Chris Gaffney

Good day. What a weekend here in St. Louis. I spent a majority of it outside, and we even ate dinner last night out on our deck, something that is not normal during the month of March. I enjoyed the scent of my wife’s lilac bushes as I was sitting outside last night, reading up on the currency markets. The research pointed to poor housing data Friday morning as the reason for the drop in the US dollar on Friday.

Purchases of new homes in the US fell unexpectedly in February, dropping 1.6% after a revised 5.4% drop in January. This data confirmed the housing recovery in the US is not as solid as some had thought. Friday’s numbers ended a week in which we saw drops in housing starts, existing home sales and new-home sales for the month of February.

The only positive sign for the housing market last week was the data showing building permits jumped, probably due to the unseasonably warm weather. The housing market is still struggling to gain momentum as the massive amount of foreclosures and potential foreclosures continue to hang over the market like the Sword of Damocles.

We will see the final piece of US housing data for the month of February this morning, with the release of pending home sales in the US. Sales are expected to have increased 1%, following a 2% increase in January. Indexes showing economic activity in the Chicago and Dallas areas will be released by the Federal Reserve banks in each of these regions.

Tomorrow will bring a report on US consumer confidence, which is predicted to have dipped slightly, along with a report from the Richmond Fed. Wednesday, we will get what most are saying is the most important piece of data for the week, durable goods, which is expected to show a 3% increase after posting a disappointing 3.7% drop in the previous month.

Thursday will bring an estimate of fourth-quarter GDP here in the US, along with personal consumption, the Kansas City Fed Manufacturing Index and the weekly jobs data. Economists are predicting the GDP estimate will remain at a respectable 3%. And Friday will close out the week with personal income and spending, the University of Michigan confidence numbers and PCE data. Lots going on this week, which should keep the currency markets jumping.

A report released this morning has pushed the euro (EUR) back above $1.33. The report showed German business confidence unexpectedly increased in March, to an eight-month high. The Munich-based IFO said today its business climate index increased to 109.8, from a revised 109.7 in February. This report offsets an earlier report last week, which showed German manufacturing output unexpectedly contracted as European governments and consumers reduced spending.

Another report showed French sentiment also jumped more than expected. Sentiment among factory executives rose to 96 from 93 in February, and economists had predicted the number would remain unchanged. This was the first consecutive monthly increase in more than a year. The confidence numbers indicate business leaders are now looking past the sovereign debt crisis — a very positive indication for the euro.

But another story I read this weekend suggests the EU debt crisis is just taking a short nap, and could re-awake at any time. Italy’s prime minister, Mario Monti, seems to be poking at the sleeping dog with his warning of a Spanish debt default. Monti pointed to Spain’s struggle to control its finances ahead of an EU finance ministers meeting at the end of this week. The finance ministers will be looking for an agreement to increase the 500 billion euro ceiling on the bailout funding, and Monti’s comments were certainly not well timed. Perhaps he is trying to deflect some attention away from problems in his home country?

No matter what the outcome of this week’s meetings, the euro debt crisis is far from over, and I have to believe we will be discussing it for the foreseeable future. Not promising for the near-term prospects of the euro.

Friday brought a bit of a jump to the commodity currencies, with the South African rand (ZAR) and Norwegian krone (NOK) leading the pack. The gain in the value of the South African rand was the first in four days, and helped to trim its worst weekly loss in over six. Stocks and raw materials prices gained on Friday, helping push currency investors back into the commodity-based currencies. These currencies had been sold earlier in the week, so some saw the recovery simply as a bounce back from an oversold position.

Norway’s krone rallied as oil prices surged over $3 a barrel. A Reuters report predicted Iranian oil exports will drop by 300,000 barrels a day this month due to tighter sanctions, sending the price of crude higher. This concern offset an announcement earlier in the week by the Saudis who said they would keep a lid on the recent rise in oil prices by increasing production. The US is pushing China, India and 10 other nations to make further cuts to their Iranian oil imports in an effort to get the Iranians to drop their pursuit of nuclear weapons. Norway continues to be a major supplier of crude oil to Europe, and the recent rise in the price of oil should have a positive impact on the Norwegian economy.

Another major oil producer that should be benefitting from the higher oil prices is Canada. But the Canadian dollar (CAD) fell on Friday after a government report showed the annual inflation rate increased last month less than forecast. The slower inflation data follows a report released Thursday that showed retail sales in Canada were slower than expected. These two reports have currency investors scaling back earlier predictions that the Bank of Canada will be increasing rates this year. Bloomberg data on swap rates suggest a 39% chance of a rate increase by year-end and a 57% chance of no change. The reports sent the Canadian dollar back below parity with the U.S .dollar. It will be interesting to watch the tug-of-war between rate expectations and the price of oil, with a pretty high likelihood that the loonie will remain right around $1.00.

The New Zealand dollar (NZD) moved higher over the weekend after imports dropped, pushing the trade balance into a surplus. Exports exceeded imports by NZ$161 million in February, from a revised NZ$159 million deficit in January. The kiwi is the third-best-performing currency this year, rising over 5.75% vs. the US dollar. No. 2 is the South African rand, which is up over 6.25% versus the US dollar this year. The No. 1 performing currency is the Mexican peso, which has gained almost 10% versus the dollar.

According to Latin America’s most accurate currency forecaster, this double-digit increase in the value of the peso is just the beginning. Currency strategists at Standard Chartered Bank, who are the top forecasters for Latin American currencies, according to Bloomberg Rankings, predict the peso will rise another 8.6% by year-end. The currency is still trading at 55.9% below fair value against the dollar based on purchasing power parity, so another increase of 8.6% doesn’t seem that much of a stretch.

Gold is looking like it will close out the month with a slight loss, but has put together three straight days of gains. Concerns over Chinese growth had put pressure on the price of gold earlier last week, but the metal is finding some support after last week’s fall. Gold has been trading below the 200-day moving average for the past two weeks, which is typically seen as a bearish indicator. But a move by the metal above $1,680 would push it out of the bearish technical pattern, and could confirm a new bullish run. Both gold and silver are up this morning, so the week is starting out positive for precious metals investors.

Then there was this: We are in the last week of our conversion to a new core banking system for the WorldMarkets area. It is a project I have been working on for over three years, so I am more than excited to see the new program go live. In celebration of the move to the new system, I have decided to point out a few of the improvements WorldMarkets investors will see with the new system. Those of you who aren’t WorldMarkets investors (I question why you aren’t) will just have to bear with me. One of the biggest improvements of the new system is more up-to-date pricing indications in the Online Financial Center. Previously, the values shown for the WorldMarkets assets were calculated using end-of-day prices from the previous day. The new system will update prices on these assets throughout the day, giving EverBank WorldMarkets investors a better indication of the values of their foreign currency and metals holdings.

To recap: The housing data were disappointing on Friday and sent the US dollar lower versus most major currencies. This week is chock-full of data, and could lead to some volatile currency markets. German and French confidence numbers came in stronger than expected and helped boost the euro. Norway’s currency rallied as oil added $3, but the Canadian dollar, which is another “petrol currency,” didn’t participate in the rally. The kiwi moved higher after New Zealand reported a trade surplus. The Mexican peso has been the best-performing currency this year, and could double its return by the end of the year according to analysts at Standard Charter. And gold continued to march back up, pushing through a very important $1,680 price point.

Chris Gaffney
for The Daily Reckoning

Chris Gaffney

Chris Gaffney is vice president of EverBank World Markets and the alternate author of the popular Daily Pfenning newsletter. Mr. Gaffney has been involved in the global marketplace since 1987, and is director of sales for EverBank World Markets. The Daily Pfennig is delivered via e-mail to tens of thousands of market watchers globally, providing commentary that allows them to stay on top of economic, currency, and market happenings. He is a Chartered Financial Analyst and holds degrees in accounting and finance from Washington University in St. Louis.

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