Santa rally for the currencies...
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In This Issue..

* A Santa Rally for the currencies?...

* Waiting for the FOMC...

* AUD and NZD rally...

* China to try and keep growth above 8%...

And Now... Today's Pfennig!

Santa rally for the currencies...

Good day...It was actually a Great day for the currencies yesterday as the dollar index dropped another full point. The Euro moved past $1.35 and then blew through $1.36 to end the day over $1.37. And the Euro wasn't even the best performer, as the New Zealand dollar rallied over 2.1% vs. the US$ to take the title of best performing currency against the greenback. The South African rand was the only currency turning in a negative performance yesterday with the other commodity driven currencies of Norway and Brazil just barely holding their ground vs. the US$.

The currency rally caught Chuck's eye and he fired off the following email for me to include this morning:

"Quite a day in the currencies again... Looks like that Santa Rally for the currencies that I first mentioned on December 8th, is coming to fruition. Of course "I didn't know this would happen" I was just giving market commentary on what looked like was happening!

So... 1.37 and change for the euro, the move from 1.27 and change has been swift and fast. And why not? I've said all along that the dollar's rally was just a bear market rally. Now, we'll have to see if this can continue, which I believe it will, or if this was just a false dawn.

Well... It's Christmas time, so the giving is going on... And it looks like we'll see the Gov't "give" more once the calendar turns to 2009. What was once a $150-200 Billion stimulus package that would be sent through in January when the new lawmakers take their oath, now looks as though it will be in the neighborhood of $600 Billion, that is according to Nancy Pelosi who made that announcement yesterday. Shoot Rudy! What's another $400 Billion among friends?

By my calculations, that will put us nearer to $3 Trillion in bailouts and stimulus packages... There's a total of over $8.5 Trillion that has been allocated with funding facilities, but the actual output of cash is around $2.5 Trillion before the next deal in January gets done.

No wonder the dollar is getting pummeled once again!

I did a 1 hour interview yesterday... It was a "the world according to Chuck" interview... Long time readers all down about what I probably had to say, but it was cool getting to go "free form" and just let it all hang out. I will go to my darling daughter's (Dawn) kindergarten classroom tomorrow and read to them... Dawn has always been a fan of the way I read, The Night Before Christmas... And her kids always get a kick out me doing this, most of them think I AM Santa Claus!"

Chuck loves the holidays, and I think reading to the kindergarten class is one of his favorite parts!

Today the markets will be awaiting the FOMC rate decision and the accompanying statement which should be released around 1:15 CST. As I stated yesterday, a cut of 50 basis points is already cooked in, but noise from the street indicates we could actually see a 75 basis point cut. The market is currently trading Fed Funds at .125%, so a drop of 75 basis points would move the target very close to where the market is trading. But as we have said in past Pfennigs, the FOMC has almost used up all of their interest rate ammunition, and will have to look for other ways to try and steer our economy out of the recession. The markets will be looking at the accompanying statement for any guidance as to the direction the FOMC will take next. 'Quantitative Easing' will be the big buzz words of the next few weeks. We will just have to wait and see just how creative our Fed is going to get.

The Fed will start to use its balance sheet as the key tool for monetary policy. Since he can't cut rates much further, Ben Bernanke will likely start channeling credit directly to businesses and consumers by further enlarging its $2.26 trillion of assets. Bernanke and his compatriots will have to try some new experiments to manipulate the supply of money to try and prevent the worst recession in a quarter century from turning into a depression.

The data released yesterday continued to indicate the US economy is faltering, as the Empire manufacturing and Industrial Production numbers showed pretty large losses. Industrial Production decreased by .6% during November, as US manufacturing output continues to fall. Production has now decreased 7 out of the last 11 months, and the more important Capacity Utilization number also fell. We won't be seeing the manufacturing sector pull us out of this recession any time soon, as the utilization number shows we are only using 75% of our manufacturing capabilities.

The manufacturing numbers were bad, but these negative numbers were largely expected. The surprise of the day came as the Net Long-term TIC flows for October were released. TIC flows were expected to be right around $40 billion, just slightly below what is necessary for us to fund our deficits. But the actual TIC flows were barely positive at just $1.5 billion. Could the rest of the world finally be tiring of our US Treasuries? Actually, foreigners continued to purchase treasuries, but sold a record amount of debt issued by mortgage-finance companies Fannie Mae and Freddie Mac and other agencies, offsetting the treasury purchases.

So investors were shortening up the duration of the US$ holdings, selling longer term securities to buy short term treasuries. This has to have the Fed shaking in their boots, as no investor buys short term paper at near zero rates with a plan to hold them. This money is being parked short term, and will move out of the dollar as soon as the markets start to calm down. China remained the biggest foreign holder of US Treasuries, after its holdings rose by $65.9 billion to nearly $653 billion. Japan is the second largest holder with nearly $586 billion of US debt.

For those of you who may be wondering why the TIC data is so important, this is how we finance our deficits. As Chuck reported last week, the US trade gap unexpectedly widened 1.1 percent in October to $57.2 billion. Yesterday's numbers show we only were able to attract $1.5 billion of foreign capital to finance this gap. So the remaining balance had to be financed with additional debt. It seems we just keep digging the hole deeper and deeper!!

The Euro was helped out by ECB President Trichet who indicated he would pause interest rate cuts in 2009. Trichet told journalists in Frankfurt that ECB policy makers want to "concentrate at this stage on getting what we already decided to be really operational." He went on to say there is a limit to how far the bank can cut rates. "Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes." Sounds like the ECB doesn't want to follow the US into the zero interest rate environment. Maybe Trichet and his colleagues realize just how dangerous a zero rate policy can be with regard to future inflation.

Data released this morning caused the euro to back off its high of $1.3737 as reports showed European manufacturing and service industries contracted at the fastest pace in at least a decade. These reports showed the Eurozone faces some of the same challenges as the US, but in my opinion, their central bank has done a better job of dealing with the slowdown. With the FOMC cutting rates today, and the ECB indicating that they are going to pause, the Euro will likely continue to gain back some of the losses of the past 6 months.

The Australia and New Zealand dollars both rose for a second day on interest rate differentials. The Australian dollar extended gains after the central bank indicated it would slow the pace of further rate cuts. The Reserve Bank of Australia trimmed its forecast for inflation to 2.5 percent from a November prediction of 3 percent. Policy makers have a target range of 2 and 3 percent for Aussie inflation. With inflation in their target range and a simulative monetary policy, the RBA doesn't need to do much more with rates. Commodity prices have hurt both the AUD and NZD, and any increase in commodity prices during 2009 would have a big positive impact on both these currencies.

Any hope for commodity prices will center around the rebound of the Chinese economy. China's central bank Governor Zhou Ziaochuan continues to call for aggressive action to keep China's growth rate from dropping below 8%. The Chinese govt. pledged last week to boost liquidity after cutting interest rates last month by the most in 11 years to spur lending and consumption. China's economy has slowed, but will likely grow at 6 percent during 2009. This is still an excellent growth rate for the world's fourth largest economy, but below the 8% rate many believe is necessary to avoid social instability.

Currencies today 12/16/08: A$ .6694, kiwi .5589, C$ .8102, euro 1.3659, sterling 1.5246, Swiss .8661, ISK 218, rand 10.3118 krone 6.9629, SEK 8.0583, forint 195.84, zloty 2.9716, koruna 19.319, yen 90.01, baht 34.78, sing 1.4781, HKD 7.7502, INR 47.91, China 6.8457, pesos 13.3631, BRL 2.39, dollar index 82.16, Oil $45.02, Silver $10.49, and Gold... $832.77

That's it for today... We got another blast of winter weather overnight, with single digit temperatures and a mix of ice and snow. The weather is tough on commuting, but it sure puts you in the mood for Christmas! We were slammed on the desk yesterday, as Mondays are always busy and we were a little short handed. Looks like today will be much the same, so I better get logged into the phones. Hope you all have a Terrific Tuesday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 12-16-2008 12:46 PM by Chuck Butler