Monday, August 28, 2006

Data and Geopolitics: USD Bearishness to Hit the Majors

EUR/USD 1.2812 Hi1.2818 Low1.2754
USD/JPY 116.96 Hi117.36 Low116.93
AUD/USD 0.7587 Hi0.7596 Low0.7563
EUR/JPY 149.83 Hi149.96 Low149.57

Busy week, lots of data and GEOPOLITICS is back. Just as Jacques Chirac announced that France would provide troops for the U.N. Peace Keeping Unit in Lebanon the little guy in Iran, who dresses like his hobby is train spotting, is back in the news. And when that happens the news is not good. First, we get news that Iran has intensified its nuclear programme. Which may or may not be aimed at meeting Iran's energy requirement. Let's give him the benefit of the doubt. But with blood-thirsty, UN-ELECTABLE "Neo-Cons" in power in Washington and a U.N. deadline scheduled for the end of the month, the timing is not good. Second, we get reports that Iran successfully test fired long range rockets over the weekend. Kinda of hard to make a case that the timing is accidental. So we have two sets of armed cowboys and a show down. One set of cowboys definitely sees this as some kind of pre-Viagra end game and the other set has been cut off from the world for so long by Washington's embargoes that no-one really knows what is going on over there. (What were the embargoes in aid of again?) Oh yeah, that's right: payback for chucking out the front man for Anglo-American oil: the Shah. Right-wing war monger conspirators are always such bad losers. Either way you only need one set of cowboys with nuclear bombs who are hell bent on engineering Armageddon to have a real crack at it. And there is only one country which has ever actually used the A-Bomb in a combat situation. Deep breath everyone.

So that's GEOPOLITICS. And the rest of the world is happy to just sit back and watch it happen. Appeasement by any other name?

Economic data due for release this week is not expected to change the overall economic outlook. The U.S. economy is in trouble. Consumer Confidence for August is out in the Sates tomorrow, together with minutes from the last FOMC meeting. Confidence is a leading indicator and the unsettled economic and political environment is expected to hit Consumer Confidence in the months ahead. Confidence is expected to fall from 106.5 to 102.5. The FED PAUSE on August 8 may see Confidence hold up better than anticipated but the overall economic picture in the States remains poor and Confidence should reflect that going forward. Forecasts for Non Farm Payrolls due Friday have been scaled back after the number has disappointed in recent months. Forecasts are centred on an increase of 125,000 jobs in August. There is no reason to believe that the number will not continue to disappoint.

Financial Market Outlook

But back to the markets. The Tokyo Stock Market took a hit today and is now down 2.17% since the beginning of the year. While some commentators are bleating on about the Japanese economic recovery being fuelled by a recovery in domestic demand that doesn't change the fact that Japan is essentially an export-orientated economy. The loss of the American export market due to failing U.S. demand for everything except military equipment will hit the nascent Japanese economic recovery hard. Markets are starting to react. Japan was one of the biggest market stories of 2005 and a great deal of the bull market run in Japanese stocks was fuelled by offshore buyers. Watch that unwind as reality sets in.

As the economic consequences of the policy mistakes made in the U.S. start to hit in the real world, Stock Markets remain at risk.

The USD bulls have had their run. Ugly GEOPOLITICS and bad economic data are going to make it extra-hard for the USD bulls to plead their case. Bernanke the mild is famous for his concern with deflation and the 1930s. There is just no possibility that the interest rate differential story will shore up support for the USD. And we still have the massive U.S. external funding requirement to contend with. So that pretty much leaves the Plunge Protection Team and the Central Banks of gullible Emerging Economies on the side of the USD. The post ASIAN CRISIS USD buying of Emerging Market Central Banks has, however, pretty much run its course and the new world order, where the United States plays ROGUE NATION, is likely to diminish appetite for USDs going forward.

The initial target for the EUR/USD is 1.2850 with 1.2900 likely on a break. The woes afflicting the U.S. economy are considerably worse than those afflicting Japan. Upside for USD/JPY from here is limited. Selling rallies is recommended. The underlying theme remains the same: the USD is at risk as massive over spending by the U.S. Government spills over into a massive external financing requirement.

The Australian Dollar continues to under perform. Concern about the health of the Global Economic Environment, Australia's massive external deficit, huge accumulated Foreign Debt and vulnerability to external economic shocks is likely to weigh on the currency. The AUD can be sold both against the USD and on the crosses. 0.7600 should hold the upside for the AUD against the USD but the EUR/AUD offers the best trading opportunity. Buy below 1.6800. Our target remains set at 1.7000

Oil 71.15
Gold 630.80

Concern about the health of the U.S. economy and the USD are expected to support both OIL and GOLD. Add GEOPOLITICS and the outlook for both remains bullish. GEOPOLITICS is the key to the support for OIL. The GOLD story remains the search for an alternative to the USD as the global reserve currency of choice. And that story is likely to run and run.

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