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Effects of Wednesday’s FOMC continue.

* Markets continue to adjust to a hawkish FOMC.
* Dollar index reaches levels we haven’t seen since 2002.
* Ruble ignores FOMC and firms on oil.
* Silver is the biggest loser…

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

Good morning. As Chuck mentioned yesterday, he has begun his annual Christmas vacation so I’ll be bringing you the Pfennig for the next several days. But I’m not going to work alone; as Frank has volunteered to get things going each morning with some of his thoughts. So take it away Frank:

For years, it seemed, we all spent the last two weeks of the year in a frenzy attempting to close deals or change investment approaches for the bank or for clients. There are a few stay examples that remain of this activity but in general this seems to be a feature of the past. For now. In many years there were tax law changes or some other statutory factor driving the activity. For now anyway that sort of thing isn’t on the horizon. After January 20th I suppose we’ll see. Is your end just cleaning up or frantic?

This week was also a week where the Fed raised its target Fed Funds rate 25 basis points to a lofty 75bp. Ask the average person on the street to describe Fed Funds, their pricing or what 75 basis points is and you’ll probably get a blank stare. Still and all it held the attention of the global press as they held their breath for the Fed’s announcement. What a relief – higher rates. New home buyers and business owners may not have celebrated. We all hope we feel good about this. We’ll wait and see.

Off into the world of fiction that sometimes resembles the truth all too well. In this Sunday’s Pfennig I’ll be interviewing Doug Casey about his new novel “Speculator”. I had a shorter crack at it here in EverBank Insights. This weekend is a longer version with a little different approach. Doug is a longtime friend and the discussion we had was entertaining. The book is too, so maybe it ends up on your giving list. Take a look on Sunday and tell me what you think.

Off to Chris now as we slide ever so slowly into the New Year.

Thanks Frank. The currency and metals markets continued to slide but not so slowly. Investors continued to price in the more aggressive rate policy which Yellen seemed to suggest during her press conference. While everyone had already priced in one rate hike and two more in 2017, apparently the thought of three hikes in 2017 was the straw that broke the proverbial camel’s back and the market reaction had really been something which caught me somewhat off-guard. The US dollar has been off to the races ever since Wednesday’s announcement, and continued its advance vs. most of the major currencies yesterday as the dollar index hit a 14-year high.

We were pretty busy on the desk yesterday, as investors decided to take advantage of the lower prices and moved back into the currency markets. We had large buyers of euros and Swiss francs which continued to slip further below parity with the US$. The euro is trading at a 14 year low, and moved within 3% of parity. The story continues to be the big difference between central bank policies in the US, Europe, and Japan. The BOJ continues to struggle with a low growth, no inflation economy and the ECB just extended their QE bond buying program albeit at a slightly lower amount. With the FOMC seeming to be the only central bank on the path toward higher rates investors are starting to pour money back into the dollar. The new administrations plans for stimulating the US economy has provided even more fuel to the US dollar’s fire which was sparked by the FOMC.

The Chinese renminbi fell to its weakest in 8.5 years yesterday as Chinese leaders continue to allow it to adjust to a stronger US$. Chinese interest rates in both the onshore and offshore markets rose as state-owned banks tightened up their lending policies in an attempt to discourage speculative short selling of the currency. Other Asian currencies joined the CNY in the moves lower vs. the US$ with INR, JPY, and even the SGD all dropping a bit in overnight trading.

The BOE ended their meeting yesterday and reiterated their uncertain view of the markets – stating they expect a surge in inflation next year, but that BREXIT still presents risks to the economy which could dictate more stimulus. Markets seem to be reading the statement released with the end of the BOE meeting as hawkish which is placing a floor underneath the pound sterling.

One currency which has largely shaken off the FOMC decision is the Russian rouble which firmed on higher oil prices. The rouble has been the best performing currency over the past week, as investors place bets that sanctions may be relaxed as a result of a more ‘friendly’ US administration. Today the Russian central bank will be meeting and they are widely expected to keep the key interest rates unchanged while possibly suggesting a cut sometime next year. The relatively high interest rates offered in Russia have attracted investors, and firmer oil prices have helped to stabilize the Russian economy. Now speculators have really started to move into the rouble as they make bets on the possibility of the end of sanctions. The rouble is one of the most volatile currencies we track, and is definitely not for the faint of heart.

Nothing much to be said regarding the precious metals. Prices continued to slide on Thursday with silver taking the biggest hit falling over 5% at one point during the day. The combination of a stronger dollar, higher interest rates, and higher confidence regarding the global economy have really been hard on the precious metal markets. Investors have been moving out of the ETFs in droves and this is the main reason for the drop in prices. They have steadied somewhat this morning as the markets take a breather as we head into the weekend.

This morning the dollar rally has steadied a bit, and even the precious metals seem to be grabbing a bit of a bid. I think this pause is a reaction to the dramatic moves we have seen over the past few days, and could be a signal of things to come as we move into the last weeks of the year. These last two weeks can sometimes be volatile, as investors scramble to book gains or exit positions which would look bad on year end statements – something referred to as ‘window dressing’. With the dramatic moves of the past few days there is a growing risk that investors may choose to take profits – locking in the gains which have been made and causing a bit of a year-end reversal in the markets. The dollar certainly has been strong as of late, and I had a conversation with an investor just yesterday regarding his ‘short yen’ position who was considering whether he should go ahead and book the profits or hold out for what could be a few more percentages. Ultimately he decided to ride it out a bit longer, but I’m sure many investors, both personal and institutional are facing similar decisions.

It could shape up to be a pretty volatile end of the year, or it could be a non-event as everyone just holds their ground.

Currencies today 12/16/16. American Style: A$ .7331, kiwi .7002, C$ .7481, euro 1.0444, sterling 1.2439, Swiss $.9714 European Style: rand 14.01, krone 8.6723, SEK 9.3572, forint 298.73, zloty 4.2283, koruna 25.869, RUB 61.6009 yen 118.11, sing 1.4445, HKD 7.7625, INR 67.775, China 6.95.08, pesos 20.374 BRL 3.37.28, Dollar Index 102.93, Oil $51.33, 10-year 2.57%, Silver $16.077, Platinum $903.74 Palladium $684.00, and Gold $1,133.84.

That’s it for today. We’ve had a blast of cold air envelope the area making the walk across the bridge from the parking garage a bit more exhilarating than usual. I’m looking forward to spending some time with my son who made it home from Richmond earlier this week, and of course my daughter who finished off her last final yesterday. I plan on spending at least one of this weekend’s mornings in the duck blind, and I’m pretty sure my wife has a big dinner planned for Sunday night so it should be a great weekend. Have a Fantastic Friday and thanks for reading the Pfennig.

Chris Gaffney, CFA
EverBank World Markets

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