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Tax Reform Talk Gooses The Dollar.

* The dollar fights back.
* Banxico hikes rate 50 Basis Points! ..
* China posts strong trade numbers!
* Gold gets whacked.. AGAIN!

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

Good Day. And a Happy Friday to one and all! It’s Friday! YAHOO! Of course I remember when I “retired” the first time in 1998, and I realized that when you are “retired” or out of work, weekends don’t mean anything, and you don’t look forward to them, that is unless you have something planned on a Saturday or Sunday. Other than that, those are just, days. The letter should be short-n-sweet today, as there’s just not much to talk about, but you know me, I’ll find something to harp on! HA! I’m greeted today by the Cowsills and their song: The Rain, The Park, and Other Things. Let’s see, testing the limits of music genres, from King Crimson, to Frank Sinatra, to The Temptations, to the Cowsills.. That’s me!

Let’s see here.. Well, a Trump / Abe meeting and joint press conference headlines today’s events. This meeting holds the risk of turning contentious, but, I doubt that it will, as Japan has smoothed the feathers ahead of the meeting by stating that they are interested in assisting the U.S. with financing of the infrastructure and defense spending.. Of course, if I were the U.S. President, I would ask Abe (Japanese PM) where he was going to get the money, given his country’s debt is already at more than 2 times their GDP.. Details, details, that’s you Chuck, always getting hung up on the details! Anyway, that’s what’s trending this morning, and has everyone’s attention.

The U.S. President’s team announced their plans for tax reform yesterday, and that really lit a fire under the markets.. Stocks soared, bond yields rose, and the dollar changed the bias to sell to a bias to buy.. Why? Well, because when I say “tax reform” I should say “tax cuts”.. Now, longtime readers know my dislike for taxes. And I love tax cuts. When a country can figure out how to do without adding to debt, of course.. Let me see here. When Reagan cut taxes, the dollar went into a multi-year weak trend, helped of course by the Plaza Accord in 1985. And when Bush II cut taxes the dollar went into a multi-year weak trend, helped of course by the placing of tariffs on Japanese Steel in 2001.. So, will history rhyme here? I don’t know why not!

The markets didn’t see it that way though, and soon the dollar was back to kicking sand in the collective faces of the currencies and metals. The euro briefly fell below 1.06, yen moved to a 113 handle from 112, and Gold lost $13.20 on the day. And bond yields rose, in swift one-day move, with the 10-year Treasury’s yield rising from 2.36% to 2.41%. The price of Oil bucked the trend, and rallied VS the dollar, returning to a $53 handle. Overnight, though, the euro has fought back and if you didn’t know about yesterday afternoon’s brief drop below 1.06, you would say, “look the euro is trading in yesterday’s clothes again”..

The markets looked at the proposed “tax reform” as manna from heaven for the U.S. economy. And an economic boom would bring about higher interest rates to combat inflation pressures. But don’t let that get in the way of the cheerleading going on for an economic boom.. But that was yesterday, when all my troubles seemed so far away, now it looks as though they’re here to stay. Ahhh, Paul McCartney on a Friday morning!

So, like I said above, overnight the euro fought back, but the move in the yen hasn’t changed, and that has the Dollar Index moving in the wrong direction this morning at 100.78 (yesterday morning it was 100.21).. As I’ve explained many times in the past 25 years, the Dollar Index is a combination of currencies of countries that are major trading partners with the U.S. The problem with just using the Dollar Index is that it is so heavily weighted with euros As all the legacy currencies of the Eurozone were converted to euros 17 years ago. The other problem with the Dollar Index is that it’s “outdated” It should include the Chinese Renminbi, for China is a major trading partner of the U.S. and I would also suggest that it included the Aussie dollar (A$) instead of the Swedish krona.. But when you just want a “quick take” on the what the dollar is doing, a peek at the Dollar Index will suffice..

Speaking of currency manipulation talk.. I had a chuckle over this article.. Germany, which happened to get in the crosshairs of the President’s National Trade Council chief , Navarro, last week due to the euro being so weak, posted a record Trade Surplus for 2016! Germany posted a Trade Surplus for 2016 of euro 253 Billion, which was a result of a 1.2% increase in exports.. So.. take that Mr., Navarro! I can see the German Trade minister, calling Navarro, and saying, “How do you like me now?” HAHAHAHAHA!

Hey! I was bang on with my thought yesterday that Banxico (the Mexican Central Bank) would hike rates 50 Basis Points at their meeting last night! Mexico’s internal rate is now 6.25%, but still probably 3 or 4 percentage points below where I think they would need to attract foreign investment and have that “risk premium” that I talked about yesterday, for the umpteenth time over the years. Oh, and the peso couldn’t muster a rally that you would think would come with a 50 Basis Points rate hike! Thus proving my point..

In China overnight, the renminbi was allowed to appreciate, and actually has had a nice week of appreciations after a one-day drop on Tuesday.. Overnight in China we saw the Chinese January Trade Data, which showed strong results in exports and imports. Exports grew 16% year on year, and Imports grew 25% year on year! However, both components of the report were skewered or affected by the timing of the Chinese New Year holiday.. As the holiday was later this year, than last year. So there were more days in this year’s data than last year..

But, the markets didn’t really care about that detail (there you go again with the details, Chuck! ) So, you had the Trump administration talking tax reform, China printing a strong trade report, and an upcoming meeting today between the U.S. and Japan where currency manipulation talk apparently is not on the agenda. (bearing in mind that Trump said, “they (China and Japan) play the devaluation market and we sit there like a bunch of dummies”) You would think that currency manipulation would be on the agenda when the leaders of the U.S. and Japan meet, but we’ll see!

But yen is weaker ahead of the meeting, just in case, the best laid plans of mice and men change today. But yen is the outlier this morning.. As I was saying above, with those things happening or have happened overnight, the bias to buy dollars is changing, but the change is taking some time, sort of like how long it takes for one of those HUGE ships to turn around!

The Reserve Bank of Australia (RBA) printed their most recent Statement on Monetary Policy (SOMP), and it was mixed. The RBA did lower their growth forecasts, but kept the tone of the statement upbeat, and not dovish in any way. And their inflation forecasts did not change, and that’s the key to the markets, who were looking for any signs that would lead them to believe that interest rates were moving in either direction. So, with a mixed message, that still leaned toward the idea that the rate cut cycle is over, the A$ got on the rally tracks.

The pull from the A$ wasn’t enough to help kiwi, which was still reeling from the night before, when the Reserve Bank of New Zealand (RBNZ) left their easing bias in place, when the markets were hoping for signs of a rate hike.. It’ll take a few days for kiwi to recover and this easing bias mess passes under the bridge.. I still say that given the idea that the rate cut cycle is over in New Zealand, which means the next move, whenever it comes, will be a rate hike, and the currency is currently taking a dip in the lower prices pool, that this could be an excellent opportunity to buy at cheaper levels ahead of a rate hike.. You don’t always get these kinds of opportunities, because when it appears that a rate hike is coming, the markets get out in front of it and run up the price of the currency.. Of course that’s all my opinion and I could be wrong.

The price of Oil bounced higher yesterday, and is trading with a $53 handle once again. this bouncing between $51 and $54 is getting old, with me folks.. But it is what it is, which doesn’t mean I have to like it! But, a range bound Oil price is better than a sharp stick in the eye, as my longtime friend, and Big Boss, Frank Trotter, likes to say.. But the range bound Oil price does keep a lid on how far the Petrol Currencies can roam about the country.. Of course, with the move higher in the Oil price in the past 24 hours, the Petrol Currencies, led by the Russian ruble are smiling this morning.

And Gold.. What the heck happened here yesterday? We were going along just fine and dandy early yesterday morning with Gold rising a buck or two, and then BANG! $10 bucks off the price of Gold in the next 30 minutes, just like that! Hall and Oates sang, “she’s gone, oh I had better learn how to take it, She’s gone, oh I’d Pay the Devil to replace her.” That’s what I kept singing in my head yesterday as I watched “Da Boyz” as Ed Steer calls the paper traders, take $10 Bucks off the price of Gold in a matter of minutes. Oh well, this is the thing I keep coming back to, whenever Gold gets whacked like this, after stringing together days of increases, that these price drops gives everyone an opportunity to buy at cheaper levels.. You know that’s me, looking at the glass half-full.. Like when my darling daughter, Dawn, who loves to track weather, says, “there’s a 35% chance of rain” I reply, but there’s a 65% chance of no rain!

Well, I didn’t hold my thought of a short-n-sweet letter today, did I? I knew I would find things to talk about, and then carry on like I always do! Carry on my wayward son, there’ll be peace when you are done.. – Kansas

The U.S. Data Cupboard has a couple of second Tier reports today, and a speech by Fed member, and the voice in Janet Yellen’s right ear, Stanley Fischer.. Yesterday’s speeches by Bullard and Evans didn’t yield any sound bites, so let’s hope Fischer’s keeps with the previous fed member speeches.. The second Tier reports today are the Import and Export prices, Consumer Sentiment, and the Treasury Budget. But not much in the way of market moving stuff, so we’ll just move on now..

Before I head to the Big Finish today, I want to carve out a special mention to a very good friend of mine, and my longtime mentor, and boss, Frank Trotter, who will be retiring from EverBank after our pending acquisition by TIAA is completed. . Yesterday, EverBank made this announcement: “Frank Trotter: Chairman of EverBank World Markets, will retire when the transaction closes. Widely admired for his insight as a globe-travelling economist and financial writer, Frank has left an indelible mark on EverBank’s entrepreneurial culture and we wish him all the best on what we know will certainly be a busy next chapter in his career.”

Frank is and absolutely terrific person. A friend to many, and an enemy to none, Frank can be the perfect gentleman, or a rock-n-roller, and can use Jedi mind tricks on anyone!

As many of you know, earlier in his career, Frank was the driving force behind the startup online only bank, I know Frank very well, and know that he certainly will not be taking it easy in his retirement and, will find a new endeavor to be successful with, in the future. I’m certain of that! He has ALWAYS been behind me and the Pfennig, and I mean ALWAYS, and for that I’m very grateful, and I thank my lucky stars just about every night that years ago at Mark Twain Bank, Bob Butler (no relation) introduced this young man in the Olive green khaki suit with a pink tie, to me.. It was Frank Trotter of course, and from there a longtime relationship grew. So.. good luck with whatever you decide to do next, my friend.. I know you’ll be great at whatever it is you do!

To recap.. Tax reform talk got the dollar out of the doldrums yesterday, and goosed the stock markets, sent bond yields higher, and pushed Gold down by $13.. China posted strong Trade numbers but they were influenced by the Chinese New Year Holiday timing, but still they were strong, and that helped the Chinese to allow an appreciation in the renminbi overnight. Banxico hiked rates 50 Basis Points, but the peso couldn’t muster a rally , that one would normally see with a 50 Basis Points rate hike. RBA’s SOMP lowered their growth forecast, but never really sounded dovish, and so the A$ rallied!

For What It’s Worth.. OK, so there’s been a lot of talk about whether or not Germany is responsible for the weak euro, which helps their trade oriented economy.. I’ve made my thoughts on this perfectly clear. But today’s FWIW is an article from Reuters, that discusses how Germany actually wants a stronger euro! You can read it here:

Or, here’s your snippet: ”
Germany prefers a stronger euro and higher interest rates in the single currency bloc, Deputy Finance Minister Jens Spahn said, responding to claims by the United States that Europe’s largest economy was exploiting the exchange rate to boost trade.

“When one considers only the German economic situation, the euro is too weak at the moment and the rates are also too low,” Spahn said in an interview with public broadcaster ZDF to be aired on Thursday.

The European Central Bank (ECB) has been buying bonds, holding rates in negative territory and giving banks free loans to fight anemic growth and inflation. Its expansionary policy has been criticized by some German politicians, notably Finance Minister Wolfgang Schaueble.”

Spahn went on to say, “One thing is clear: the value of the euro, as well as the interest rates in Europe will not be influenced by Germany. The U.S. is accusing us of wanting to keep the rates artificially low. The government has nothing against rising rates.”

Chuck again.. Makes sense to me.. And it’s what I’ve been saying all along! But does anyone listen to me?

Currencies today 2/10/17. American Style: A$ .7645, kiwi .7187, C$ .7610, euro 1.0640, sterling 1.2505, Swiss $1.0028, .. European Style: rand 13.3110, krone 8.3685, SEK 8.9073, forint 289.62, zloty 4.0410, koruna 25.3822, RUB 58.97, yen 113.80, sing 1.4211, HKD 7.7579, INR 66.73, China 6.8673, peso 20.30, BRL 3.1192, Dollar Index 100.78, Oil $53.49, 10yr 2.41%, Silver $17.61, Platinum $1,018, Palladium $773, Gold $1,228.80 and SGE Gold $1,250.98.. (all caught up now from the week-long holiday)

That’s it for today. Well, it’s down to the crunch now folks.. have you secured your gift for your sweetheart? VD is next Tuesday.. it’s also the day that pitchers and catchers report for Spring Training.. I read where the Cardinals loaded up the trucks this week and headed for Jupiter.. it won’t be long, yeah, yeah, yeah, year, it won’t be long yeah.. 15 days until the first Sprint Training game! That’s when I return to the ballpark, walk in, see the green grass, smell the hot dogs cooking, and hear the sound of the ball on the bat and in the leather gloves, that I get goosebumps, look up to the sky, and thank the Good Lord for allowing me to live and be a part of another Spring Training. That means I have 15 days to get my back pain straightened out, or I’m going to have to exchange my seats in the shade for some handicapped seats! OK.. I spent a lot of time on this today, so you had better read it and like it! HAHAHAHA! George Harrison takes us to the finish line today with his song: What is Life? From the All Things Must Pass album, one of his best! Now, let’s put the news of Frank Trotter leaving EverBank aside, and see if we can still make this a Fantastico Friday! And don’t forget to Be Good To Yourself!

Chuck Butler
Managing Director
EverBank Global Markets
Editor of A Pfennig For Your Thoughts

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