Thursday, July 06, 2006

No Rate Hikes in Europe but the Writing is on the Wall

EUR/USD 1.2750 / 53 Hi 1.2784 Low 1.2717
USD/JPY 115.17 / 21 Hi 115.75 Low 115.12

No rate hikes were announced in the Euro Zone, Japan or the U.K. today, but Central Bankers leave little doubt that higher rates are on the cards. In Japan hints were made that a rate decision will be made as early as next week. While in the Euro Zone The President of the ECB, Trichet, pretty much outlined the case for at 25 point rate hike when the bank reconvenes on August 3rd. Central Bankers are talking Oil Price Shock and containing second round price rises. This fear of inflation means that the trend towards higher rates is far from over. Something Trichet has made abundantly clear.

Signals out of Japan are a bit more confusing, but no-one thinks the next move in rates will be down. So it's just a matter of time and, unless the BoJ is freeze dried for eternity, the recovery in Japanese domestic demand and inflation means that a rate rise is necessary. Business leaders and the Japanese Government are keeping the pressure on the BoJ to leave well enough alone and, given the Japanese cultural commitment to consensus, this makes clear cut policy decisions tricky.

But the clock is ticking.

Oil 74.90
Gold 629.00

Meanwhile back at the farm, OIL is breaking out to the upside with a target of USD 80 likely to be reached within weeks. Non-Farm Payroll Data is due tomorrow and markets are a chatter with the possibility that the recent correction on Stock Markets was just another opportunity to buy. The idea being that if NFP is weak then the FED will pause, so you buy stocks, and if the NFP is strong then that points to a strong economy, so you buy stocks. Which would be nice. A stock market rally would certainly help the people in Hedge and Mutual Funds recover some of their recent losses.

Unfortunately NFP may not really be such a big deal and certainly is unlikely to provide the market with clues about direction. As always watching what's happening on FX markets is far more important.

If the Dollar goes up Stocks are likely to follow. A stronger dollar means currency flows (speculative or not) are continuing in favour of the buck and this would keep creaking world markets ticking over. So thank God for cheap money (and hedge funds and leverage) while you can get it. But keep an eye on the buck. Should sad things start to happen to the dollar then rush to the exits while there is still time. We haven't seen the end to risk adjustment quite yet.

As soon as carry trades start to look like yesterday's garbage, we have trouble.

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