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In This Issue.

* Chuck's Top Ten Currency Stories

* For 2010.

And, Now, Today's Pfennig For Your Thoughts!

Happy New Year!

Good day... And a Happy Friday to one and all! I'm sure it will be a Fantastico Friday, so I'm going to go ahead and call it that! I realized yesterday afternoon, that I had built up today's Pfennig too much. I'm sure when you see what I've done, you'll not think it to be such a "special treat". or then again, maybe you will!

In keeping with the media's insistence to give us the Top Ten of "fill in the blank" each year end. I thought I would do the same. Now. mind you, this is not in any order of importance, the numbers are there so I knew when to stop! Having said that though. #1 is still the most important to you, and will be until the day that I no longer feel it should be feared.

So. Here are the Top Ten Currency Stories of 2010. according to Chuck!

10. the Eurozone periphery countries were thrown together to form the PIIGS ( I called them the GIIPS) with the countries of Portugal, Italy, Ireland, Greece & Spain. The Debt levels of these "Eurozone states" were brought to light late in 2009, and in early 2010, Greece's budget deficit was focused on in the markets, and caused a huge drop in the value of the euro VS the dollar. Greece would eventually received a bail out and along with austerity measures adopted by the Greek Gov't (not without insurgency) the euro was allowed to gain back a huge chunk of the lost ground.

9. the Swiss National Bank (SNB) begins to intervene verbally, and then follow up with actually physical intervention, in an attempt to stem the Swiss franc's rise VS the euro and dollar. The SNB ended up spending 21 Billion Swiss francs in what became a wasted effort, as the franc continue to rise in value VS the euro and dollar, actually reaching new all-time records against both in 2010.

8. Gold rose 28% VS the dollar in 2010, and Silver rose 79% VS the dollar in 2010. There were many reasons for these two precious metals to rise again in 2010, marking 1 decade of growth. However, I do believe that the main reason for these increases is the physical demand from consumers. In 2009, physical demand was up 429%, In 2010, It will eventually show that physical demand was even greater than the previous year's demand! Consumers are watching the goings on around the world, with not only the U.S. but other countries, keeping their interest rates low, and implementing Quantitative Easing, and believing that owning Gold and Silver will be the main way they protect their wealth VS what will most likely be hyperinflation in the U.S.

7. Speaking of Quantitative Easing. in March of 2009, the FOMC implemented a HUGE Quantitative Easing program, buying Treasuries, with newly printed money. By March of 2010, the FOMC made claims that the U.S. recovery was in full force, and that they would be exiting their "emergency measures". This announcement was good for the dollar, but only briefly, as soon the actual results from the economy showed that exiting emergency measures would be a big mistake, the dollar went right back to its weak underlying trend.

6. More Quantitative Easing were the buzz words going around the markets by the end of summer. The plans to exit the emergency measures were dumped, and now the FOMC Chairman, Ben Bernanke, was preparing the markets for more Quantitative Easing, which was implemented the first week of November. This time, an end amount and date were announced by the FOMC, which will really hurt the dollar, should those targets be missed in 2011.

5. Interest rates hikes continued for Australia, Brazil and Norway in 2010, adding to their entries into rate hike cycles in 2009. In addition, there were new members of this rate hike club. Countries like Sweden, Canada (the first G-10 country to raise rates), India, and China. While interest rate differentials can be Huge for a currency's ability to attract investment and drive it higher in value, differentials are not everything. But, as long as the U.S., Japan, and now even the Eurozone, keep their interest rates near zero, the Countries above, and the Emerging Markets countries will continue to gain favor with investors looking for yield.

4. Australia, Canada, Switzerland. What did these three countries have in common during 2010? Their respective currencies all reached and traded above parity to the U.S. dollar! All three bounced back and forth, over and under parity to the dollar in 2010, but the fact that they did reach that level, and remained strong was a good indication that they could reach it again, any time they fell below parity. The Swiss franc, and Australian dollar both reached all-time record highs VS the dollar in 2010.

3. China signs more currency swap agreements. In 2009, we talked about the currency swap agreements that China had signed with most of Asia , Belarus, Argentina and Brazil. In 2010, China signed a currency swap agreement with Russia. So no longer will dollars be used when Russia and China exchange trade with each other. Slowly but surely, China continues to move its currency to a wider distribution and acceptance. These are the baby steps to allowing their currency to float, and become deliverable, which would be requirements to the renminbi becoming the next reserve currency of the world.

2. Ireland's debt problems came to the markets in the fall of 2010. The markets acted as if this news of a problem with Ireland's debt was brand new. However, it was first brought to light in December of 2009. But that didn't stop the markets from taking shots at the euro once more, although this time the selling of euros wasn't as strong as it was earlier in the year with Greece's problems. I've said this before, and I'll say it again that the Eurozone needs a better plan for dealing with the budgets of all Eurozone members. They need to have the authority to direct these budgets, and penalize those that don't comply with budget rules. I would also be wise for the Eurozone to adapt taxing measures, and a one country bond issuance.

1. An Inconvenient debt continues to weigh on the dollar. The mid-term elections in November brought hope that spending could be brought under control, as it was a direct message from the voting public to do so. Unfortunately, that message didn't get through to the lawmakers. The current congress (house and senate) are responsible for adding over $10,000 of debt for each citizen in 2010, brining the total to nearly $45,000 per citizen! And the Congressional Budget Office tells us that the budget deficits will continue for the next decade at a clip of at least 4.5% of GDP. In 2010, Niall Ferguson wrote that he "thinks the debt problem is going to go live really soon. In that sense, I mean with the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos."

In the end. taxes will go sky high, and the dollar will be devalued over a period of years just to pay for the interest that's owed to the holders of our debt. Does anyone now question the thought that deficits do matter, any longer?

I see that the currencies are ending the year on a high note. I wouldn't get too caught up in today's trading, as traders all around the world, are closing their books, which means they close out the short positions, which would really help the euro today, and that's exactly what we're seeing with the euro nearing 1.34 this morning.

And with that. I'll remind you once more to be very careful tonight. and say. Good luck to my son Andrew and his fiancé, Rachel, as they tie the knot this afternoon. And. get to work, so I can get out of here, and make the wedding on time! Going to the chapel and. (now you'll have that song in your head all day!) . So, come back next week, and let's see what we can find to talk about! I hope you have a Happy, Healthy and Prosperous New Year, 2011. Let's Go!

See you next year!

Chuck Butler


EverBank World Markets



Posted 12-31-2010 10:19 PM by Chuck Butler
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