Cruise Control for the Currency Rally

Good day… And a Wonderful Wednesday to all! First, I just want to thank Chuck for letting me Pfill in for the Pfennig again and express what a great honor this truly has become. As he mentioned yesterday, I’ll be your author today and all of next week, so I’ll try to keep you on top of what’s going on and provide your daily dose… So let’s get right to it…

The currency rally yesterday had the cruise control set for most of the day but had to tap on the brakes a bit in the afternoon as profits were being removed from the table. We saw the euro (EUR ) shoot up to 1.2822 at one point and was trading just below the 1.27 handle on my way out the door last night. Many of the “high” yielders and emerging economies had a ticket on the love train since investors were willing to dip their toes into some riskier assets.

It seems many had a warm and fuzzy after Citigroup announced it was having its best quarter since 2007 and that the company was profitable for the first two months of the year. This sent the S&P 500 up nearly 6.5% and the Dow Jones up close to 380 points… It seems like investors just wanted some type of news that didn’t involve the end of the world and an excuse to spend some of that money sitting on the sidelines.

The Australian dollar (AUD ), the Brazilian real (BRL ), and the South African rand (ZAR ) were among the top five performers with the Swedish krona (SEK ) leading the charge at a 3.5% clip against the dollar. We had some disappointing data come out of Brazil as fourth quarter GDP fell 3.6% and marked the biggest quarterly contraction since 1996. Most economists are looking for a 1.5% rate drop as a result of that news at today’s meeting, but we’ll see how that pans out. The bottom line is that Brazil is a big commodities country but its emerging market status requires caution.

We saw the Canadian dollar (CAD ) rise 1.5% from a four-year low on the back of the higher currency market. Even though the Canadian economy has close ties to the United States, they may emerge from the recession faster due to the country’s better bank and government financial position according Prime Minister Harper. The loonie, along with the Norwegian krone (NOK ) need higher oil prices to really provide the lift needed to begin flying again.

I saw where the EU policy makers basically blew off pressure from the United States to take more action and additional measures surrounding the financial crisis. This is all coming on the heels of the G-20 meeting later this week to discuss the global recession. Luxembourg’s Finance Minister was quoted as saying, “Recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis were not to our liking and we want to see what the effect of the recovery package is going to be.”

The German Finance Minister also threw a barb, commenting that the United States should better familiarize itself with economic stimulus measures in Europe that have already been started or are about to get started. I guess this tough talk can go along with what Chuck mentioned yesterday about Bundesbank President Weber’s wishes for rates to not fall below 1%. I don’t know what kind of drama (if any) will come about, but the EU appears to remain more reserved when it comes to stimulus and its dealing with the financial crisis.

While I’m talking about Europe, the pound sterling (GBP ) was only one of two currencies that didn’t get the starting nod yesterday. British home sales falling to the lowest levels since 1978 and manufacturing at its lowest levels in 40 years are still keeping the pound in the doghouse and on the bench. There just doesn’t seem to be much on the horizon to change its overall downward trend.

Gold had a tough day as we saw it fall to under $900 as the financial woes were being swept under the rug. We still remain bullish and there are plenty of investors out there that remain steadfast about buying on dips. The big question mark here is where do the bargain shoppers come out in force and provide the support for its next run. It has at least gained a couple of dollars this morning and is trading just above the $900 mark.

To piggyback on what Chuck was saying yesterday about Treasuries, I found a snippet that agrees that a weaker dollar is needed to attract buyers. Vincent Chaigneau, head of currency and interest rate strategy at Societe Generale, said, “The current account deficit and the massive government bond issuance suggest heavy dollar losses over the next 6 to 12 months. Investors aren’t buying risky assets and are focused on Treasuries. With the amount of bonds the government is issuing, investors will demand higher yields. Yields will remain low if the Fed buys bonds. The dollar will have to fall to improve returns.” Our sentiments exactly.

Today we have mortgage application numbers and the February monthly budget statement. The budget deficit is expected to widen to $205 billion after January’s figure of $175.6 billion and shouldn’t come as a surprise given the amount of spending going on. As I came in this morning, there wasn’t much to report on from the overnight trading sessions so the currencies are collectively in the same range as where I left them last night. UBS posted a larger than expected 2008 loss of $18 billion and China’s trade surplus fell to the lowest levels since February 2006. It’s certainly good news that the dollar didn’t get bought on these concerns, so at least we have that going for us today. Hopefully the currencies can use these levels as a base to regroup, but let’s see where the budget figures come in and how tomorrow’s retail sales numbers pan out first. Look at this, the euro has run up to 1.2750 as I’m getting ready to hit the send button… Hopefully the wind remains in those sails today…

Currencies today 1/15/09: A$ .6470, kiwi .5048, C$ .7809, euro 1.2712, sterling 1.3781, Swiss .8602, rand 10.30, krone 6.9556, SEK 8.8668, forint 236.50, zloty 3.6217, koruna 21.1992, yen 98.48, sing 1.5384, HKD 7.7557, INR 51.8850, China 6.8405, pesos 15.1901, BRL 2.3334, dollar index 88.47, Oil $45.50, Silver $12.77, and Gold… 904.22

That’s it for today… On April 23-25th The Big Boss, Frank Trotter, will be returning to one of our favorite conferences when he heads to the mountains of north Georgia – at the invitation of old friend Martin Truax – to attend and speak at the 18th Atlanta Investment Conference. Over the years we’ve had some of the best interactions with customers and other speakers in the spectacular surroundings that Martin and his team provides. This gathering combines some great economic and investment discussions with a good cause; put on by the Friends of Autism, this fine organization benefits each year from your attendance. To get more information click here , or send an email to . I don’t know about you, but I still haven’t recovered from that loss of an hour during daylight savings. It just seems like I’ve been behind all week long. Oh well, time to get to work… Hope you have a Wonderful Wednesday!

Mike Meyer

The Daily Reckoning