daily Currency Market Outlook
In This Issue..
* A Santa Rally for the currencies?...
* Waiting for the FOMC...
* AUD and NZD rally...
* China to try and keep growth above 8%...
And Now... Today's Analysis!
Santa rally for the currencies...
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 Analyst'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 Analyst" 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!"
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, 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.
In This Issue..
* The Fed fires its last bullet...
* Euro breaks back above $1.40...
* AUD and NZD rally...
And Now... Today's Analysis!
Fed brings rates down to near zero...
Good day... The 'noise' from the street which I wrote about yesterday turned out to be correct, as the FOMC cut 75 basis points to put the Fed Funds target at .25%. The US now has the lowest interest rates in the industrialized world, even below those in Japan. The dollar lost ground quickly after the announcement and continued to fall overnight to a 13 year low vs the yen and the weakest vs. the Euro in 4 months.
I fielded the calls from reporters after the FOMC cut, and the most popular question asked was what the near zero interest rates would mean for the man on the street. Well it was great news for those on Wall Street, but I told the reporters that the rate cut really wouldn't have much of an impact on US consumers. After all, interest rates at 1% weren't stimulating the banks to start lending so why would .25% rates cause any change?
Fed Funds have been trading at around .25% for some time, so this move by the Fed simply moved their target rate closer to the actual market. In addition, the Fed can't really impact the Libor rates, which most loans are now tied to. So yesterdays interest rate move was largely for cosmetic purposes.
"So... The Fed goes 75 BPS... Japan now has higher interest rates than the U.S.! How is that possible? How many times must I repeat that it's not the COST OF THE CREDIT... IT'S THE AVAILABILITY OF THE CREDIT! That's causing the Credit Crisis!
In This Issue..
* Santa rally continues...
* Norway cuts 175 basis points...
* Japanese intervention possible...
* Indian rupee moves up...
And Now... Today's Analysis!
Santa rally continues...
Good day... The dollar is falling much faster than it rose, the euro surged over 6 cents vs. US$ since yesterday at this time. The 5 day return chart for the major currencies vs. the US$ is pretty impressive: Swiss Franc +12.55%, Euro +9.5%, Danish Krone +9.44%, New Zealand $ +8.41%, Australian $ +5.08%, Swedish Krona +4.85%. And it continues. The past two weeks have been the most dramatic move by the dollar that I can remember. The dollar index, which tracks the US$ vs a group of major currencies is back trading right where it was at this time last year.
I pulled a chart of year to date currency returns vs. the US$, and there are now 5 major currencies which have appreciated vs. the greenback: Yen +26.44%, Swiss + 8.07%, and Singapore, Danish Krone, & Euro + 1%. And with the recent big moves, our phones have been lighting up with investors moving back into currencies. I love the fact that all of these investors are diversifying, but the speed of this recent move demonstrates why we suggest keeping your investments spread across all asset classes. Trying to time into or out of a market can be frustrating, while keeping consistent asset allocations is the key.
The cut by the FOMC is putting pressure on other central banks to follow suit. Norway's central bank cut its benchmark rate by 1.75%, a huge move meant to counter the growing global recession. The Norges bank said the rate could go even lower during 2009 as falling oil prices reduce the risk of inflation. The Czech central bank also cut rates yesterday, but kept its move at a relatively small 50 basis points.
In This Issue..
* Dollar bounces back up...
* Paulson heads back to congress...
* BOJ cuts rates to below the US...
* China to continue increasing the value of the Renminbi...
And Now... Today's Analysis!
Dollar bounces back up...
Good day... The currencies took a breather overnight as the dollar bounced back up. When we left last night, the Euro was still holding above $1.42, but the single unit dropped 3 cents overnight and is now hovering around the $1.39 level. This move back down was to be expected, and serves as an excellent opportunity for investors who were afraid they had missed out on getting back into the currency market.
I have searched the news wires this morning and can't find any good reasons for the dollar's turn around other than it had simply gone too far too fast. Mike Meyer and I were talking about this yesterday morning, as we were looking at the trading screens in amazement. The dollar's move down over the past two weeks was even faster than the move up earlier this year. Analyst had warned readers all during the dollar rally that the strength was only temporary, but the reversal was just too quick. This move back up is healthy for the markets, and will allow investors another opportunity to move back in.
The US jobless numbers were better than expected as they dropped to 554k from an adjusted 575k last week. The continuing claims also fell to 4,384,000 out of work. Leading indicators fell .4% during November, and Octobers number was revised to -.9%. So while all of these numbers could be spun as positive (not quite as bad as the last ones), they still reflect an economy which is continuing to falter.
Treasury Secretary Paulson will probably be heading back to Congress to claim the second half of his $700 billion bank rescue plan. I think he is probably hoping Congress is in a giving mood with the upcoming holidays and will go ahead and let loose of the additional funds. But Paulson may have some trouble securing the additional funds as lawmakers have warned the Bush administration it must come up with a new effort to aid homeowners and get aid directly to their constituents.
Paulson is also probably worried that congress may pull back some of the promised funds and earmark them for the new administration's stimulus package. So now we have the present and future administrations fighting over who is going to get to spend the taxpayers money, with Paulson doing his best to get it all spent before heading off into the sunset. Analyst spent a tough day as the eye doctor yesterday, but still sent me the following note:
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In This Issue..
* FOMC to cut further...
* Bernanke turns his back on inflation...
* Kiwi and Australia rally...
* Gold continues to shine...
And Now... Today's Analysis!
Waiting on the FOMC meeting...
Good day...and welcome to another week, hopefully the currency markets can continue their assault on the dollar which began a few weeks ago. The dollar index peaked back on November 21, and with the exception of a few days around the beginning of December, the greenback has consistently fallen vs. most of the major currencies. Friday was no exception, and the dollar continued to give back gains over the weekend with the Euro climbing back over $1.35 for the first time in two months.
This morning the markets are focusing on the Fed's Open Market Committee meeting and rate announcement which will come tomorrow. It is widely expected that Bernanke and his compatriots will push US interest rates close to just 0.5%, the lowest on records dating back to July 1954. From everything I've read over the weekend, this 50 basis point cut is pretty much a done deal, and currency traders are actually more interested in what the Fed's statement will say about 'alternative easing measures'. The rate announcement will come tomorrow at around 2:15 pm EST after a two day meeting. The FOMC meeting had originally been scheduled for just one day, but was extended so policy makers could study options for unusual steps to spur the economy. I guess they finally figured out that they are running out of room with the interest rate cuts!
The Feds newest weapon against the falling economy is 'quantitative easing', which the Bank of Japan used in the 1990's. This non-traditional method of easing centers around pumping money back into the financial markets as quickly as possible. The Fed has already started down this path by allowing its balance sheet to more than double in size after pumping over $1 trillion into financial markets. The markets are now expecting the Fed to announce it will start purchasing private sector mortgages to drive down home loan costs. By purchasing these bonds, the Fed would narrow the spread between their yields and yields on US Treasuries, and theoretically allowing banks to offer home loans at lower rates.
But the Fed has already pumped trillions into the banks in an effort to get them to start lending, so I'm not sure having the Fed narrow mortgage spreads will get these same banks to open up their lending windows. And even if the banks lower mortgage rates, they won't be lowering credit standards. Unemployment continues to rocket upward as more and more firms lay off workers. Do you think these banks are going to be willing to refinance someone who has just lost their job?
And what will be the long term impact of all of this 'quantitative easing'? The Fed is mashing on the money supply accelerator, totally ignoring the inflationary results which all of this will bring down the road. Ben Bernanke is smart enough to know the risks of the path he is speeding down, but right now he is choosing to ignore the consequences in an attempt to keep the economy from falling off the abyss. Some at the Fed believe they will be able to pull all of this added liquidity back out of the markets as soon as the economy starts to recover. But this is a very difficult thing to do, as the Fed would have to start pulling liquidity and increasing rates just as the economy is starting to turn. I think it is pretty obvious the 'experts' have a tough time calling the turning points, as it took them almost a year to call the recession!! And the consequence of missing the timing on pulling the liquidity back out of the market is much more drastic than mistiming the entry into the recession. Hyperinflation is waiting on the other side of this short term deflationary pause, and the Fed is currently looking the other way.
This weekend, President Bush announced that he is thinking about spending some of the TARP money which was set aside to stabilize the financial system to bail out the auto industry. This announcement caused a further sell off of the dollar as it is quickly losing its status as a safe-haven currency.
"Well... We went to cut down our tree today, then watched Alex's basketball team get smoked! Put the tree up in a spiffy, with one of the greatest inventions of man kind, the swivel stand... And now I'm off to tell you what I've read about this weekend...
First though... A quote from Ronald Reagan... "The most terrifying words in the English language are: I'm from the government and I'm here to help"
OK, with that in mind, I wanted to discuss the bailout for the automakers, GM and Chrysler.
First of all, I know it will be tough for the autoworkers should they be laid off, especially at this time of the year. But, the problem here is the fact that the automakers have run their respective companies very badly, and now they expect the taxpayer to bail them out.
It was reported on Friday that the Gov't is "looking into" using TARP money for the automakers bailout since the Senate voted "no" to the $14 Billion plan.
First of all... Congress said nothing about helping carmakers, or any other non-financial business, in October when it authorized the $700 billion Troubled Asset Relief Program, or TARP. But yet, it is being discussed as the "funding source of funds"...
That fund was never designed to rescue manufacturing companies with long-term operational issues. It was designed to shore up confidence in the banking system in order to thaw the world's credit markets.
Our own David Nicklaus of the St. Louis Post Dispatch has this to say, which makes a whole lot of sense to me! "The Detroit Three have been losing market share for decades, and their bloated cost structure makes it difficult for them to turn a profit even in good times. They have too much debt, too many models, too many dealers and, sad to say, too many workers.
Congress seemed to view an auto bailout as a jobs program, and TARP is nothing of the sort. In fact, the Treasury has invested in Bank of America, which is eliminating 35,000 jobs, and Citigroup, which is slashing 52,000.
The Treasury program, as it's been used so far, at least lacks one of the worst features of the failed auto bill. Nothing in the TARP legislation allows the government to name a car czar."
Yes, a Car Czar... Those Czars worked out well for the Russians, eh?
But the thing that really gets my blood boiling folks, is the fact that if bailout had gone through with the Car Czar, it would have been one more nail in the free markets / business coffin, just another opportunity for those that want to run the country toward the socialist side of the ledger..."
As I started to say before I went off on my FOMC tangent, the dollar continued to give back ground vs. just about all of the major currencies over the weekend. The Euro was up over 1.2% vs. the dollar, and broke through the $1.35 handle. The only two currencies which sold off over the weekend were the South African rand and Brazilian real, which were down just slightly. In addition to the FOMC meeting and announcement, we will get the TIC flows, Empire manufacturing number, Industrial Production, and Capacity Utilization numbers today. Tomorrow will bring the CPI numbers along with housing starts, building permits, and ABC Consumer confidence. Wednesday will be a light data day with just the Current Account Balance reported, and Thursday will close out the data with the weekly jobs numbers along with Leading indicators.
The Australian and New Zealand dollars rose on speculation the FOMC will be cutting US interest rates. These two currencies will benefit from their higher rates with the US cutting rates to near zero. The currency markets have started to move back toward trading on fundamentals over the past few weeks, and interest rate differentials are one fundamental which favors the NZD and AUD. If the Fed's statement makes it known that interest rates will remain low for a long time, the dollar would likely fall further vs. the Aussie dollar, as the RBA has signaled that it is close to the end of its rate cutting cycle. Benchmark rates are nearly 400 basis points higher in Australia and New Zealand when compared with the same rates here in the US.
In a break with the recent trading pattern, the Japanese yen rallied along with the New Zealand and Australian dollars. A former Deputy Governor of the BOJ said Japan is probably not going to lower rates further; "with the interest rate already so low, a further reduction would have only limited impact." The central bank's Tankan survey today showed confidence among large manufacturers fell the most in 34 years as a deepening global financial crisis crimped export demand, forcing companies to pare production and fire workers. The yen's recent surge to a 13 year high has compounded woes for manufacturers.
Gold continued to rise over the weekend, pushing back up to an eight week high in London. The dollar's fall has spurred investors to move back into gold as an alternative investment. News that President Bush was looking to tap the bank bailout fund to keep GM and Chrysler out of bankruptcy spurred further purchases of gold. With the tremendous growth in the US money supply, and the FOMC turning their back on inflation concerns, precious metals should continue to gain ground. Gold is traditionally one of the best hedges against rising inflation.
Wish all of you happy trading