Another dollar rally….  Rumors in Ireland…  Trade Deficit narrows…  Retail Sales to disappoint?  And Now… Today’s Pfennig!
The dollar ripped through the 1.32 handle of the euro yesterday, like a hot knife goes through butter! There was little to no resistance in that 1.32 handle, and before you could tell one of the many people on the desk here that sneeze all day, God Bless you, we were trading with a 1.31 handle in euros. The talk about a European Central Bank (ECB) rate cut has really ramped up this week, and taken its toll on the single unit. No one is mentioning that even if the ECB cuts 75 BPS this week, they’ll still have a an interest rate / yield advantage over the U.S! I guess they’ll sort that all out somewhere down the line, eh?

There’s a rumor going round, that’s someone’s underground, no wait, there’s a rumor going around that Ireland had requested aid from the IMF… Whoa there Partner! I know that things in Ireland have turned around on a dime from boom to bust, but I wasn’t aware of a problem that would run that deep… The rumors were denied, of course, but you know me… Where there’s smoke, there’s fire… I’m reminded of an email I received 2 weeks ago from a reader in Ireland, that talked of a major slowdown in the economy. The writer, was very adamant about how bad things had gotten that he compared Ireland to a banana republic! I responded to him, and said, no… That can’t be, because we’ve got a corner on being a banana republic right here in the U.S.A.!

You should have seen the sell off in euros when this rumor hit the streets! It was scary how fast a currency could lose a handle! But, after the rumors were denied, the single unit rallied back nearly as fast as it fell, and is now trading, as I write at 1.3225. The dollar is swinging a mighty hammer once again…

Talk about a flight to Risk Aversion! This rumor has the Risk Aversion campers battening down the hatches and heading to the cellars! Risk Aversion is NOT good for currencies and commodities.

Another reason for the Risk Aversion campers to batten down the hatches is the report from yesterday that Citigroup is going to sell their brokerage arm, Smith Barney, to Morgan Stanley for $2.7 Billion in cash… This to me, sounds like a fire sale, and that Citigroup is in deep dookie once again… Citigroup has already received $45 Billion from the Gov’t in TARP money, much more than any other bank has received, for sure!

This news scares the bejeebers out of me, as Citigroup has always prided themselves on the fact that a customer could do “one-stop investing”… I guess, we’ll have to wait-n-see if Citigroup announces a sale of another unit somewhere down the line, eh? But for now… This news is not good for any asset!

Well… Today, we’ll see the color of the Retail Sales for December. We all know that December Retail Sales should be kicking rear and taking names later… But… And that’s a BIG BUT… Not last month, unfortunately. As we get ready for the printing of Retail Sales, the experts say that Retail Sales will have fallen -1.2%, following a -1.8% in November. The Butler Household Index (BHI) tells me that while Christmas shopping was good, it wasn’t on scale with other years, and I believe the Retail Sales will be very disappointing this morning.

OK, what do we have here? A Fed Head talking about our ZIRP (zero interest rate policy). I know, we’re not quite at zero yet with the official rate, but the Fed Funds people would tell you differently! So, in my book, I say ZIRP! Well, this Fed Head, Lacker, thinks that interest rates will stay very low for some time… Say it ain’t so, Joe! I don’t want to see rates at zero for a long time, folks! That’s part of the reason we’re in this mess to begin with!

Oh, and yesterday, Big Ben Bernanke, was speaking over in London, and kind of threw some cold water on Obama’s $800 Billion stimulus plan… I can hear Obama saying… “Hey! He backed all the other stimulus plans, but now he’s throwing cold water on mine!” Well… I said “kind of threw” I didn’t say he DID throw cold water on the plan… I’ll let you decide… Here’s Big Ben… Fed Chairman Ben Bernanke said the “stimulus package being crafted by Barack Obama and Congress could provide a “significant boost” to the sinking economy. But he warned that such a recovery won’t last unless other steps are taken to stabilize the shaky financial system.” And what is he talking about in the “other steps”?

Here’s more Big Ben… “There will be no lasting recovery without further government action and funds to strengthen the financial system, with the timing of an economic recovery “highly uncertain.” OH GREAT! More Government action! That’s Central Bank parlance for “we’re getting our hands deeper into the cookie jar”!

OK, I’ve gone this far, and have not mentioned the huge drop in the Trade Deficit that showed up in the print yesterday… The Trade Deficit fell from $56.8 Billion in October to $40.4 Billion in November! WOW! This fabulous! Or is it? Let’s take a closer look at the numbers… U.S. exports fell $8.7 Billion and imports fell $25 Billion. Lower oil imports accounted for more than half of this drop, but ex-petroleum imports also fell $10.5 Billion.

So… Here’s the problem folks… As I tried to explain yesterday… A narrowing Trade Deficit because of less spending and larger exports would be manna from heaven… But a narrowing Trade Deficit because spending was slashed, and exports also fell, is not a good thing for the economy. It simply means that 1. The U.S. consumer has dried up and with consumption at least 70% of GDP, we’re in for a long recession… And 2. that the dollar is too strong, otherwise exports wouldn’t be so far off too. Yes, I’m quite aware of the fact that the recession is hitting all over the globe, but come on, we still buy Chinese and Japanese and even German exports even in a recession don’t we? These same countries would be doing the same with U.S. exports…

And then there’s this… News of the weird… Chris Gaffney saw a story yesterday that he sent to me, that qualifies for this category… Here’s a snippet of the story… “The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.” Oh boy! Just what the pound sterling needs as a stabilizer eh? NOT! This is awful news for the pound folks…

I’ve said for months now that the Bank of England (BOE) was following in the Fed’s & Treasury’s steps, which could be to ruin, but following nonetheless! This is just another step in the Fed’s & Treasury’s direction. The free use of a printing press… The story went so far as to say “this will spark comparisons with the Weimar Germany and Zimbabwe, were uncontrolled use of the printing press ultimately caused hyperinflation.” This is where they’re getting a little out of control with the sensationalism… I prefer to say that it should compare to the U.S…. Which may still see hyperinflation in the future… But not the kind of Germany and Zimbabwe! YIKES!

So… As I get ready to head to the Big Finish… It looks as though that Trading Theme is back in force again, and the dollar will benefit any time the data shows the recession to be deeper, darker and more dangerous… Makes no sense to me! But that’s the work of the mental giants these days… So… If Retail Sales is as disappointing as I suspect it to be in about 15 minutes, then the dollar should be supported today…

Currencies today 1/14/09: A$ .6670, kiwi .5440, C$ .8185, euro 1.3190 (slipped back again), sterling 1.4535, Swiss .8925, rand 10.0450, krone 7.14, SEK 8.30, forint 210.20, zloty 3.1420, koruna 20.42, yen 89.45, sing 1.4920, HKD 7.7570, INR 48.83, China 6.8350, pesos 13.83, BRL 2.3140, dollar index 84.15, Oil $38.87, Silver $10.76, and Gold… 826.50

Source: The Dollar Swings A Mighty Hammer!