A HUGE Currency Rally!
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In This Issue..

* Another currency rally....

* SNB cuts another 50 BPS!

* Budget Deficit continues to widen!

* Treasury yields go south for the winter!

And Now... Today's Pfennig!

A HUGE Currency Rally!

Good day... And a Tub Thumpin' Thursday to you! It's been quite the rally this week in the currencies led by the euro, which is like old times, eh? The Big Dog on the porch finally gets to stretch its legs and chase the dollar down the street! It's been a long time since we've seen this go on for more than a day. Yes, we've seen one day spikes, and even two day rallies turn into false dawns, but this one has lasted about a week now. Ever since last Friday's awful Jobs Jamboree, the tide has turned, and the Trading Theme that has held the currencies in a full nelson since the end of July, could very well be on the way out the door. I said that about the Trading Theme earlier this week, so I just wanted to repeat that to emphasize the point!

So... Yesterday, we saw the euro lead the currencies higher all day, with the single unit finishing the day in the 1.3050 area... I turned on the currency screens this morning, and what did my wondering eyes did appear, but the euro trading at 1.3170, and others bringing up the rear!

The Swiss National Bank (SNB) cut rates further this morning, bringing their internal rate to 1/2%, 50 BPS, that's it... So, one would think that bringing your interest rates to near zero, would NOT be a good thing for the currency, right? Well, in this day and age of rewarding a currency for lower interest rates to promote growth, that's not the case. The franc has rallied on the news... Of course it's probably just caught up in the euro's move higher.

Looks like the U.S. House of Representatives approved a $14 Billion package for GM and Chrysler, but the Senate has put some roadblocks out on this deal, and that puts the whole deal in jeopardy... A Final Jeopardy if you will for the contestants Gm and Chrysler! Notice I didn't include Ford. The people at Ford, backed out, and tried to put a 100 miles of desert between them and GM & Chrysler. Good for them!

Well, earlier in the week, the glimmering light of the bailout for the Big 3, helped the currencies... But now that the Trading Theme seems to be taking its last breaths, the news of the bailout in jeopardy, has helped the currencies, as this would mean that we could finally be back to focusing on fundamentals! Could we really? Is it possible? Well, maybe if you're real good and take a nap... No wait, that's what I used to tell the kids on Christmas Eve! It IS possible... But we need a few more days of what we've seen so far this week to confirm the Trading Theme to be a thing of the past.

Speaking of things of the past... A Bank of New York (BONY) strategist, issued a statement saying the, "Carry Trade is Dead and Buried." Hmmm... I beg to differ with him on that, for if we get investors and traders focused on fundamentals again, and the risk takers come out of the woodwork again, the Carry Trade could very well be on the burners again... But then, I do see his thought here and that is (I think it is) that if every Central Bank is cutting interest rates to the bone, there won't be any "high yielders" left to buy on the buy-side of the Carry Trade. Well, let's see now... Aussie and New Zealand were the BIG WINNERS of the last Carry Trade craziness, and their rates are lower, but still 3 and 4 hundred basis points above those in Japan, Switzerland and the U.S.! But, the Carry Traders might have to look further, and do some additional leg work this time to find the "high yielders" like... Brazil, and India...

OK... I came across this story yesterday and really had my blood boiling... I wanted to talk to the Big Boss Frank Trotter about it and get his thoughts, but the poor guy was tied up on the phone all day, well, all day that is, until I left to go home! Anyway, here's the base story, that the entire piece can be read here: http://www.cnbc.com/id/28153817/

The U.S. Federal Reserve is considering issuing its own debt for the first time, the Wall Street Journal said, citing people familiar with the matter.

"Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis."

NOW WAIT JUST A MINUTE THERE BIG BEN! This is the bailiwick of the Treasury Dept, issuing debt! You've already got the printing press for currency, and now you want to issue your own Debt? This is complete madness I tell you, complete madness! I think the Fed is thinking of ways to deal with deflation...

Oh well, apparently, Big Ben can do whatever he pleases these days, the new President has named an "energy Czar" and the automakers might get a "Car Czar", the new President had better think about naming a Fed Reserve and Treasury dept Czar!

OK, yesterday's printing of the Monthly Budget Statement saw the monthly deficit not "as bad" as forecast, with the figure posting a $164.8 Billion deficit, instead of $171 Billion as forecast... That's still really bad folks, let's not get caught up in the media spin of talking about how it "wasn't as bad as forecast"! Let's focus on the fact that for the second consecutive month the Budget Deficit widened... And this month it went from $98 Billion in October to $164.8 Billion in November!

Of course you know why this is happening, right? No? Ahhh grasshopper... Recall the bailout money? Well, whenever any of it is spent, it will show up here! Want even further bad news here? Government revenue fell 4.2%, while spending soared 24%!

The Treasury Dept has written checks on all but $15 million of the first half of the $700 Billion allocated to help financial institutions.

So, as I said the other day when I mentioned that the President-elect's plan to spend more money on infrastructure since 1950 might be the right thing to do at the wrong time... We've got the deep, dark recession going on, the Credit Crisis and this collapse of revenue... But don't let that stop him! Why would we want to stop with the deficit spending here? I shake my head in disgust!

Today's data cupboard has the Trade Deficit for November, which should narrow, given the collapse of the Oil price. That and the recession should allow the Trade Deficit to narrow... But, let's not get caught up in the media spin on this too... You see, the Trade Deficit is still $53 Billion, which annually is $636 Billion... Which is probably right about where it will end out this year...

And... $53 Billion still needs to be financed! Let's not forget that little ditty!

I just watched the euro gap up to 1.32... This is a rout like I've not seen since last summer! And wouldn't you know it, here it is, and I'm going on vacation! Oh well, maybe the old adage that the currencies rally when Chuck's away, will come back!

I just can't pass up on this one though... And I know the legal beagles will be all over me on this, but here goes... This certainly looks like the Santa rally that I talked about earlier this week, eh?

I know, I know, it could all be reversed in a New York Minute, but you've seen these types of routs before...

Another currency on the rally tracks this week is the Chinese renminbi... After all the "bad talk" about China last week, the Chinese have said, "you'll be sorry"! What I'm talking about here is the fact that everyone is dissing the renminbi right now, and selling it, and pushing forward contracts down in value... And the Chinese, because they can, have moved the renminbi higher VS the dollar this week! There! In Your Face, disgrace!

So... What's everyone thinking these days buying Treasuries? I mean, the yield on a 3 month T-Bill is 1 BP! You have to go out 30 years in a Treasury Bond to get 3% yield! OUCH! But, investors keep buying! Well, I think what you've got going on here is simply the fact that all this repatriation of dollars has investors with tons of cash, that they don't want to put into banks, (for a number of reasons, like FDIC insurance limits, shaky banks, etc.) So, they put the cash into Treasuries, realizing that they may not earn any interest, but it will be there when they want it at some point in the future. And this "point in the future" is what scares the bejeebers out of me! Because when the icing is off the cake here, there will be a swift exodus from Treasuries, as no one will want to be the last man standing here... UH-OH! Just be careful folks...

The weekly Initial Jobless Claims will also print this morning. We've seen a huge increase to average above 500K in the Weekly Initial Claims, and that should hold true today. This isn't a good thing folks...

Well, the rally this week hasn't been cornered by currencies... The Commodities have come back too! Oil is up $2, but the real meat here is the rally in Gold! Gold this morning is perched above $827, when it was sitting at $770 just a week ago!

Currencies today 12/11/08: A$ .6660, kiwi .5525, C$ .8015, euro 1.3235, sterling 1.49, Swiss .84, ISK 215.50, rand 10.13, krone 6.95, SEK 8, forint 199, zloty 3.01, koruna 19.64, yen 91.30, baht 35, sing 1.4890, HKD 7.75, INR 48.30, China 6.8515, pesos 13.30, BRL 2.3950, dollar index 84.33, Oil $45.50, Silver $10.46, and Gold... $832

That's it for today... And for me until after Christmas... I'll probably send Chris notes from time to time, but I really don't expect to be monitoring the markets THAT much while on vacation! And of course, I'll attempt to write a Christmas Pfennig, which has been a tradition that goes back to 1992! I've got the Review & Focus to do while on vacation and my "other" newsletter, the Currency Capitalist to do too! Don't know what I'm talking about there? Well, for new readers, I was honored to be asked to be the main writer for a "paid for" newsletter that is published by the Sovereign Society, called the "Currency Capitalist"... So, I've got "all that" going for me! My little buddy, Alex, is still sick, poor guy, he was supposed to be playing in the 7&8th grade jazz ensemble concerts last night... It's beginning to look a lot like Christmas, as the house gets decorated, and we will finally go to cut down our Christmas tree on Sunday. (Hope Alex is better by then!) This is late for us, as we normally put up our tree earlier in the month! I love a Christmas Tree in the house! OK, I've carried on enough, Mike's here, Mary's here... I'll head out now... I'll leave you with the note I put in the December Review & Focus...

I wish everyone a joyous Holiday Season. Myself, I celebrate Christmas, and say Merry Christmas in hopes that it doesn't offend anyone that doesn't celebrate Christmas.

May the light of faith, the warmth of heart, and the love of family be your gifts this year...

Chuck Butler


EverBank World Markets



Posted 12-11-2008 9:00 AM by Chuck Butler