It's a Battle Royal Between
the Canadian and U.S. Dollar

Today's comment is by Sean Hyman, Currency Director and Editor of The Money Trader.

Dear A-Letter Reader,

Last Friday, two countries released their employment reports. These reports generally come out on the first Friday of each month.

In one corner, we have Canada. At the other side of the ring, we have the United States.

Canada took the first punch because their report comes out at 7am EST whereas the United States payroll report comes out at 8:30am EST.

Nothin' But Good News for the CAD

Canada got off to an early start with an exceptional employment report. The Canadians added over five times more jobs than economists estimated. To be exact, Canada added 42,600 jobs, when economists expected 8,000. So that was a very good sign for the Canadian economy and Canadian dollar. But wait, this could mean that Canada may not lower rates aggressively. If so, this would be another improvement for their currency.

However, Canada's unemployment rate did tick up a notch to 5.9% vs. 5.8% formerly. So the Canadian dollar (or "CAD" in trader's speak)_took a minor blow. However, overall, the report was very positive for the CAD.

Next we anxiously awaited the fate of the U.S. dollar as the clock hit 8:30am EST.

The U.S. payrolls report had mixed results. On one hand, the payrolls beat estimates slightly (94,000 vs. 85,000 expected). However, the market typically views this as being somewhat "in line," with expectations.

The numbers would have to be far and beyond expectations to receive a favorable response. But wait, last month's payroll numbers were revised downward by 48,000. So when you consider that, it was a net loss.

But then the unemployment rate came out at 4.7% vs. 4.8% in October. Even going down 1% is a good sign. So in the end, it was a mixed bag for the U.S. dollar.

Canada Clearly Wins the Employment Report Match

So the CAD won out this month's round with the U.S. dollar.

After all, Canada blew out its numbers by over five times whereas the U.S. just squeaked out ahead of estimates. The U.S. actually lost when you consider last month's downward revisions.

How to Tell Who's Winning in the Currency Markets

Currencies are neither strong nor weak until they are directly compared with one another. So when you compare the U.S. dollar directly to the CAD (as shown above in the USD/CAD pair), you can see how strong or weak both currencies are.

However, next year look for Canada's economy to slow down, right along with the United States. The reason? The U.S. is Canada's major trading partner, so when the U.S. buyers can't buy as much Canadian goods, Canada's economy also slows.

It's not a question of which economy's currency will slowdown. The question is which one is slowing down more. Because in currencies, it's not which currency is doing badly, it's which currency is doing worse. It's not what's doing well; it's what's doing better.

So in this case, Canada's economy is slowing at a slower pace than the United State's economy. That makes the Canadian dollar strengthen against the U.S. dollar and thus brings the USD/CAD pair downward. Watch next month to see who wins the next round.

SEAN HYMAN, Currency Director

EDITOR'S NOTE: Sean is keeping a close eye on all the economic data from around the world, so he predict where currencies are heading next year. This February 20 - 23, Sean will join 19 other global investment experts in St. Kitts for The Sovereign Society's Emergency Money Summit to reveal all these ideas. During this three day event, Sean will give you his best currency plays to fight off a possible recession in late 2008 and 2009.

This is the first time we've created an event specifically to help you navigate the turbulent markets. And we think it's so crucial you attend, that we'll even let you bring a guest for FREE! Sign up before January 1st, and you can bring your spouse, your business partner or best friend absolutely FREE.

Investors Lose Confidence
in the "Shadow Banking System"

According to Bill Gross, the well regarded bond fund manager at Pacific Investment Management (PIMCO), the root of the credit crunch problem lies in a systemic loss of confidence in what he calls the "Shadow Banking System."

The Shadow Banking System is a largely unregulated world of financial engineering. In recent years, the financial guys behind the Shadow Banking System have packaged "sub-prime mortgages into a host of three-letter conduits that only Wall Street wizards could explain."

Now these fancy sub-prime conduits are blowing up left and right. And Wall Street's wizards are at a loss to explain why. Since the credit bubble burst, the casualty list has been predictable as Gross explains: "Home prices have been the obvious first hit - down 5% nationwide already, with perhaps another 10% to go over the next several years. Following in lock-step have been financial stocks with sub-prime exposure to be joined in short order by consumer-based equities as jobs and disposable income falter."

So far, Gross is following my Market Shock Trader template chapter and verse!

He goes on to explain that the key problem is uncertainty about just how big the credit crunch losses may snowball. That's why the Fed's rate cuts so far just haven't done much, besides lowering yields on ultra-safe U.S. Treasuries...(To read on, see my blog right now!)

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: All this sub-prime nonsense echoing through the Shadow Banking System is really taking a toll on the U.S. economy. In fact, the odds of a recession in the year ahead have increased sharply in recent months. And even if the U.S. manages to avoid an outright recession, most sectors are still feeling the pinch. However, Mike still just managed to isolate a pocket of growth for Market Shock Trader subscribers - which capitalizes on basic materials. Click here to test drive his service so you can get the full story on this strategic play right now.

Privacy & Rights

USA Quietly Expands Draconian
Emergency Powers Part I

After the events of Sept. 11, 2001, the U.S. government quickly imposed economic sanctions against its "enemies" throughout the world.

The most important law the government used is a little-known statute called the International Emergency Economic Powers Act (IEEPA). President Bush has used it on numerous occasions. In particular, President Bush used this act to add names to a "terrorist watchlist" maintained by an obscure Treasury Department bureaucracy called the Office of Foreign Assets Control (OFAC). The watchlist is over 250 pages long and includes more than 6,000 names.

If you live or do business in the United States, you're supposed to check this watchlist before you conduct any type of business with anyone. If you fail to do so, you become subject to the civil and criminal provisions of the IEEPA. There is no minimum threshold. If you sell a glass of lemonade to someone on this watchlist, you've violated the law.

And the penalties for such violations just increased - substantially. On October 16, 2007, President Bush signed into law the International Emergency Economic Powers Enhancement Act.

This law increases civil penalties for IEEPA violations from US$50,000 to US$250,000 per violation, or up to twice the amount of the violating transaction. It also increases criminal penalties to US$1 million per violation. The maximum prison term of 20 years per IEEPA violation remains unchanged.

The law applies retroactively, which means that alleged violations that occurred prior to Oct. 16, 2007 are subject to the higher penalties.

IEEPA also contains draconian civil forfeiture provisions. Tune in tomorrow to hear more on these provisions...

MARK NESTMANN, Privacy Expert &
President of The Nestmann Group
www.nestmann.com