Santa rally continues...
Daily Pfennig

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In This Issue..

* Santa rally continues...

* Norway cuts 175 basis points...

* Japanese intervention possible...

* Indian rupee moves up...

And Now... Today's Pfennig!

Santa rally continues...

Good day... The dollar is falling much faster than it rose, the euro surged over 6 cents vs. US$ since yesterday at this time. The 5 day return chart for the major currencies vs. the US$ is pretty impressive: Swiss Franc +12.55%, Euro +9.5%, Danish Krone +9.44%, New Zealand $ +8.41%, Australian $ +5.08%, Swedish Krona +4.85%. And it continues. The past two weeks have been the most dramatic move by the dollar that I can remember. The dollar index, which tracks the US$ vs a group of major currencies is back trading right where it was at this time last year.

I pulled a chart of year to date currency returns vs. the US$, and there are now 5 major currencies which have appreciated vs. the greenback: Yen +26.44%, Swiss + 8.07%, and Singapore, Danish Krone, & Euro + 1%. And with the recent big moves, our phones have been lighting up with investors moving back into currencies. I love the fact that all of these investors are diversifying, but the speed of this recent move demonstrates why we suggest keeping your investments spread across all asset classes. Trying to time into or out of a market can be frustrating, while keeping consistent asset allocations is the key.

The cut by the FOMC is putting pressure on other central banks to follow suit. Norway's central bank cut its benchmark rate by 1.75%, a huge move meant to counter the growing global recession. The Norges bank said the rate could go even lower during 2009 as falling oil prices reduce the risk of inflation. The Czech central bank also cut rates yesterday, but kept its move at a relatively small 50 basis points.

Chuck sent me the following note last night, as he is feeling better and keeping an eye on the currency markets:

"So... I read to Dawn's class on Wednesday, they were all so cute... They were completely convinced by the time I left that I WAS Santa Claus. I left to the sounds of "Merry Christmas Santa"... So cute!

What another day for the currencies, eh? 1.45 in euros? That's a rise from 1.27 just a week ago. I read something that said this was the largest 1-week move higher EVER in the euro VS the dollar! I guess investors and traders don't appreciate the Fed's new ZIRP! (zero interest rate policy)

This is what the Japanese policy has been called for over a decade now, so why would the U.S.'s policy be any different? I'm turning Japanese... The stimulus packages are just like Japan's of the 90's I'm turning Japanese, I really think so... The bailouts, and everything in between is just like Japan of the 90's!

The "other stars" right now are Gold and Silver... If you are a "believer" (and I'm not talking about whether I'm Santa Claus or not!) of the lofty prices for Gold that are being bandied about, then you have to think that these are bargain basement prices, and if these are bargain basement prices, then what we had just a month ago and all autumn long were dirt cheap prices! Dirty deeds, done dirt cheep! OK, I have no idea why I went into that AC/DC song! But see, I even do this at home! Which by the way, you should not try at home without an adult's supervision! HA!

Now, most of you who are long time readers have probably been asking where Chuck's take on the Bernie Madoff scandal is.... Well, I would be right there with my voice, if it wasn't the SEC... The last thing I need is to get in a fight on a Saturday night in Jackson Mississippi, with the SEC! But, I don find it to be very sad that the SEC admits that the SEC had credible and specific allegations going back to at least 1999! Now investors are licking their wounds to the tune of at least $50 Billion in losses... I'll steer clear of this one, and let those that have armored shields take their shots...

Have a great day! I'm off to the eye doctor, and not "looking" forward to it!"

I spoke to Jeff Opdyke at the Wall Street Journal yesterday about a story he was writing with regard to the Japanese yen. He was wondering why the BOJ hasn't intervened yet. It is an excellent question, as the yen has continued on its assault on the US$ unabated. Finance Minister Shoichi Nakagawa has been trying some verbal intervention, letting currency traders know that they stand ready to intervene. But the BOJ is smart enough not to jump out in front of a freight train, and as Chuck points out above, the speed of the dollar's recent fall has been unprecedented. Also, since Japan imports almost all of their oil, a stronger yen reduces the price of crude imports. So at least some of the pain felt by Japanese manufacturers/exporters is being mitigated by these lower oil prices.

If Japan does intervene, the thin markets during the holiday season would be an excellent opportunity. There is also a chance that the BOJ will lower their interest rates tomorrow, following their two day policy meeting. This would be another good opportunity for additional 'verbal' intervention. Holders of yen may want to book gains, and look toward the Singapore dollar or Chinese Renminbi to maintain their Asian exposure.

India's rupee has climbed for a fourth day as the Indian stock exchange headed for the biggest advance in more than a week. Capital inflows across all of Asia have increased as the dollar continues to lose its status as a safe haven. India's inflation rate, as reported today, fell to the lowest since March as crude oil prices have fallen. Prices increased 6.84% last week vs. an expected increase of 7.5%. The slight fall in inflation may allow officials to lower interest rates, which are currently some of the highest in Asia. The rupee has benefited from high interest rates as investors return to carry trades.

The Australian dollar will increase another 12% vs. the US$ according to a note by the head of currency strategy for National Australia Bank Ltd. The strategist believes the Aussie dollar hit a bottom of 60 cents in October, and says the currency will begin to outperform as growth in China starts to recover. He targets 79 cents as the top.

We agree with the report, and suggest the Aussie dollar will again begin to rally as the commodity prices recover. Raw materials account for 60 percent of Australia's exports, with China being one of their biggest customers. Growth in China has slowed, but remains at a relatively strong level above 6%. The stimulus package announced by China will concentrate on infrastructure construction, which will increase demand for commodities.

Currencies today 12/18/08: A$ .7081, kiwi .6002, C$ .8432, euro 1.4675, sterling 1.5366, Swiss .9541, ISK 112.19, rand 9.7288, krone 6.6677, SEK 7.5780, forint 183.20, zloty 2.837, koruna 18.1062, yen 88.39, baht 34.39, sing 1.4279, HKD 7.75, INR 46.95, China 6.8292, pesos 13.18, BRL 2.3527, dollar index 77.822, Oil $40.68, Silver $11.39, and Gold... $875.98

That's it for today... I head off to a 'hand specialist' today, the hand feels much better this morning. Thanks to all the readers who sent me notes, my favorite was from a long time investor who is 90 years old, he wrote one simple line: "Stick with what your good at son." Some very wise advice!! Hope everyone has a Tub Thumpin Thursday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 12-18-2008 10:30 AM by Chuck Butler