Friday, July 07, 2006

Bad NFP Kill Hopes of USD Rally

EUR/USD 1.2850 / 53 Hi 1.2865 Low 1.2766
USD/JPY 113.91 / 95 Hi 115.31 Low 113.90

The market was looking for an increase of 175k (with rumours of a lot more) and got 121k. Another disappointing number in the series. The picture of weak economic activity in the States is starting to add up to more than just a temporary blip. Pre-release market chatter was all USD positive. This was more a result of the hope that the recent USD bounce back, in line with the bounce back in Stocks, could be the start a new medium term trend. A flimsy hope based on a flimsy premise.

All the USD fundamentals look poor right now.

The FED may well be forced to continue hiking rates to fight the inflation bogey-man (read fear of the price whiplash likely if the USD takes a dive) but the FED is not the only major Central Bank hiking rates right now. So the interest rate differential argument in favour of the USD is gone.

And that doesn't leave much else that is USD favourable.

Stock Market bulls will try and make the case that today's poor data will see the FED pause. And hey if you have a pause in interest rate hikes then that must mean there is something to celebrate. Right? Well you can make that case. But it's a fairly weak one. If the FED is pausing (and let's face it there hasn't been a pause yet - and it's been a while) because the economy is in trouble, then maybe the longer term outlook for Stocks is not that great.

Oil 75.65
Gold 632.80

Meanwhile it looks like OIL can reach 80 in less than a month and there is no reason to believe that the rally in OIL prices is anywhere near over. For GOLD and OIL to stage a serious reversal there would be need to be a serious shift in fundamentals.

In the case of GOLD the world would need to be more comfortable holding paper money than it is now. But with confidence in Governments falling, particularly global confidence in the competence of the current U.S. Administration, the chances that the attraction of holding little bits of green paper will increase any time soon are slim.

As for OIL, well you only need to think Middle East to wonder if the DOOMSDAY CROWD are onto something, so unless all the simmering conflicts and outright wars are dealt with in short order, there is no reason to believe that the price of OIL is likely stage a major reversal.

End of week and the USD downtrend has resumed.

It will be interesting to see if the BoJ bites the bullet next week. The pressure on the BoJ from the Government and the Business Sector has intensified. So the wrestling match isn't over yet and it's too early to say that a rate hike is a "fait accompli" in Japan. One thing's for sure though, a rate hike in Japan could really get the USD/JPY bear trend into gear.

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