Brazil’s lower house of Congress launches impeachment proceedings.

* Silva adds to the volatility in Brazil…
* BOE keeps rates stable as Brexit hurts the pound.
* New Zealand’s GDP increases 2.3% YOY…
* Silver moves higher, Gold steadies…

And Now, Today’s A Pfennig For Your Thoughts.

Good morning and happy Friday. Markets were much quieter yesterday but continued on the paths set after Wednesday’s FOMC meeting. But after all of the excitement on Wednesday, the relatively calm Thursday was a bit of a relief. Frank sent me some notes from his trip which will kick off today’s Pfennig – so take it away Frank:

I have checked in on the news mid-afternoon Thursday from a distance. There is a lot of noise but not a lot of policy statements to go around. Maybe it’s just me but it would be nice for someone from either party to actually produce a proposal that starts with the line: “if elected the first bill I would request congress to consider would contain the following 25 elements. The second would be, . . . ” Guess those things don’t matter anymore.

I’ve been at a news deficit for a few days already and frankly things haven’t changed. The price of oil is up a bit. The Wall Street Journal reports that stock prices have turned positive for the year. The ten-year Treasury Note remains below 2% shouting that the market expects no growth and no inflation for a full decade to come. Many of the currencies we follow are well up in 2016. No action but a lot of conversation from the Fed. After all talk is cheap.

Being at a deficit already I’ve decided to go completely dark for a couple 8+ hour days. At 7am local time here we’ll head out on horseback for a two-day journey. Mobile phone coverage will be a fantasy. Newspapers won’t be delivered. No 24-hour news channel will be reporting anything to us. Friends and spouses will drive in to meet for dinner and report if the world is ended but we’re pretty much stopping there with communication.  I understand I’ve been assigned a four-gated Peruvian Paso Parawana (my spelling, horse aficionados please don’t email the correction). As a simple cattle-farming Midwesterner I am honored with this and also note that it’s similar in gate to our Missouri Fox Trotter breed. Just fancier. Since we already solved the questions of the FBI’s inappropriate request of Apple today we’ll have to move on to more global topics for the next couple days. I’ll hope to be alive to report Monday.

I’m looking forward to hearing all about Frank’s horseback adventure on Monday! His trip got a bit cheaper overnight as the Argentine peso dropped over 2% against the US$ yesterday as the political troubles in Brazil are sending shockwaves across the border. I might as well lead my portion of the Pfennig with a quick update on Brazil as that is grabbing many of the headlines this morning. As I mentioned yesterday, the former President of Brazil, Luiz Inacio Lula da Silva was added to current President Dilma Rousseff’s cabinet as chief of staff. This move was seen by almost everyone as an attempt by Rousseff to shield her mentor from prosecution for corruption. Protests grew larger in the streets of the capital and Brazil’s lower house of Congress launched impeachment proceedings against Rousseff. Her new chief of staff will have his work cut out for him to try and avert impeachment. All of this political unrest has actually pushed the Brazilian real higher in value as investors look forward to the ousting of Rousseff who is seen as anti-buisness and bad for the Brazilian economy. The Brazilian real is the best performing currency YTD against the dollar, moving over 8.3% higher since the start of the year.

The pound sterling is on the flip side of the BRL in the YTD numbers and has fallen just under 2% vs. the US$ in 2016. The pound is the worst performing major currency vs. the dollar due to concerns regarding a possible Brexit. The Bank of England finished their policy making meeting yesterday and announced they would be keeping interest rates steady ahead of the June 23 Brexit vote. The BOE did reiterate that interest rates would more than likely raise over the next three years but that this increase would be gradual. Expectations of an imminent interest rate increase had drove the pound sterling higher through the last half of 2015, but these expectations have reversed course turning the value of the pound around with them. So it was a bit of a surprise to see the pound sterling jump past $1.45 on Thursday – on track for its best daily gain in a year. With the June Brexit vote hanging over the pound like the Sword of Damocles, I don’t expect to see too many more ‘sur prisingly positive’ days for the pound.

The commodity currencies of both NZD and AUD continued to move higher as the ‘risk on’ environment encouraged investors. The FOMC statement earlier this week has convinced many investors that central bank leaders in the US will be willing to let inflation run. Chairwoman Yellen has always been seen as a ‘dove’ – more willing to allow inflation to increase in an effort to boost GDP; and her comments on Wednesday are being seen as positive for commodity prices. Helping push the kiwi higher was data showing New Zealand’s gross domestic product rose a seasonally adjusted 2.3% on the year, beating estimates. Stronger growth and the expectations of inflation should keep the commodity currencies well bid.

The commodity currencies are dependent on a strong Chinese economy, as China continues to be the major global trading partner for all of the commodity exporting countries. Data overnight showed China’s home prices rose at their fastest clip in almost two years in February adding to inflation pressure. Average new home prices rose 3.6% in February from a year ago – the quickest year-on-year advance since June of 2014. As is true here in the US, China’s housing market is crucial to their economy – contributing 15% to China’s GDP. There was one piece of data contained in Thursday’s report which may cause some concern, as the price increases were all in the larger cities with the smaller / rural home prices actually dropping. But the government doesn’t seem too worried as they allowed the Chinese currency to appreciate in the overnight fixing. The Chinese currency is now trading at the high of 2016, reversing the sharp selloff which began the year.

The dollars downward spiral was slowed a bit yesterday after data showed the US manufacturing may be stabilizing. Data released yesterday morning showed factory in the mid-Atlantic region expanded in March for the first time in seven months. The weekly jobless claims rose a bit, but continuing claims remained below a level associated with a strengthening labor market. This data stabilized the dollar’s recent drop as it further weakens arguments that the US economy is in danger of slipping into a recession.

The precious metals markets eased back on their recent run higher, and Gold will likely end the week largely unchanged from where it started. Silver on the other hand has had a more impressive rally and should end the week with over a 4.5% increase. The dovish tone of the FOMC meeting, along with dollar weakness has helped propel silver higher. Two big questions for precious metals going forward are what happens to the Chinese economy and if/when the FOMC makes their next move.

Currencies today 3/18/16. American Style: A$ .7633, kiwi .6820, C$ .7731, euro 1.1284, sterling 1.4494, Swiss $1.034. European Style: rand 15.2611, krone 8.3079, SEK 8.2147, forint 274.73, zloty 3.7756, koruna 23.936, RUB 67.3705, yen 111.51, sing 1.3535, HKD 7.7549, INR 66.365, China 6.4628, pesos 17.257, BRL 3.6199, Dollar Index 94.914, Oil $41.05, 10-year 1.88%, Silver $15.996, Platinum $974.75, Palladium $592.70, and Gold $1,252.00

That’s it for today. Thanks to all of the readers who sent me nice messages about my St. Patrick’s Day story, I’m glad my grandfather had the courage to embark on such an adventure. To think he left home at 11 years old – our kids weren’t allowed out of the yard at that age. Times have definitely changed. I got so excited about our Irish celebration yesterday that I forgot to mention the opening rounds of ‘March Madness’! Hopefully your brackets survived the first few games – I know there were a couple ‘bracket buster’ upsets yesterday. Mike Meyer will have the Pfennig the next couple of days as I head down to Florida with my wife and daughter to enjoy a quick spring break. I’m lucky enough to get to attend a spring training game with Chuck on Monday – it will be my first ever spring training game so I am grateful to have the ‘old pro’ showing me the ropes. With that I will get out of your hair – I hope you have a Fantastic Friday and Wonderful Weekend. Thanks for r
eading the Pfennig.

Chris Gaffney, CFA
EverBank World Markets