Its all about the yen...
Daily Pfennig

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    In This Issue..

    * Japan dominates news wires...                                        
    * US retail sales to drop...
    * Russia devalues the ruble again...
    * Happy Birthday Kathy Butler...                             

    And Now... Today's Pfennig!

    Its all about the yen...              

    Good day...Hope everyone had a wonderful holiday, I had a great Christmas and Christmas eve.  I ate entirely too much, but that is one of the joys of the holidays!  Most of the markets were closed yesterday, and trading was very light on Christmas eve.  The Asian markets were open, and the dollar did sell off a bit vs. most of the major currencies with the one exception being the Japanese yen.

    Unless we see a big bounce today, the yen will end the day with the first weekly loss vs. the US$ in two months.  With a majority of markets closed, most news stories centered around the Japanese yen.  Japanese industrial production fell the most in 55 years as reported on Wednesday.  Factory output plunged 8.1% from October, more than 6.8% estimated by economists.  Other data released in Japan showed the jobless rate climbed to 3.9% from 3.7%, and household spending slid .5%, a ninth drop.

    Markets are now counting on the Bank of Japan to follow the FOMC's lead and begin 'quantitative easing'.  Bank of Japan policy board member Hidetoshi Kamezaki said policy members would consider 'extraordinary steps' to help the economy.  Japan's central bank already countered the drop in US interest rates with a drop of their own, and again have the industrialized world's lowest interest rates.  Now they will turn to other means designed to pump liquidity into the financial markets.  Kamezaki told reporters that the bank's next policy steps should focus on improving funding for companies and influencing long-term borrowing costs.  The bank will likely start buying corporate bonds and could actually go into the equity markets purchasing stocks to support Japanese industry.

    If Japanese policy makers do adopt aggressive quantitative easing, the yen could see a fall in value.  These measures pump large amounts of cash into the markets, and the laws of supply and demand tell me that these tremendous increases in money supply will eventually drive down the value of the currencies.  The values of both the yen and the dollar will be challenged by these 'quantitative easing' measures over the next few years.

    But some in the Japanese administration want a more cautious approach.  Prime Minister Taro Aso has yet to implement two announced stimulus packages.  He believes the Asian economies are better positioned than those of the west to endure the global recession.  Instead of using all of their ammunition at once, the Prime Minister wants to take a more gradual approach to combating the economic slowdown.

    One thing helping Japan weather the economic downturn is the falling price of crude oil.  Since hitting a high of 147.27 on July 10 of this year, the price of oil has fallen 75%.  OPEC has cut production in an attempt to slow the drop, but these announced cuts have yet to have an impact on crude prices. 

    The lower oil prices have kept a lid on global inflation, and several countries are taking advantage of these lower numbers to bring their interest rates down.  India's inflation slowed to a nine month low, with wholesale prices increasing 6.61% from a year earlier, down from 6.84% the prior week.  Inflation in India has fallen below the central bank's target of 7% largely due to lower fuel costs.  I would expect India to continue cutting rates, which could reverse some of the rupees recent gains.

    But the fall in oil prices haven't helped all economies. Russia's central bank devalued the ruble for the third time in a week, sending the currency to its lowest level against the dollar in two years.  The Norwegian krone had also fallen as oil retreated from its highs.  But the recent dollar weakness has steadied the krone, and it has been trading in a fairly tight range vs. the US$.

    No data will be released in the US today, and the markets will likely be very light.  Most will be heading out to the malls to try and take advantage of all of the year end closeout sales.  Retailers have been dropping prices dramatically to try and salvage a tough holiday shopping season.  US retail sales fell between 6 and 8% this season according to predictions by the credit card companies.  This was one of the most challenging holiday seasons on record, and with a falling US economy, I would expect next year's to be even worse. 

    The dollar strength we saw during 2008 will not spill over to 2009.  I would think the recent dollar weakness will be the rule for next year, as the tremendous increase in money supply here in the US will help drive the value of the dollar lower.  On that note I will move on to the currency scorecard:   

    Currencies today 12/26/08: A$ .6851, kiwi .5765, C$ .8209, euro 1.4097, sterling 1.4747, Swiss .9321, ISK 145, rand 9.74, krone 7.1259, SEK 8.022, forint 189.79, zloty 2.9163, koruna 18.728, yen 90.43, baht 34.99, sing 1.4469, HKD 7.75, INR 48.4437, China 6.8413, pesos 13.3125, BRL 2.3764, dollar index 81.214, Oil $36.37, Silver $10.38, and Gold... $848.55

    That's it for today...  I want to give a big birthday shout out to Chuck's beautiful bride Kathy Butler who turns another year older today.   I won't be able to wax as eloquently as Chuck usually does about how wonderful she is, so I won't even try.  I can tell you that she has been a tower of strength to Chuck and her family during this very difficult year; and her love for Chuck is one of the things which helped pull him through.  I'm sure Chuck will try his best to spoil her on this special day, she certainly deserves it!!  Hope everyone has a Fantastic Friday, and a wonderful weekend.
    Chris Gaffney, CFA
    Vice President
    EverBank World Markets

    Posted 12-26-2008 9:55 PM by Chuck Butler