Boxing Day

Good day… I had a very merry Christmas getting together with family both Christmas Eve and yesterday. Hopefully this Pfennig will reach you much earlier than Monday’s; we had a server problem which delayed it several hours. Apparently the server fix also shook loose two other Pfennigs which had been stuck, so many of you got a Christmas treat of three Pfennigs for the price of one!

Most markets were closed over yesterday, and many continue to be closed today in honor of ‘boxing day’. The volume of trading in the currency markets is expected to be just 10 percent of the normal average. The only piece of data to be released in the US is the S&P/Case-Schiller housing index which is expected to show October home prices slumped by the most in at least six years. This negative housing data will continue to increase selling pressure on the US$.

While the US housing market continues to be a drag on the dollar, low interest rates in Japan look to hold down the value of the Japanese Yen. The Yen traded near a seven-week low against the dollar after minutes from the BOJ’s November meeting were released today. In the minutes, Bank of Japan policy makers said risks to world economic growth are rising, and global financial markets are expected to remain volatile. The markets now believe the odds that Japan’s central bank will lift its benchmark rate on Jan. 22 are just 1 percent. Most don’t believe the BOJ will raise rates at all in 2008 and as I reported on Monday, there are rumors floating in the markets of a rate cut!

But one of the members of the BOJ policy’s board came out overnight stating Japan’s slowing economic growth doesn’t mean the central bank should lower rates. “The Japanese economy currently doesn’t warrant a rate cut,” Hidetoshi Kamezaki said at a news briefing. “We don’t have any preconceptions about future policy. We’ll carefully monitor the economy and prices and remain vigilant.” A report released later this week will likely show CPI in Japan rose at the fastest pace in almost a decade in November. This report, to be published December 28, will likely put to rest all of these rate cut rumors.

The yen will continue to be weak, as low rates in Japan will continue to fuel the ‘carry trade’. But I am one of the few that believes we will still see rates rise in Japan during 2008. So while the yen will probably continue to get sold over the short term, the prospect of higher rates will provide a floor for this volatile currency.

With the yen weaker, it was really no surprise to see some of the higher yielding currencies do well. The South African Rand rose over 1% during trading yesterday as investors moved back into the carry trade. The Rand was also helped by rising gold and copper prices due to continued strong demand by China. The rand continues to be one of the more volatile currencies we deal in, and should only be considered by those who are willing to speculate.

The Brazilian real also strengthened on the re-emergence of the carry trade. Brazil’s currency has risen almost 20 percent against the dollar this year, making it the biggest gainer among the most actively traded currencies. Brazil remains a speculative currency, but their economy continues to grow due to increasing commodity prices.

Another currency which has benefited from higher commodity prices is the Canadian dollar. The loonie was one of the best performing currencies vs. the US$ over the first three quarters of 2007, but it has come under selling pressure in the past few weeks after the Bank of Canada cut rates in concert with the US. But the Canadian dollar climbed to a three week high on Monday after a deal was reached which allowed the asset-backed commercial paper market in Canada to resume trading. There had been a 4 month suspension in trading of commercial paper prompted by investor apprehension about ties to US subprime mortgages (the Subprime mortgage mess has tentacles running everywhere!).

It was nice to see the loonie climb back up over the past few days, but don’t expect it to regain the torrid pace of appreciation we saw earlier this year. I believe it will struggle to top the record high hit earlier this year, and will probably trade in a fairly tight range around parity through the first half of 2008.

One of the main contributors to the most recent dollar rally has been a infusion of capital into the US markets by Asia and the Middle East. Merrill Lynch, Morgan Stanley, Citigroup, and Bear Stearns have all sold stakes to foreign investors to bolster capital eroded by credit market losses.

These investments were on Chuck’s mind as he emailed me last night: “Sunday, I read just what we had suspected was going to happen… Credit Card debts are getting ignored… Balances in arrears 90 days and more have risen at a road runner pace… So… No wonder, retail sales have continued to do well… People are charging, and not paying… UGH!

And then this morning, I read where Merrill Lynch got a $6 Billion infusion to Capital… From a Thai investment firm… Rumors are rampant that Merrill will have to write down up to $10 Billion in the 4th QTR, which will be made public in January…”

I expect these Asian and Middle Eastern nations to continue to diversify their reserves. The dollar made up 64.8% of central banks’ currency reserves in the second quarter, down from 71% in 1999, the year the euro made its debut, according to the IMF. The euro accounts for 25.6% of reserves. This should continue to support the euro vs. the US$.

Currencies today: A$ .8728, kiwi .7664, C$ 1.0179, euro 1.4479, sterling 1.9844, Swiss .8691, ISK 63.25, rand 6.9840, krone 5.5360, SEK 6.5603, forint 175.84, zloty 2.4977, koruna 18.36, yen 114.13, baht 30.23, sing 1.4523, HKD 7.8056, INR 39.42, China 7.3496, pesos 10.8176, BRL 1.7832, dollar index 77.386, Oil $94.55, Silver $14.585, and Gold… $814.32

That’s it for today…Chuck will be back to work tomorrow, after spending the last day of his winter vacation at home celebrating his beautiful wife’s birthday. Happy Birthday Kathy! Trading in the currency markets will continue to be light, as many of the senior traders are off until the first of the year and most of the junior guys won’t want to take any large positions. Look for more of the same for the dollar with it ranging down vs. most of the currencies. Hope everyone has a Wonderful Wednesday!!

Chris Gaffney
December 26, 2007