The dollar is kicking up its heels once again, and this is to be expected during this Obama bounce… You see, the markets are swayed by the smooth talking President-elect’s call for $300 Billion in Tax-cuts, a job creation program, and $1 Trillion economic stimulus package… And believe me, if this is what it takes, then I’m all for it… But, here’s the spanner in the works, I believe… All these things cost money, lots of money, and money we don’t have, unless… We just go and print more. This is why I believe that once all the euphoria of the Obama presidency has run its course, the markets will do a V-8 slap to the forehead and realize we’ve just dug ourselves a deeper hole!

I’ll tell you one thing about the Obama bounce that we should see, and that is Risk Taking come back in a large way. And that, will underpin currencies like Brazilian real, Aussie dollars, and kiwi. We could even see South African rand strength. But like I tell people all the time, I don’t trust rand, I don’t trust the Gov’t of South Africa, and I don’t trust the Central Bank, therefore, I always say that I wouldn’t touch rand with YOUR ten-foot pole… But, I do realize that investors in rand have made bundles of cash over the years… But unless they timed it good, they saw those bundles dissipate quickly. The swings in rand are so violent… So… Keep that in mind.

But, back to what I was talking about before I went off the “rand” road… This Risk Taking could bring back the Carry Trades, and that won’t be good for Japanese yen, which has already given back 3 whole figures from last week’s trading levels of 90, to trade this morning at 93. And Commodity prices are seeing some love for the first time in a month of Sundays! I know that doesn’t sound like right, with the dollar rallying and Commodities also rallying… But, it’s happening, right here, right now!

One Commodity that has really taken off, is Oil… I know this isn’t something that everyone wants to see happen, but, when you have our friends (NOT!) at OPEC cutting production, and a return of risk taking, that’s what you get with Oil… A quick look at last Monday’s price shows that Oil was trading at $39 and change, and today it is trading at $47 and change! That’s a HUGE jump in just a week…

The Obama bounce received some support from San Francisco Fed Head, Janet Yellen, this weekend. Let’s listen in to Yellen… “It is increasingly likely that inflation will fall to undesirably low levels,” Yellen said at the meeting in San Francisco. She said the Fed would likely expand its raft of unconventional monetary policy measures now that its cycle of interest rate cuts has hit rock-bottom. She also urged an aggressive spending program by the administration of President-elect Barack Obama, as she gave a dismal assessment of the economy.”

Notice, she said that “the Fed would likely expand its raft of unconventional monetary policy measures now that its cycle of interest rate cuts has hit rock-bottom.” So… If I were reading that, and I did, I would be asking “what unconventional monetary policy measures”? Ahhh Grasshopper… Have you ever heard of “Quantitative Easing”? It’s a trick that the Japanese used in the 90’s, oh, here we go again with the comparisons to what we’re doing and what the Japanese did… But it’s sooooooooo true!

Anyway… Quantitative Easing is, a way to flood the banking system with large amounts of money. It’s a way to mimic below-zero rates and provide support to the economy. The process often involves buying up large quantities of assets from banks, such as the Fed’s latest programs to buy mortgage-backed securities. So… Once again, should the Fed go down this road, and I don’t see how they can resist going down it, they will be taking on more bad collateral…

One more thing that Ms Yellen said that hit a nerve with me, was that, “the Fed must have a “timely” plan for ending lending programs. The Fed must have an “exit strategy” to wind down the facilities when they are no longer needed.”

Hmmm… Well, since she said that, and she’s a Fed Head, we are left with the understanding that the Fed doesn’t have a clue what to do with all these programs they’ve instituted… Now, that gives me a warm and fuzzy… NOT! I’m going to go yell at the walls for a minute, don’t go away, I’ll be right back!

OK, I’m back, see that didn’t take long! HA! Well… The data cupboard gets restocked this week, with the Big Kahuna coming on Friday, with the Jobs Jamboree. Right now the early forecasts have December losing 500K more jobs… The thing to look for this Friday though is the previous month’s revision… You may recall me going spastic on these revisions last month, when the previous two months numbers were revised, and not by small numbers, but by large, market moving type numbers.

Here’s what I said on December 8th… “OK… Did you see the rot on labor’s vine Friday? The Jobs Jamboree was very unkind to many, with a 533K jobs lost in November. That number was the worst figure since 1974! The tally of 1.9 million jobs lost this year surpasses the losses of the past two recessions, and according to the Wall Street Journal, signals that the current downturn could be the worst since the years immediately following World War II.

Now… The thing that really ticks me off folks, is the fact that the October figure saw a major revision. You might recall that the September figure which was bad enough, was revised up by over 100K… Then last month we saw a negative -240K figure, which was bad enough, but one month later the figure is revised up to -320K… So, in my mind, the -533K figure reported this month for November, will probably be revised upward to the -600K figure… UGH!”

So, it will be interesting to see the revision this Friday… But the scary thing that the markets seem to be forgetting about is the 500K in job losses… If that would happen the two month losses would be greater than 1 million! That’s not good! In fact it’s not even close to good! I told the crowed in Marco Island that the unemployment rate would reach 7.5% before this was over. And that was before the 533K job losses were printed! I’ll have to redo that call… That’s too bad too… That’s a call I don’t like making one iota! But… I have to do it, because the boys and girls on TV won’t do it!

On Friday, just passed, we saw the color of the latest ISM (manufacturing) Index, which I reported to you as already bad… Well, my friend, John Mauldin, wrote about ISM this past week in his wonderful weekly letter (www.2000wave.com). So… I thought I would just let him explain the report, as he does it better than I would!

“We got the US ISM numbers today, and they were just awful. The overall index is down to 32.4, down over 25% in the last three months. This is the lowest level since 1980, in what was a severe recession. The ISM survey points to one of the deepest contractions in industrial output in the post-World War II era, this quarter. The forward-looking details were weak and point toward further declines in the ISM manufacturing index. Businesses are cutting orders, inventories, and workers because of tight credit conditions, declining final demand, and shattered confidence. Manufacturers reported in December that their customers’ inventories were too high, a bad omen for future production.

But when you look at the components, it gets even more sobering. New Orders are down over 50% from six months ago, to 22.7. This is the lowest number since they began keeping records in 1949. Production is down to 25.5. New Export Orders were way down (35.5), as was Order Backlog (23).

“Another standout in the December report was the decline in the prices-paid index [down to 18! -JM] which fell to its lowest level since 1949. The abrupt decline in energy and other commodity prices is driving the index lower. Lower input costs may entice manufacturers to pass on the savings via reducing their prices. If businesses broadly across industries cut prices to preserve some sales, it will heighten the threat of deflation.” (www.economy.com)

This is all suggestive of an economy in serious decline. The GDP for the 4th quarter should be down somewhere between 4-5%. It is likely we are going to see even more earnings downgrades in the next few months, and as I outline below, we have probably not yet hit bottom. As long as the ISM numbers look like the ones we just analyzed, things are likely to be getting more difficult. And that goes for the world in general, not just the US economy.”

Well… That’s sobering news, eh?

OK… We’ll also see Factory Orders tomorrow, ADP Employment on Wednesday, Weekly initial jobless claims on Thursday, and the big Jobs Jamboree on Friday. There are other second tier data reports printing, but for this discussion we’ll keep it with the Big Kahunas…

None of these will give anyone a warm and fuzzy, folks, and if the dollar continues to rally through all of them, we can figure that the Trading Theme of rewarding the dollar for the deepest, darkest, dangerous economy will be back on the burner… But in any case, the Obama bounce looks to be ready to go…

Currencies today 1/5/09: A$ .71, kiwi .5835, C$ .8215, euro 1.3650, sterling 1.4520, Swiss .9055, rand 9.4550, krone 6.93, SEK 7.8575, forint 195.70, zloty 3.0250, koruna 19.59, yen 93.20, sing 1.4720, HKD 7.7540, INR 48.56, China 6.8310, pesos 13.71, BRL 2.32, dollar index 82.80, Oil $47, Silver $11.05, and Gold… $856.15

That’s it for today… OK, on Friday, I reported that the Czech Republic would adopt the euro on Nov. 1st… Not so fast, Tim! The Czech Republic will begin discussing adopting the euro on Nov. 1st… My bad! Once the month is over, I’ll be heading to Florida for the Orlando Money Show… This ought to be an interesting Show this year, as we’ll be in the middle of the Obama bounce, and the stock jockeys will be bouncing off the walls with forecasts of riches… Me? I’ll just be there to remind everyone that they need to diversify their investment portfolios… OK, time to go… I hope you have a Marvelous Monday!

Source:  The Obama Bounce Begins

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 (FNM) and Freddie Mac (FRE)  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

Source: Santa Rally for the Currencies

This from The Sovereign Society:

The U.N. is predicting the first worldwide recession since the 1930s … for 2009. If that wasn’t bad enough, developed nations are supposed to shrink up to 1.5%. “It seems inevitable that the major countries will see significant contraction in the immediate period…even if the bail-out and stimulus package succeed,” according to the report. In other words, the recession may have spared Black Friday 2008, but next year, the worldwide recession will cut into worldwide spending even further. In the currency markets, you can already see that four currencies will suffer next year as the U.N.’s prophecy comes true…

The Four Currencies On the Chopping Block for 2009

1. Euro: Yes, the euro WAS King of the Hill for the most of this decade. But those days are long gone. Right now, the Eurozone is only as strong as its weakest members – and some of its weakest members happen to be suffering emerging markets in Eastern Europe. Not to mention, the European Central Bank has already started following the Federal Reserve in slashing their own interest rates. And, just last week the European Commission urged all EU member states to unite in an EU-wide fiscal stimulus package worth 200 billion euros (US$260 billion) to stave off recession. That spells disaster for the single unit currency.

2. Pound – The London markets have been the most overexposed to the subprime-credit crunch for quite some time. In fact, the pound started to turn as early as November of last year. Today, a year later, the pound is still suffering for the same reasons – deteriorating housing wealth, frozen credit market and heavily indebted consumers, among other sore spots. The U.K. labor market (especially in London) is also still at risk from financial-specific job losses (even after massive layoffs this year). And, the Bank of England too is racing to catch the Fed in lowering interest rates to stem the economy’s collapse.

3. Australian dollar – Australia has been a satellite country to China for years. Australia is used to providing so much of what hungry Chinese manufacturers need to produce their “stuff.” But if China further cuts back their demand for such input products and commodity prices continue to drop, then Australia will lose the financial boost of its best customer. In other words, Australia’s exports will suffer mightily and crush the Aussie dollar even further. If that’s not bad enough, the Reserve Bank of Australia is on a similar path with monetary policy. As it is now they can’t seem to cut interest rates fast enough.

4. South African rand – The ramifications from a sick global economy will reach beyond just the major currencies. Whether South Africa’s economy lives or dies is based largely on their commodity exports. And as commodity prices continue to drop next year, which we think they will, the South African rand will suffer even more. Plus, economic troubles will likely rekindle political and social unrest. Right now jobs are at risk in South Africa, so many South Africans could face the constant threat of unemployment. Of course, a rising jobless rate doesn’t sit well with a nation’s citizens. And civil unrest doesn’t exactly reflect well for the body politic. (A situation like this doesn’t bode well for any currency.) But as you’ll see, you can use economic slowdowns the coming 2009 recession to grab never-before-seen profits in the Forex market.

Source: Recession Will Kill These Four Currencies In 2009

The chart you’re looking at compares the South African rand’s performance (versus the U.S. dollar) and the iShares MSCI South Africa ETF (EZA). This is what’s called an inverse correlation. When the rand becomes inflated, South African companies don’t perform well.

The opposite is also true: When the rand gains in strength versus the U.S. dollar, South African companies perform better.

Over the past couple months we’ve seen exactly that. The interesting thing is South Africa is in the midst of a power crisis. In fact, many of its mining companies are scared they won’t have enough power to produce things like gold and platinum.

With aging power plants and failing infrastructure, South Africa needs an injection of investment cash into its power sector. And while its economy technically maintains a budget surplus, it’s constantly battling things like unemployment and poverty.

In short, a commodities bull run, with gold and platinum prices soaring, won’t mean much to the resource-rich country if it doesn’t have the power to produce them — or if the workers wage strikes against low wages and immigrant workers.

My take? Without some positive news on the situation soon, expect the EZA to drop back, and the rand to inflate a bit more. Here’s some numbers: EZA could drop to $110 and the rand versus the U.S. dollar could fall to a ratio of 7:1.

S.R. Nunnally

Editor, Taipan Trader

P.S. The US dollar has been rising in India and Pakistan, too… So sharply that one might expect a bit of a backlash here. Check out the chart, and see for yourself.

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Source: The Dollar IS Rising… In South Africa, That Is