* Dollar consolidates its losses..
* But is this a sign? .
* Fed members talk Balance Sheet.
* China’s Trade Surplus narrows.

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And now. Today’s A Pfennig For Your Thoughts.

Good Day.And a Happy Friday to one and all! It’s a combo Friday. Huh? I hear you saying.. . Well, today is a combination of: Friday the 13th, Pay-day, and the start of a 3-day Holiday Weekend! YAHOO! I don’t get into the Friday the 13th stuff (I loved the first movie with Jamie Lee Curtis, but not the 14 or whatever it was sequels) and I hear you saying, “that’s odd, Chuck, for you are Mr. Conspiracy Theory. Well, I guess there’s a line in the sand, eh? And the 3-day weekend.. It will be welcomed in St. Louis, given that starting today, they are supposed to get hit with a major ice-storm that goes on throughout the weekend.. That, in a nutshell, is why I no longer live in St. Louis in the winter! The Moody Blues greet me this morning with their song: Ride My See Saw. That seems apropos given that’s what the currencies have done lately one day up, next day down.

Well, the rout on the dollar that was taking place yesterday morning when I wrote to you, continued throughout the day, but in the overnight markets, it fizzled out, or in trading circles they call that “consolidating its losses”. It’s interesting, I think that when the currencies have the conn, they really have the conn, and when the dollar fights back, it doesn’t do so with gusto. You know like Schlitz Beer, the “beer with gusto”.. I have no idea why I just thought of that, but I did and you got to read about it! But, getting back to the currencies and their rallies. So far this year, the Aussie dollar (A$) has put in the best performance VS the green/peachback, followed by the ruble, kiwi, and the Canadian dollar/ loonie. The worst performers so far this year are the Mexican peso, and British pound sterling.. (I’m talking majors here, if I were talking all currencies then we would have to talk about Turkish lira as the worst performer)

So, does this pattern of strong currency rallies, followed by weaker responses from the dollar mean anything? Well, I’ll tell you what I think it means, from all my years analyzing and writing about currencies. I think that it’s an indication that the strong dollar trend is nearing an end. I know, I know, I said that same thing last winter, but. we didn’t have this current trading pattern then. Of course I could be wrong again, and the dollar gain control again, and ascend to the top of the hill once again. Remember, it’s not fundamentals that move the currencies and metals any longer, it’s sentiment. And, right now the markets aren’t feeling the love for the dollar..

One thing to look for with the A$, loonie and kiwi. And that is: Can they follow through with gains once January ends. The last couple of years have seen these three move strongly VS the dollar in January, and then spend Feb and March giving the gains back. Should these three have follow through into Feb, then we just might have something, with regards to the strong dollar trend ending.

Yesterday, I told you that there were a lot of Fed members scheduled to speak. And guess what? They were singing from the same song sheet! And guess what they were singing about? The Fed’s Balance Sheet! Yes, that more than $4 Trillion Balance Sheet that has become a liability to the Fed, and the markets during the 3 rounds of Quantitative Easing / QE/ Bond buying/ debt monetization. We had Fed member Harker saying that “When rates are 1%, we need to look at unwinding the Balance Sheet”. We had Fed member Kaplan saying that, “the Fed should probably be debating the Balance Sheet in 2017”. And we had Fed member Bullard saying that, “The Fed is in a better position to end the Balance Sheet reinvestment.”

What Bullard is talking about is that when bonds mature in the balance sheet, they buy replacement bonds, and if you read the Sunday Pfennig where I talked about Treasuries, I pointed out that there were some suspicious increases in the Balance Sheet (by 2 to 3 Billion) in recent weeks.

Harker and Kaplan are voting members this year, and Bullard has long been a bell cow for Fed policy. So, let’s look at what unwinding the Balance Sheet might do. Well, first of all is the Fed going to put the bonds up for sale? I doubt that, because they would be subjecting the bond market to a major sell off, and cause yields to rise very quickly. Or rather, they could just stop buying bonds when bonds mature, and the effect on the bond market would be minimal, and would take many years to achieve a total unwinding.

But, like I explained in the Sunday Pfennig from a couple of Sundays ago, it’s not that simple for the Fed, which is the buyer of last resort, to step away when Saudi Arabia, and China have been selling Treasuries, and Russia stopped buying them and has substituted Gold purchases. I even had a graph showing the downward trajectory for Saudi Treasury holdings. You can always go back to read it, in the archives of the Pfennig website, by going to: www.dailypfennig.com That’s the one (Sunday Pfennig) that I kept talking about that was the best one I’ve done in a while.. So, how could you bypass “the best”? HA!

China printed their latest Trade Balance last night, and the report showed that the Trade Surplus that China prints every month had narrowed. But, it also showed that imports had grown strongly. That’s a good sign for domestic demand. So, this is where I put on my tin foil hat and wonder if this report was on the up and up? I can see the Chinese fidgeting the report to make it look like imports are good for the President- Elect to ponder, while he decides to name China “a currency manipulator” or not.. I’m just saying, I wouldn’t put it past them.

It’s been a week void of real economic data around the world, and one where the dollar had to stand on its own, and not get knocked down. But that all changes today, when December Retail Sales in the U.S. print. I’ve already told you that the BHI indicates that this will be a rip-roaring print today. Surging Auto Sales, and gasoline sales will really goose this number so high, probably about 1%. The consensus is for 0.8% growth, so see? I’m not gloom and doom all the time! HA! I think the data will beat the expectations.. And when we strip out the Auto & gasoline sales to what they call “control Retail Sales” we’ll still have a good report..

I think the forecasts for this data is what turned the dollar around last night. So the risk here is that the data disappoints, which I find to be highly unlikely, but should it disappoint, I would think the dollar would potentially go back to the chopping block.

Next week brings us the two-day visit to “the hill” by Janet Yellen to discuss the economy with lawmakers. This used to be a required visit, per the Humphrey- Hawkins bill, but that bill expired a very long time ago, and Greenspan, Bernanke, and now Yellen still honor that bill.. So, next week, the markets will have their collective ears to the ground, and waiting for Yellen to say something that they find market moving.

But let’s get through today’s Retail Sales report first. Well, I stirred up a hornet’s nest yesterday with my FWIW section talk about demographics. Those responding to me, stated that the world couldn’t handle the population we have now. So, bad demographics are welcomed. Well, that’s all fine and good, but, here’s the problem that I didn’t talk about, because, I really thought it was quite evident. When you have a retirement system (Social Security) like we have here in the U.S. it’s all about people paying the S.S. tax so that those that are pulling money from the system, have money to replace it. Us Baby Boomers, were a very large generation population, so when 10,000 of us retire every day for at least the next 13 years, we’re going to have to have the younger generations paying their S.S. taxes. And therein lies the problem. There won’t be enough of them to pay S.S. taxes that come close to replacing the funds that are being withdrawn from the retired Baby Boomers that now live longer due to better living through chemistry. But going further out, and I won’t be here to worry about it, but when the next generation gets to retirement age, well, let’s just say that I doubt there will be S.S. for them. For there won’t be enough S.S. taxes.

My good friend, the retirementor, Dennis Miller of www.milleronthemoney.com just wrote an excellent piece on Social Security, that you can read by clicking on the link above.. And if you are retired, or getting ready to retire, or just thinking about retirement, I strongly suggest that you sign up for his weekly letter.

Gold inched higher yesterday by nearly $4 at $3.90. And this morning, has Gold up $3. But when I looked at the price of Gold this morning, it was nearly identical as the price yesterday morning, so in reality, Gold was stronger yesterday than the $3.90 it gained at one point, but was not allowed to keep the $1,198 figure. So, the shiny metal is back at it this morning, pushing the envelope to $1,200 across the desk. I think that $1,200 is a psychological level for Gold, and should it get taken out I would think that Gold has the potential to run a little bit to higher ground.. Of course that’s my opinion and I could be wrong.

The price of Oil really rebounded in the past 24 hours. Just two days ago, the bubblin’ crude, black Gold, Texas Tea, was looking weak trading with a $51 handle, but two days later, the price of Oil has rebounded to trade with a $53 handle.. And the Petrol Currencies, led by the Russian ruble, are playing along with this rebound in the price of Oil.

Well, have you heard about PEXIT? That’s Poland breaking the peg for their currency, the zloty, to the euro. The zloty has been trading inside the ERM (Exchange Rate Mechanism) which allows a currency to float inside a band that’s tied to the euro. All the legacy currencies of Europe had to go through this process, and the zloty has been in the ERM for some time now, without converting to the euro. I find this interesting. And should the zloty be pulled from the ERM, then that would mean they could no longer convert to the euro, unless they started the process all over again.. And that, I find to be a real sticking point, here. And therefore I don’t see a PEXIT.

To recap. The dollar’s sell off yesterday morning fizzled out overnight, and the dollar has “consolidated its losses” But Chuck points out that in recent days, the currencies have seen their rallies perform much better than the dollar’s rebounds. Could it be the beginnings of the end of the strong dollar trend? December Retail Sales dominate the data today, and the BHI indicates that it will be a rip-roaring report. China’s Trade Surplus narrowed in a report that printed last night, but imports were stronger than expected, which is a good sign for domestic demand. And Chuck points out that Fed members were singing from the same song sheet yesterday about the Fed’s Balance Sheet..

For What It’s Worth. I read an article that asked why Wal-Mart and Boeing are laying off workers if the U.S. economy is in good shape.

Here’s a summary: Many major retailers are closing stores and laying off workers. USA Today reports that Wal-Mart is cutting approximately 1,000 jobs in its corporate headquarters by the end of this month.( http://www.usatoday.com/story/money/2017/01/11/walmart-layoffs-just-latest-retail-cuts/96450196/ ) And the LA Times reports that Boeing is engaging in employee buyouts in a number of its locations. ( http://www.latimes.com/business/la-fi-boeing-layoffs-20170111-story.html ) Finally, the San Diego Tribune reports that Petco will cut around 180 positions. ( http://www.sandiegouniontribune.com/business/retail/sd-fi-petco-layoffs-20170111-story.html )

This is precisely the point I’ve been making for over two years. If the U.S. economy is so strong, why are interest rates still below 1%? And why aren’t bond yields soaring higher? And now we have these store companies laying off workers, and big retailers like Sears and Macy’s and The Limited all closing locations..

Currencies today 1/13/17. American Style: A$ .7491, kiwi .7112, C$ .7666, euro 1.0644, sterling 1.2188, Swiss $.9915, . European Style: rand 13.5220, krone 8.5052, SEK 8.9256, forint 288.94, zloty 4.1102, koruna 25.4043, RUB 59.47, yen 114.82, sing 1.4278, HKD 7.7544, INR 68.22, China 6.9349, peso 21.79, BRL 3.1868, Dollar Index 101.31, Oil $53.08, 10-year 2.36%, Silver $16.88, Platinum $986.45, Palladium $763.30, Gold $1,198.50, and SGE Gold $1,210.86

That’s it for today. Yikes! Our Blues got whacked out in LA last night. That’s bad hockey, losing 5-1, and once again I point to what I feel is our weak spot: Goaltending. The next round of NFL playoffs kick off tomorrow. (pun intended!) I’m still pulling for the Packers and Steelers to play in the Super Bowl.. But realize that the Cowboys and Patriots will probably be there. I missed my colleague and friend, Mary Vance’s birthday this week.. I sure hope you had a grand day, Mary! (her birthday was last Saturday). I heard a rumor that the St. Louis office might get closed today, due to the ice storm.. Reminds me of ice storm we had 30 something years ago. I got to work (first one to arrive as usual) and as I went to make a turn into my parking spot, my car continued to slide off the parking lot and down a creek bed that ran alongside our office, when my car hit bottom, it flipped upside down, and there I was suspended by my seat beat, upside down, with water running through the car. The creek didn’t have a lot of water that day, thank goodness. So I have a deep respect for Ice-storms.. And there’s something else that I feel is important that marked 25 years when we turned the calendar to 2017.. .Can you guess? 2017, marks 25 years that I’ve been writing the Pfennig. That’s a long time folks.. A quarter of a century! The Jethro Tull takes us to the finish line today with their song: Aqualung. A classic rock song for sure! And with that, it’s time to get off this bus today, and send you on your way to a Fantastico Friday, and 3-day Holiday Weekend, which means no Pfennig on Monday! Be Good To Yourself!

Chuck Butler
Managing Director
EverBank Global Markets
Editor of A Pfennig For Your Thoughts
1-800-926-4922
https://www.everbank.com