GDP is expected to have fallen .5% in the 3rd quarter, and Personal Consumption is also predicted to have dropped last quarter. Later in the morning we will get reports on the sagging housing market. New home sales and existing home sales are both expected to have dropped slightly during the month of November. And with sales dropping, prices of both existing homes and new homes are also expected to have dropped. Finally, this afternoon we will get the ABC Consumer Confidence number which will likely show another drop in consumer sentiment.

I went over to a shopping center last night while I waited for my son’s hockey practice to end. I was surprised at the number of shoppers in the Electronics store, but after speaking with a sales person, he told me the traffic has been down, with many shoppers waiting for items to go on sale after the holiday. Most retailers make their year during these last two weeks of December, and it will be interesting to see just how many sales we will see post Christmas.

The Japanese yen has been in the news again, as Toyota Motor Corp. forecast its first operating loss in 71 years yesterday. The worlds second largest automaker said the sagging global economy and a rising yen were to blame. Japanese officials have not yet decided to intervene, but a quick move below 90 by the yen could trigger action by the central bank. Bank of Japan Governor Masaaki Shirakawa was trying to jawbone the yen yesterday as he spoke about the negative effect the strong yen has on the economy. The thin holiday markets give officials a perfect opportunity to drive the yen back down.

New Zealand’s dollar fell for another day as a report showed their economy shrank. New Zealand’s gross domestic product declined .4% in the three months ended Sept. 30 from the 2nd quarter. A further move down in NZD interest rates will likely combine with the slower economic growth to put further selling pressure on the kiwi. New Zealand central bank Governor Alan Bollard has been aggressively cutting rates to try and avoid the deepening recession. He has cut 3.25% since July, and has indicated that there is still room left to cut further.

In a split with their kissin cousin across the Tasman, Australia’s currency advanced against the US$. The Aussie dollar rallied as some of the base commodity prices rallied. Copper rose yesterday in New York trading as traders predicted the drop in Chinese interest rates will keep the largest Asian market growing. Gold futures also rose overnight, helping to support the Australian dollar. Raw material exports make up 60% of Australians economy, and China is their biggest trading partner. I believe the Chinese government will be successful in keeping economic growth right around their target of 8%, and this growth will support the Australian dollar.

The Indian rupee fell further against the US$ yesterday, and will likely end up the year as the worst performing Asian currency. But Moody’s Economy.com is predicting the currency will be the region’s biggest gainer during 2009. “India’s rupee is one of my top picks as the country has a strong domestic market with very strong growth potential,” Moody’s Sherman Chan said in an interview yesterday. “It is one of the most attractive destinations for foreign direct investments with its large domestic market and a very well educated workforce.” He expects the currency to rise 7.7 percent against the dollar next year. But much of this rise will occur during the last half of the year, and Chan said the rupee could get weaker before starting its move up.

Moody’s Chan also said he thinks the Chinese Renminbi will be ‘largely stable’ as authorities seek to protect exporters while avoiding upsetting trade partners. I agree with his assessment, and believe the Chinese Renminbi will continue its long slow appreciation through 2009.

As I wrap this up, I want to remind everyone to take advantage of this pause in market volatility to take a look at your portfolios. It is a perfect time to reallocate your positions to align them with your investment goals. The big moves in the markets have probably caused most portfolios to become over allocated in some currencies such as the Renminbi and Yen, and under allocated in commodity currencies of Australia or Norway. You can contact the trade desk and have one of our specialists review your holdings. While we can’t manage accounts, they will be more than happy to share their opinions with you.

Currencies today 12/23/08: A$ .6840, kiwi .5723, C$ .8219, euro 1.4007, sterling 1.4832, Swiss .9223, ISK 145, rand 9.7375, krone 6.9865, SEK 7.8310, forint 189.08, zloty 2.9429, koruna 18.8077, yen 90.06, baht 34.60, sing 1.443, HKD 7.75, INR 48.7625, China 6.8488, pesos 13.18, BRL 2.3755, dollar index 80.966, Oil $40.16, Silver $10.76, and Gold… $845.25

Source: Holiday Pause

But the news may have bigger implications for Japan’s entire economy, as the country’s exports continue to take a beating from sagging worldwide demand for its products.

Japanese exports plunged 26.7% in November from a year ago. Shipments to the U.S. slid an unprecedented 34%, Japan’s Finance Ministry said. A strong yen, which makes Japanese goods more expensive, combined with deflated consumer spending, is hammering Japanese exporters.

Toyota will post a $1.7 billion (150 billion yen) loss in the year through March, it said in a statement, scrapping a previous forecast of a $6.6 billion. The last time Toyota posted an operating loss was in the year ended March 1938, spokesman Hideaki Homma told Bloomberg News.

“The environment we’re in is extremely tough,” President Katsuaki Watanabe told reporters in Nagoya. “We’re facing an unprecedented emergency situation. Unfortunately, we can’t see the bottom.”

U.S. auto sales are down 16% this year, led by declines of 28% for Chrysler LLC, 22% for General Motors Corp. (GM) and 19% for Ford Motor Co. (F), Bloomberg News reported. The three U.S. automakers will close about 59 factories over the next month as they struggle to avoid bankruptcy.

“It is difficult to envision any swift recovery from the present damage in the U.S., Toyota’s core market, and we anticipate increasing cuts in overseas local production,” wrote Barclays Capital (BCS) analyst Tsuyoshi Mochimaru in a research note on Dec. 19, according to MarketWatch.

Compounding the demand problem is a surging yen, which erodes overseas profits for Japanese exporters. The yen has gained 25% against the dollar this year.

But Toyota’s problems may just be the tip of the iceberg for Japan’s economy. The November export plunge was the biggest drop on record, as global demand for cars and electronics collapsed.

Earlier this month, Sony Corp. (ADR: SNE) announced it was cutting 8,000 jobs, or about 4% of its worldwide workforce. Sony recently blamed a 72% profit plunge in the third quarter partially on a resurgent yen. Electronics company Sanyo Electric Co. (OTC: SANYY), facing tough market conditions around the globe, agreed Friday to sell itself to rival Panasonic Corp. (PC).

“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad, he told Bloomberg News.

Like the U.S. Federal Reserve, The Bank of Japan has been hacking away at interest rates in an attempt to stanch the economic bleeding. Japan’s central bank lowered rates to 0.1% on Friday.  But the rate cuts haven’t been enough to kickstart the Japanese economy, as the yen has remained stubbornly strong.

Source: Toyota’s First Operating Loss Since 1938 Spells Trouble for Japanese Economy