Currency markets stabilize...
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In This Issue..

* Currency markets stabilize (for now)...

* Data packed holiday shortened week...

* China cuts rates...

* Indian rupee falls...

And Now... Today's Pfennig!

Currency markets stabilize...

Good day...The dollar settled in at the slightly higher levels it reached Friday morning and is trading in a narrow range heading into a holiday shortened week. Trade desks across the globe will be mostly staffed by the backups as the big bosses take Christmas week off. Volume will likely be lighter, which can sometimes lead to an increase in volatility.

The data calendar is empty today, but chock full tomorrow and Christmas eve. Markets will be closed on Christmas day, and most will be closed again on the day following Christmas (known as boxing day). GDP, Personal Consumption, U of Michigan consume confidence, New Home Sales, Existing Home sales, House price index, Richmond Fed Man. Index, and ABC Consumer confidence numbers will all be released tomorrow. On Christmas eve the US will release MBA Mortgage applications, Personal Income, Personal Spending, PCE deflator, Durable Goods orders, and the weekly jobs numbers will all be released. I told you we will be packing in a weeks worth of data in the next two days!!

So what will all of this data mean to a thin currency market? I expect all of this data will show a US economy which is continuing to weaken. 3rd quarter GDP is expected to show a drop of .5%, and Personal Consumption is expected to have dropped 3.7% during last quarter. The housing industry continues to weaken, which will be reflected in this week's data. Personal Income is expected to be flat, with spending in the US to show a slight decrease. Durable goods orders will probably show a drop of 3%, and the weekly jobs data will end the data packed two days showing further weakness in the US labor market. The bias for the US$ will continue to be negative, as the next two days of economic data will confirm just how bad the state of the US economy is.

As I mentioned earlier, the currency markets have been trading in a tight range with the Commodity currencies of the Canadian dollar, South African Rand, and the Australian dollar leading the pack. The Japanese yen weakened slightly, trading back above 90 yen per dollar. The yen weakness came as investors slowly moved back into risk trades as a US bailout of GM and Chrysler moved closer to reality. The yen stayed lower vs. the US$ as China announced an interest rate cut in order to try and support its economy.

The dollar weakened a bit vs. the Euro which held just above 1.40 during early European trading. According to a story on Bloomberg by Stanley White, the Euro will likely rise to $1.50 in the next two weeks. The relative strength index for the Euro moved above 50 which illustrates the Euro is gaining momentum. The Fibonacci series of numbers says we are in a bullish trend, with resistance at $1.50 near a 150 percent projection of the euro's rise from its Dec. 4 low of $1.225 to its Dec. 16 high of $1.4147. White goes on to report the 14 day relative strength index shows the euro will start heading higher after a short correction.

The Australian and New Zealand dollars rose as the Feds bailout moved investors back toward higher risk trades. These currencies have been two of the biggest recipients of 'carry trade' flows, and the expected rescue of US automakers gave currency investors confidence to move back into these higher yielding currencies. Even after aggressive rate cuts in both South Sea nations, benchmark rates are still over 400 basis points better than in the US. If commodity prices can start to rebound, the combination would be very good for both the AUD$ and NZD$. I still favor the Australian currency vs. the kiwi, as New Zealand has a much larger current account deficit, which will need to be funded with foreign capital flows.

China's central bank cut interest rates for the fifth time in three months to try and support growth. Chinese leaders have stated they want to keep growth in the world's fourth biggest economy from dropping below 8%. The IMF predicts they will be unsuccessful, as a recent report released estimates 2009 Chinese growth at 5% to 6%. But the People's Bank of China is going to continue to try and meet their goal, using a combination of economic stimulus spending, lower deposit requirements, and easier credit. Mike Meyer tells me we have been fielding a number of callers selling their Renminbi deposits after Dr. Steve Sjuggerud suggested investors exit their positions. While I don't disagree that there are probably many currencies which will outperform the Renminbi, I do think the Renminbi will continue its slow ascent vs. the US$.

The Indian rupee fell sharply after its recent move to a 2 1/2 month high vs. the US$. The selling was probably due to importers taking advantage of the rupee's strength to lock in rates. The rupee touched 46.86 in trading on Friday, the highest since October 3, rebounding more than 8 percent from a record low of 50.615 on Dec. 2. Trading in the forward markets indicate the rupee will recover slightly from where it is trading now.

Currencies today 12/22/08: A$ .6861, kiwi .5755, C$ .8299, euro 1.3976, sterling 1.4807, Swiss .9096, ISK 176.5, rand 9.6712, krone 7.0286, SEK 7.7487, forint 189.52, zloty 2.9259, koruna 18.784, yen 89.96, baht 34.55, sing 1.449, HKD 7.75, INR 46.02, China 6.8512, pesos 13.12, BRL 2.3644, dollar index 80.88, Oil $42.95, Silver $10.965, and Gold... $842.52

That's it for today...Had a great weekend, as a couple of work crews worked long days so that I will be able to make my wife's Christmas eve deadline. I guess the injury to my hand had a silver lining, as these guys really knew what they were doing and probably did a better job than I would have been able to. I caught up with some Pfennig readers and old friends at a big formal ball on Saturday night and got to go watch the Blues vs. Boston yesterday. The new puppy is adorable, but is just like having another child, as he got us up a few times during the night. With temperatures hovering in the single digits, taking the puppy out to do his business is not an enjoyable experience!! Got to get to work, hope everyone has a Marvelous Monday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 12-22-2008 9:40 AM by Chuck Butler