts about a rate hike proved to be false dawns in the past? I mean, didn't we just go through two years of the Fed telling us that there would be “X” number of rate hikes in the coming year, only to end up with one rate hike each year? What I'm saying here is, wouldn't it be prudent to wait-n-see if the Fed really does hike rates in March?


A Tent Revival

In the Daily Pfennig® newsletter, I've been talking about a good old-fashioned Tent Revival, where you walk under the tent to be saved by a man of the cloth. Only this Tent Revival is about the saving of Global Growth. Global Growth has been showing signs of a return and what it needs is the help that a Tent Revival can give it! Commodity prices are rising. Copper, iron ore, gold, oil, and a lot of the raw materials that are used every day are on the rebound. Domestic demand is stronger in almost every country, and the Proxy for Global Growth (which is what I call the Aussie dollar (A$)) had a stealth-like move higher.

So, could this nascent recovery in Global Growth be the real McCoy? I guess we'll have to wait-n-see, but a “speculator” might be looking at this as an opportunity to get in when prices are still really cheap and no one else is interested in the assets. My guitar-playing, investment-analyst guru, Steve Sjuggerud, always tells people that one of his criteria for buying an asset is that it is “hated.” Well, I do believe that commodities fall into the category of being hated, and it wasn't that long ago that analysts were saying that the A$ was ready to collapse.


Greece To Dump The Euro?

On Valentine's Day, President Trump's nominee for U.S. Ambassador to the European Union (EU), Ted Malloch, threw a cat among the pigeons with a statement that had the markets scrambling. Malloch basically told reporters that Greece was considering ditching the euro in favor of the U.S. dollar.

Here's how I explained it in the Daily Pfennig: Malloch implied that due to Greece's crippling financial crisis, officials are said to be desperately searching for an alternative to the euro, and the senior Greek economists are looking into taking on American bank notes (the dollar), which would be Greece turning its back on the European Currency (euro). Holy craziness Batman!

Malloch continued, indicating that Greece leaving the EU would be the best option for “the people,” since the current situation is simply “unsustainable.” He then went on to say, “I know some Greek economists who have even gone to leading think tanks in the U.S. to discuss this topic and the question of dollarization.”1

I'll say it again, holy craziness Batman! All this time everyone, including yours truly, thought that if Greece left the euro, they would go back to their drachma, which they could then debase and devalue all they wanted to inflate their debt down to working order. But they sure wouldn't be able to do that if they started using dollars, that is, unless inflation in the U.S. got out of control.

Of course, I'll continue to keep an eye on Greece.


Here In The U.S.

The old saying goes: Meanwhile back at the ranch, grandma is holding down the fort. And that saying kind of comes into play with the U.S. economy. But instead of holding down the fort, grandma is holding off the aggressive rate hikes. That's because, as I like to say, here in the U.S. we just keep shooting ourselves in the foot! Starts and stops, racing then dragging, the economy is so uneven. In the fourth quarter (Q4), U.S. Gross Domestic Product (GDP) growth was only 1.4%, which brought the annual GDP growth for 2016 to 2.4%, the same level as the 2015.

Now we're seven years removed from the last official recession, and 2.4% is all the GDP growth we can muster up? Really? When you look under the hood, cars are driving the economy (pun intended). Auto sales have gone bananas in the U.S. this past year, and without car sales, the GDP numbers would look very weak. Add that to the fact that U.S. corporate profits in 2015 dropped by the most since 2008 (when the economy was veering into recession) and we see why the numbers look this way. We don't have the 2016 numbers yet, but since the GDP numbers were the same in 2015 and 2016, I can't imagine that corporate profits have changed much.

Now, let me ask you this question: given what you now know about the strength of the U.S. economy, would you be so willing to hike interest rates if you were the Fed? Yes, inflation hit the Fed's target, so did unemployment, but the economy is running cold, and about to get frigid if rates are hiked again folks. I'm just saying.


What Do You Say When They Call You A Cheater?

Your cheating heart will make you weep. You'll cry and cry, and try to sleep. Yes, that's the song that kept rattling around in my head when I heard that the U.S. National Trade Council Chief, Peter Navarro, called Germany cheaters. He said this because according to him, they keep the euro weak, to promote their great export business. Now, when I was a young man learning to play the guitar (on my own I must add), my dad used to tell me to play Hank Williams songs, so that's why that song kept rattling around in my head.

But Navarro apparently doesn't understand the Eurozone, and how the euro works, because Germany—although it's the Eurozone's largest economy—only has one vote at the European Central Bank (ECB) meetings, just like France, Holland, Austria and the rest of the member nations. So tell me Peter, just how does Germany manipulate the euro weaker? Wouldn't that finger pointing be better directed at the ECB, who implemented QE/bond buying, and negative deposit rates?

Oh, and to rub salt in Navarro's wound, Germany posted a record Trade Surplus for 2016!


HOW HAS GOLD BEEN PERFORMING?

Gold had a strong performance at the beginning of this year, just like last year. The question is, will gold be able to maintain this strong performance in the face of a possible March rate hike in the U.S.? Well, if inflation continues to rise (it breached 2% last month, but I truly believe that inflation is way higher than 2% here in the U.S.), then gold should be able to maintain its leverage over the rate hike. Of course that's my opinion and I could be wrong. I just look back at history, and in the late 70s when interest rates were soaring because inflation was soaring, gold too soared.2.


It Still Feels Like An End To The Strong Dollar Trend

The feeling I get is that we're still nearing an end to the strong dollar trend. It may still take some time to work itself through, but it feels like to me only the beginning of a currency and metals run on the dollar. This could cause periods of doubt as the dollar rallies for short-periods, but those of you who were with me in 2001 when I wrote the white paper, “The Decline of The Dollar,” (when the dollar was as strong as it was going to get) thought I had “lost it.” But you soon found out that I hadn't lost it, and those that took a chance and bought cheap currencies, wound up with very strong currency and metals gains. I don't like the saying that “this time will be different,” and that's good because I don't believe it will apply here. That's my opinion and I could be wrong.


In Conclusion

I hope you had a grand Groundhog Day and Valentine's Day in February. Pitchers and catchers, and full squads a few days later, reported to major league baseball Spring Training, and the first games will have already been played by the time February ends. I'm one happy camper in the spring, so I'll leave you with a happy song: Don't worry, about a thing. 'Cause every little thing, is gonna be alright.

ASSET TRENDS 1/13/2017 – 2/10/2017

Source: Bloomberg World Currency Ranker Screen (WCRS). WCRS asset trends are based on BGN “Bloomberg Generic” indicative or “spot” currency exchange rates and metals prices as of 5 pm Eastern Time on the dates specified. Such rates and prices are generally only available for large volume transactions conducted by institutional investors at a specific point in time. These values are illustrative only and do not reflect wholesale rates available to us or the rates or prices we make available to customers at any point in time, and the trend data provided do not include retail exchange spreads or other transaction costs.

Currency3, 4 Trend Change (%)
Australian dollar 2.28%
Brazilian real3 3.22%
British pound 2.42%
Canadian dollar 0.32%
Chinese renminbi3 0.32%
Columbian peso 3.24%
Czech koruna -0.16%
Danish krone -0.17%
EMU euro -0.19%
Hong Kong dollar -0.06%
Hungarian forint -0.45%
Indian rupee3 1.90%
Israeli shekel 1.78%
Japanese yen 0.80%
Mexican peso 5.47%
New Zealand dollar 0.94%
Norwegian krone 1.33%
Polish zloty 1.76%
Russian ruble3 2.09%
Singapore dollar 0.53%
South African rand 0.79%
South Korean won 2.11%
Swedish krona -0.18%
Swiss francs 0.35%
Turkish lira 0.73%
Metals5 Trend Change (%)
Gold 2.77%
Silver 6.46%
Platinum 1.51%
Palladium 4.30%
EverBank CD Baskets3, 4 Trend Change (%)
Balanced Debt® 1.54%
BRICS 1.66%
Commodity 1.08%
Euro Trax® 0.22%
European OpportunitySM 0.45%
Geographic 1.88%
Global Power Shift® 1.79%
Investor's Opportunity® 2.79%
Mining Opportunity® 1.65%
New World EnergySM 1.31%
Pacific Advantage® 0.63%
Pan-AsianSM 1.17%
PetrolSM 3.07%
Ultra Resource® 0.89%
Viking® 0.43%
World Energy® 1.59%

EverBank CD Basket trends are also based on WCRS indicative spot rates for the underlying currency mix, which is described at everbank.com/currencies, and thus are not reflective of wholesale rates available to us or the rates we make available to customers at any point in time and do not include our spread. For more information, please see everbank.com/currencies.

Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
You can count on Chuck to tell it like it is. He has over 35 years of experience in the currency field. And he's got a wit all his own. A frequent and respected analyst for various national media outlets, Chuck is also the original author of the popular Daily Pfennig® blog.

Asset trend data are illustrative only and do not reflect retail exchange spreads or other transaction costs.

Along with the potential for market gains, foreign currency accounts carry some additional risks from currency fluctuations, economic and political factors, and accounting differences.

All statements, comments and opinions expressed are solely those of the writer or speaker and are not the statements, comments or opinions of EverBank or of any of its affiliates, and are subject to change without notice. Due to the rapidly changing nature of currency and commodities markets, any statement, comment, or opinion may quickly become outdated. This is not a solicitation for the purchase or sale of any securities or options on securities or for the purchase or sale of a currency or any precious metal, and it does not constitute a recommendation to you or to any specific person of any particular action. EverBank, its officers and employees do not provide investment or other types of advice. All factual information has been obtained from sources that the writer or speaker believed to be reliable, but the accuracy, completeness, and interpretation of the factual information is not guaranteed and has not been independently verified. Not all products are right for everyone. You should conduct your own research and/or consult your advisor before making any purchases.

  1. http://www.dailymail.co.uk/news/article-4222990/Greece-considers-ditching-Euro-favour-dollar.html
  2. Past performance is not a guarantee of future results.
  3. Certain EverBank® accounts may be denominated or partially denominated in a Non-Deliverable Currency ("NDC").  Current NDCs offered by EverBank include the Chinese renminbi, Indian rupee, Brazilian real and Russian ruble. See your Account Terms, Disclosures and Agreements Booklet for more information regarding delivery restrictions, exchange rates, and funding and withdrawal restrictions on NDCs.

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