Wednesday, August 30, 2006

The FED goes with PAUSE

EUR/USD 1.2829 Hi 1.2856 Low 1.2815
USD/JPY 116.98 Hi 117.16 Low 116.59
AUD/USD 0.7639 Hi 0.7649 Low 0.7612
EUR/JPY 150.13 Hi 150.28 Low 149.56

FED minutes released yesterday confirmed the view that the FED is going with the PAUSE. With no rate hike expected on September 20 and a rate hike unlikely at the October 24/25 meeting, given the proximity to the November 7 elections, this means that the first window of opportunity, should the FED choose to hike, would be December 12. But if, as it seems, that the quickest, least painful way out of the DEBT TRAP in the States is to REFLATE, then no rate hike can be expected this year. What we really have here is the PAUSE before the FED and the markets start talking about an EASE.

The Stock Market liked the news. And for as long as there are no secondary effects on other markets, notably the currency market, mildly bullish trading can be expected to continue.

Data out in the States today is not expected to change the overall outlook. The cost of America's debt binge likely to start showing up in data across the board. Slower growth from here on in is pretty much a given. The FED PAUSE policy can only be expected to limit the damage. Given America's massive debt burden, until REFLATION actually starts to take hold, little economic relief can be expected.

Yesterday saw the release of Consumer Confidence in both Germany and the U.S., the contrast could not have been more marked. The U.S. Consumer is heading for the hills while in Germany the outlook remains positive. Tomorrow we get the ECB meeting and, more importantly, guidance from Trichet. While no rate hike is expected, given the general positive tone of the economy in Europe, Trichet is expected to suggest that more rate hikes in Europe are likely. Another 25 points before the end of the year is likely.

The Bernanke FEDERAL RESERVE has clearly broken with Greenspan's policy position, although the market has not fully factored in this change. With no hikes likely in the States, rate hikes still on the table in Europe, the massive U.S. Trade Deficit, the huge U.S. external deficit, and a slowing economy, in contrast with the healthy state of external accounts and the economy in the Euro Zone, a currency realignment is on the cards.

EUR/USD is headed to 1.3000 over September. Downside from here is limited to 1.2750, with initial support seen at 1.2800. The only thing preventing the USD/JPY from taking a similarly USD bearish course is the concern that the Japanese economy will suffer as the U.S. economy slows. It will. Indeed, recent stats released in Japan have been disappointing. This, together with the exodus of foreign funds from the Tokyo Stock Market, may slow the USD/JPY descent or even see further mild rallies. The outlook for the USD/JPY over the medium term, however, remains bearish. For now, while the market grapples with these contrasting factors, trading opportunities will be limited. Longer term players should still sell the USD/JPY on rallies.

Oil 70.19
Gold 624.50

OIL saw a short lived break to the downside. With REFLATION the FED's preferred policy option and the USD likely to remain under pressure (not to mention GEOPOLITICS) the likelihood of a sustained bear trend in OIL is limited. GOLD saw similar trading yesterday, a short-lived bear move and a recovery. The FED's position suggests that the move towards GOLD as a reserve can only accelerate. GOLD is not headed for a bear trend any time soon.

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