You can point to profit taking as the reason for the move, and with the volumes thinned out by Holiday trading, one profit taking sell begot another, and before you knew it, the euro was looking at a loss on the day.

But don’t despair, as the single unit has rallied back overnight. Back to the high 1.41 handle, in fact when I arrived it was 1.4205! Wild Swings… I keep saying Wild Swings and every time I type it I want to say Wyld Stallyns, the name of Bill and Ted’s band in their Excellent Adventure move… “Ted, while I agree that, in time, our band will be most triumphant… Hey! That’s righteous… Excellent!

OK, enough of that silliness… I had some guy tell me that I should stop the silliness and just report the news, that the silliness was making me look foolish… Well! If I couldn’t go off on these silly tangents then I wouldn’t write the letter! It’s what I do! It’s my style! It’s me! And I wouldn’t change a thing!

So, back at the ranch… The fighting in the Gaza Strip continued yesterday, and those fears of disrupted oil supplies to the U.S. are once again on the minds of currency traders this morning. You know, I said this a few weeks ago, and it needs to be repeated, especially now with these fears of disrupted oil supplies. Can you imagine what this whole recession and financial meltdown would look like if Oil had remained around $100 a barrel? The drop in the price of Oil would always be welcome at my house, but even more with the U.S. economy staring straight the nose of a .44 that has recession written all over it!

This collapse in the price of Oil has other consequences… For those of us that need gas for our cars the collapse is manna from heaven. But for the Canadian dollar / loonie, this collapse has been a shot to the mid-section, bowling over the loonie and leaving it in a fetal position on the canvas. Yes, the shot to the mid-section was that devastating for the loonie, but wait! That’s not all (why do I feel like Billy Mayes here?) The loonie also had to contend with falling interest rates and Commodity prices overall that collapsed… That’s one, two, three strikes you’re out at the old ball game!

But, I still think the loonie can improvise, overcome, and adapt, (to borrow a line from Clint Eastwood) once inflation begins to creep into the markets again.

OK, I can hear every mother say, “that’s not going to happen any time soon, Chuck”… Well, maybe not, but I can tell you this… U.S. Consumers might be turning into “savers” once again, but they won’t / can’t stay that way. It’s not in our blood! We bargain hunters, and let me tell you about the bargains that will be out there in all the assets that have suffered from asset price deflation! They will be at “can’t pass that up” levels, and the U.S. consumer will eat up those levels like kids eat up cake! And after all this recession has taken its toll on businesses, that have closed up or slowed production to snail’s speed, that’s where the inflation comes in… Money chasing not enough goods… Think about that…

That will also mean that the U.S. Fed will be behind the inflation eight ball once again, as they won’t see it coming, and will be so focused on getting out of the recession, that they’ll keep interest rates too low for too long once again, and that will speed the inflation rate along to high levels once again.

Well… That was quite the discussion, eh?

I saw a story by the Wall Street Journal talking about how Japan’s NIKKEI had fallen 42% this year… I wondered why did the WSJ pick on Japan? It’s not like the NIKKEI was the only stock market to suffer this year… A quick look at the roster shows the Dow down 36%, NASDAQ down 43%, and S&P 500 down 41%, the German DAX down 41%, the FTSE down 33%, and so on… Stocks had one very bad year… I don’t see that reversing any time soon either, folks. Globally, Corporations are going to be posting some very ugly returns in the 4th QTR, and that should show up in stock prices…

When we turn the calendar to 2009, the euro will be celebrating it’s 10th birthday! WOW! Has it really been that long already? In 10 short years, the euro has done things its creators never thought it could do in 10 years… To have gained 26% of the world’s currency reserves in 10 short years… To reach parity to the dollar and then move to 1.60 in 10 short years… To be within spittin’ distance of parity to the pound sterling in 10 short years… Europeans, even including those in Spain, which is one of the countries naysayers like to point to as one that will break away from the euro. 70% of the Spanish that were polled, believe the euro will overtake the dollar as the World’s reserve currency…

OK… Don’t know what those crazy Spanish are smoking, but you can’t complain about the euro, and the European Central Bank, and then promote the currency as the world’s reserve currency… I guess the rumors of Spain’s want to leave have been greatly exaggerated, eh?

Well, the Aussie dollar (A$) has found a base around 65-cents, and is knocking on the door to 70-cents… I would think that given Gold’s rise, 70-cents would be the top for now… But if Gold can take the next step to $900 and beyond, then the A$ will have support to move higher than 70-cents. And the A$’s kissin’ cousin across the Tasman, kiwi, looks like it is in a range between 55-cents and 60-cents… If the A$ does follow a rise in Gold, kiwi would grab the coattails of the A$…

It’s all tied to “Risk Aversion”… If Risk Aversion continues to hold a grip on the markets because of the Credit Crisis, then Commodities as a whole can’t take off on any extended rally, and that keeps the currencies in check too. I do see less Risk Aversion in the markets these days than I saw in October and November, but it remains there like the relative that comes to stay for Christmas and doesn’t leave!

The Gaza Strip fighting doesn’t do anything to eliminate the Risk Aversion trades, but does lend a hand to the rise in Swiss francs. The franc is still seen as a “safe haven” currency. We had a few people sell francs yesterday on some story they read about Switzerland’s economy mirroring Iceland’s… Yeah right! OK, I’m not in Switzerland, and don’t have the on the ground experience there, but that sound pretty strange doesn’t it?

Long time readers might recall when I used to give the weekly updates of the IMM futures positions in the currencies. This was one way of watching the demand for a currency, or the lack of demand in short positions in a currency. I stopped because at one point it was getting crazy each week. But, I never stopped watching them… And I noticed something last week… Dollar short positions, the previous week, stood at $238.3 million… But last week they jumped to $559 million, with positions in yen, euro, franc, loonies and A$’s all increasing… Hmmm…

A friend / colleague in Jacksonville sent me a story in the WSJ yesterday regarding this Russian dude that has predicted the fall of the U.S. He first predicted it in 1997, and said the U.S. would fall by 2010, with sections of the country going to different countries. This is all crazy stuff folks, but if you want to read it, put away the sharp objects, and click here.

Now… I’m not even buying one word of what this guy is saying, and liken him to Iben Browning, you know the guy that predicted the massive earthquake in the 80’s? But found it interesting that he wrote his first thoughts on this in 1997…

The Chinese renminbi is back to its old tricks of barely registering gains on the scale… But at least they are gains! The renminbi’s gains this year will come in around 7%… Hey! That’s better than losing 43% in the NASDAQ! The currency was on pace to gain more than 10% this year until the recent goings on… I suspect the Chinese currency officials will continue to allow the renminbi to gain, but not down a One-Way Street. So expect setbacks along the way…

Currencies today 12/30/08: A$ .6925, kiwi .5780, C$ .8135, euro 1.4180, sterling 1.4510, Swiss .9455, ISK 145.50, rand 9.4940, krone 6.9660, SEK 7.7250, forint 188, zloty 2.9325, koruna 18.75, yen 90.15, baht 34.75, sing 1.4410, HKD 7.75, INR 48.48, China 6.8309, pesos 13.70, BRL 2.3540, dollar index 80.55, Oil $39.15, Silver $10.81, and Gold… $871.75.

Source: Risk Aversion Remains but is Waning