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

Good day… And a Terrific Tuesday to you! Thanks for the notes regarding my son Andrew. I believe he’ll be fine… Shaken, beaten a bit, but fine… Well… It’s Tax Day… A day hated by many, including yours truly. I always like to bring out the Beatles on Tax Day…

Should five per cent appear too small,
Be thankful I don’t take it all.
‘Cause I’m the taxman,
Yeah, I’m the taxman.

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold, I’ll tax the heat
If you take a walk, I’ll tax your feet

OK… Well… I think the currency guys are all spittin’ raspberries at the G-7 ministers and saying G-7, Schmee Seven! NEENERNEENERNEENER! What the heck am I talking about? Well… As I left you yesterday (in the middle of the night) the G-7 ministers had issued a communiqué that – for all intents and purposes – was a warning for the dollar bears… And those who were scaredy-cats ran for the hills, with the dollar rallying.

But, the last thought I had before signing off was that I believed the G-7 warning would probably need to see some actual intervention by the Fed and the ECB to really scare the dollar bears. And… By the time I made it in to the office yesterday morning, that thought was prevalent in the markets, and the euro (EUR) was off to the races versus the dollar once again.

So… All the worries about battening down the hatches were ditched on the roadside. I sure hope I don’t begin to sound like the boy who cried wolf, always pointing out short-term risks, but I guess that’s the chance I take, writing every single workday! But… One thing to keep in mind is this: Have the markets misunderstood G-7’s shift in exchange rate thinking? Or, did G-7 simply try to “call it in” with the statement?

And the euro is even higher versus the dollar this morning, as it received two pieces of data, with one outweighing the other. Here’s the skinny… First the damaging data to the euro… German investor confidence, as measured by the think tank ZEW, printed a negative -40.7 versus -32 in March. That whipsawed the euro a bit… But then France printed an inflation report that showed inflation rising at the fastest pace in at least 12 years! OUCH!

With the European Central Bank (ECB) focused on inflation (as well they should be!), and not growth, this report all but keeps interest rates at their current levels. I say “all but” because, you never know what kind of smokey back room deal the Fed is trying to work with central banks around the world to help them in their attempt to drive off a credit meltdown…

Did you see the announcement by Wachovia yesterday? They posted a huge loss, slashed their dividend, and had to raise $7 billion to make their capital position look better. I’m not picking on Wachovia here… I think we’ll see more of this kind of stuff as we move along… And that just weighs on the economy folks.

I just had to take a break from writing, as one of my all time fave songs just played on the radio, and I had to stop and sing along… There’s A Kind of Hush… I used to sing it to my little buddy Alex, when I rocked him to sleep at night. OK… I’m sorry, I got really sappy there… Let’s get back to the markets!

Even a surprising retail sales number yesterday couldn’t help the dollar. Retail sales for March, surprised to the upside at +0.2%, and February’s negative -0.6% was revised to only -0.4%… So, the rumors of the U.S. consumer being dead have been greatly exaggerated! But… In my mind, this is just the faint heartbeat of a consumer driven economy. The breathing is shallow… And it looks like it’s on its last legs.

The thing that really kept retail sales going, though, was gas sales – up 1.1%. I can vouch for that! I won’t tell you what it cost me 10 days ago to fill my gas tank, but it was roughly twice was it used to cost me when I bought the car two years ago! OUCH! Whoa, I think that’s going to leave a mark! Oh… And this little ditty just came across my screen… Our friends (NOT!) at OPEC have decided to cut production… Interesting.

Swiss francs (CHF) are back to parity with the dollar, and even beyond! Japanese yen (JPY) is flirting with a sub-100 figure too! I believe someone (me!) used the term “blue light specials” a couple of weeks ago to describe the cheaper levels to buy these currencies. I love it when a plan comes together!

Every once in a while I like to drag out the “euro wanna be” currencies of Czech, Poland and Hungary to talk about them. These currencies have been stealth like in their ability to fly below the radar while they move higher and higher versus the dollar. The Czech Republic just announced that their February current account surplus more than doubled from January! The February figure was the third-biggest surplus ever for the Czech Republic.

Looking back over the past three months, one would see that the Czech koruna gaining 3.2% versus the dollar. I know for the BIG TIME oil traders, that figure is small… But… I think it’s better than a wedgie!

You know… When I normally talk about the current account surplus, or positive balance of payments countries, I totally draw a blank on the Czech Republic. That will have to change!

And you all know how I feel about current account/positive balance of payments countries… They are at the top of my “hit parade” of currencies that investors should look to when diversifying into currencies.

Chris mentioned last week the HUGE move by the Singapore dollar (SGD)… I’m surprised at the size of the move, given that the currency is managed by the Monetary Authority of Singapore. I think the Monetary Authority saw the writing on the wall with regards to inflation, and decided to let the currency “go to work!” The move in the Sing dollar has really been impressive, and should go a long way toward helping inflation, along with padding the pocket books of sing dollar holders!

While I’m on currencies that I forget to talk about… The Mexican peso has quietly moved higher versus the dollar. Normally, the peso needs the U.S. dollar to get going first… So… This is interesting, in that even the peso is beating up on the dollar! And the peso rally comes just in time for the Cinco de Mayo celebration!

Today, we’ll see the color of the U.S. PPI for March. The Producer Price Index is expected to jump to 0.6% from 0.3% in February. I don’t get caught all up in the PPI and CPI because of all the cooks in the kitchen on these reports… But… Inflation, no matter what PPI and CPI say, is rising faster than you can sell funnel cakes at a State Fair!

The really important piece of data this morning is the TIC Flow. I’ve explained this before… But, here is a refresher course… TIC is Treasury International Capital, and measures the net flows of foreign investment into the United States, which is very important, due to the fact that foreign investment is what we used to finance our ever-growing deficit…

In my last four or five presentations, I highlight the fact that last year we only averaged $51 billion each month in net TIC flows… The problem here is that we need $80-85 billion each month to finance the deficit!

For some reason or another, the markets and media sweep this data under a rug each month. And I just don’t get it! This is important stuff folks! But then, the media keeps telling us, “deficits don’t matter”… So, why would they get concerned when we can’t finance the deficit? Dolts… The whole lot!

Currencies today 4/15/08: A$ .9245, kiwi .7840, C$ .9795, euro 1.5840, sterling 1.9680, Swiss 1.0009, ISK 74.30, rand 7.90, krone 5.0030, SEK 5.9440, forint 159.10, zloty 2.15, koruna 15.68, yen 100.90, baht 31.55, sing 1.3550, HKD 7.7935, INR 39.97, China 6.9929, pesos 10.45, BRL 1.6855, Oil $112.80, Silver $17.83, and Gold… $934.06

That’s it for today… It’s the 50th anniversary of the “stealing of Buddy Holly’s guitar”, which happened right here in St. Louis! The guitar has never surfaced… Can you imagine what it would be worth today if it did surface? It’s also Tax Day… UGH! I got home last night, ate dinner, checked email, and went to bed! So… Hopefully, I’ll be able to get through today better than I did yesterday! We’re finally supposed to get some sun and warmer weather today. I don’t know if my little buddy Alex will get a baseball season this year, given all the rain and flooding in our little river town… But the sun’s coming out! YAHOO! I hope you have a Terrific Tuesday!

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Editor’s Note: Chuck Butler is the senior vice president of EverBank World Markets. He oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single-Currency and Index CDs .