Currencies continue to rally…  More Stimulus…  Data shows more rot on the vine… And Now… Today’s Pfennig!

Another rally day in the currencies yesterday… One that wasn’t as pronounced as Monday’s 3-cent rally… But a rally just the same, and at one point, the euro was trading above 1.30… Hadn’t seen that level in a while, so welcome back to the 1.30 level, Mr. euro…

Someone sent me a note the other day, and said, why don’t you talk about Australia, Canada, and Swiss more? Hmmmm… Maybe they don’t read the Pfennig “every day”… But those currencies are in my notes most days, and if they are not, they are a part of the overall direction in currencies that are being pushed down by the Trading Theme… But in the spirit of the season…

Aussie dollars have rebounded nicely the last three days, but this is really putting a band-aid on a bullet wound, for the A$ has suffered a shot to the heart, and you’re to blame, no wait! They’ve gotten bashed, beaten and left for dead, by the unwinding Carry Trades, and Commodities price collapse. Large interest rate cuts by the Reserve Bank of Australia (RBA) haven’t helped the A$… And so… Until risk is back in the markets, driving commodities higher and bringing the battered Carry Traders back, the A$ will not be on the short list of currencies that can mount a rally VS the dollar… Should those two items come back with vengeance? Now that’s a horse of a different color!

The Canadian dollar is getting tarred with the same brush as the A$, only the main commodity pushing the C$ down is the price of oil… Now, this is a case of: Torn between two lovers, feeling like a fool… I would love to see the C$ rebound, but it needs a higher oil price to do so, and I’m not about to turn my back on lower oil prices! I love less than $2 gas!

Now there are those that would tell you that this current level of the price of oil is just a fleeting moment price, and that we’re still in store for $8 gas down the road… OK, I’m not sure I can get my arms around that, unless… We as a country do what we’ve done about gas driven automobiles for the last 35 years… Nothing, absolutely nothing! Then $8 gas is probably in our future… But it’s not now, and won’t be next week or next month, or even next year… Let’s all hope it’s not in our future at all!

The Swiss franc… Oh, where to start? The Swiss National Bank (SNB) shot an arrow into the heart of the franc last week, when they cut interest rates 100 BPS… Who would have thought that the SNB had 100 BPS of rate cut arrows in their quiver? But they did, and now francs are back on the block…. The “block” I’m talking about is the selling short block to fund Carry Trades, where they held court with Japanese yen, until the SNB began raising rates in 2007… Then the U.S. dollar took over, and that’s where we are now… Good thing for francs that the Carry Trade and risk Aversion is hanging over the markets like the Sword of Damocles right now…

You know… We’ve been stuck in this Trading Theme of investors buying dollars whenever the economic Tsunami looks deeper, darker and more dangerous, for so long now, I had to sit back and examine this current currency rally further for what it was… At first, I thought this was simply a case of the currencies rallying because the “light at the end of the tunnel was brighter” as witnessed by the large rallies in stocks, caused by the bailout of Citicorp… But, then if that was the “true case” we would have seen the yen get sold along with the dollar… And guess what? Japanese yen was rallying too, while the dollar got sold!

In short- it seems like the market is starting to realize that all the various stimulus packages and bailouts our “leaders are throwing at the problems our economy faces and recognizing that while they may or may not lead us to the promised land of no deep, dark, dangerous recession, one thing that is a certainty is they will need to be financed. And isn’t this the Big Problem for the dollar that I’ve talked about for over a year now? In the end, the reality will be that this is all negative for the dollar… And well, in the end, our fiscal well being.

Yes, I completely understand that Europe faces a similar challenge, but let’s face the facts here, Europe has a surplus, right now at least, and does not have the funding requirements that the U.S. does…

And finally, there’s the “other” thought… The dollar has gone a long way in a very short time erasing 5 years of gains from some currencies… It was about time that it paused for the cause…

So… In keeping with the thought about the stimulus packages and bailouts… The Fed and Treasury announced another round yesterday… You might want to sit down, and reach for your wallet, just to make sure it’s still there!

Here’s how the Wall Street Journal reported the news… “The U.S. on Tuesday stepped up its efforts to support strained credit markets through new programs aimed at boosting consumer credit and the market for mortgage-backed securities.

Under the Term Asset-Backed Securities Loan Facility, or TALF, the Federal Reserve will extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by consumer and small-business loans.

The Fed also said it will purchase up to $100 billion in GSE debt through a series of competitive auctions starting next week. It will also purchase up to $500 billion in mortgage-backed securities backed by GSEs, with the goal of starting that program by the end of the year.”

For those of you that didn’t experience “new math”… (HAHAHAHAHAHA 2+2 is still 4!) the tote board shows us that yesterday’s announcement totals $800 Billion in addition to what they already have in the hopper! Geez Louise, when will this all stop? The Fed’s balance sheet has grown by over $1.3 Trillion so far this year and could very well be turning Japanese once again! What am I talking about here? Well… You all know how I’ve been saying that the U.S. if following Japan’s model of the 90’s? Well… The Japanese added debt on to debt creating stimulus packages and bailouts too, and then lowered interest rates to zero, and the only thing left was targeting the quantity of money rather than its price. By that I’m trying to say that they didn’t care what happened to the yen’s value, they printed and printed… Oh brother! Here we go again! Are we doomed to experience a decade of deflation like the Japanese did?

I don’t think so… I think our deflationary period will be much shorter, and then on the other side of that, we’ll see inflation that will cause you to reach for your wallet again to see if it’s still there! This inflation will push commodities back into the limelight, and once again the dollar will be punished…

That’s my story, and I’m sticking to it!

OK… The data yesterday was more of the same-o, same-o, awful looking stuff… U.S. preliminary 3rd QTR GDP printed at negative -.5%, and Personal Consumption (which the Fed used to look at closely, but doubt they do any longer) fell to negative -3.7% from -3.2% in the 3rd QTR. And, the S&P/CaseShiller House Price Index fell another 17.4% in September from a year ago. The rot on the Housing price vine still has some additional deterioration to go, unfortunately…

The Data Cupboard continues to yield plenty for us to look at each day with a heaping helping of Personal Income and Spending for October today. In addition, we’ll see Durable Goods Orders for October, the Weekly Initial Jobless Claims, Chicago Purchasing Managers Index (manufacturing for that region), U of Michigan Consumer Confidence, and New Home Sales for October… Whew! My fingers are worn out after all that! HA!

But there’s more… I’ve been wanting to have a brief discussion about this for some time now, and each day I experience a loss of memory and forget to do so! What am I talking about, I hear you asking? Well… It’s Gold… And not just the price of Gold in dollars, which has rebounded nicely this past week… But to point out that Gold has been rising VS all the currencies. Which makes sense right? The dollar has pounded the currencies for 4 months, and Gold gets stronger in those currencies… It’s an interesting situation… So, Gold hasn’t sunk VS the other currencies like it has VS the dollar.

OK… Here’s the dilemma for the currency traders today… We’ve got all this data to deal with, and everyone is going to be trying to leave early today to get a head start on getting home for Thanksgiving… Will the lack of volume this afternoon cause wild swings? It has a history of doing so…

China has cut their internal interest rate to help stimulate their economy, which the OED lowered their forecast for China’s economic growth from 9% to 7.5%… Well… 7.5% still sounds pretty darn good, doesn’t it? Especially, when you consider that by the time the 4th QTR U.S. GDP numbers are printed (not until probably Fed 2009), they will show U.S. GDP to be a negative -5.0%!!!!!!

OK… Now that was a lot for the day before Thanksgiving, eh? I had better stop here, as I don’t want to get you stuffed before your Thanksgiving meal!

Currencies today 11/26/08: A$ .6480, kiwi .55, C$ .8175, euro 1.2960, sterling 1.5340, Swiss .8375, ISK 235 (really, this is the quote we received Monday!) rand 9.8880, krone 6.9530, SEK 7.9260, forint 201.30, zloty 2.9180, koruna 19.48, yen 95.40, baht 35.20, sing 1.5080, HKD 7.7550, INR 49.43, China 6.8285, pesos 13.37, BRL 2.3370, dollar index 85.38, Oil $51.60, Silver $10.29, and Gold… $816.84

Source: Maybe It’s Time For A Change?