Monday, August 21, 2006

GEOPOLITICS, the USD and Market Wobbles

EUR/USD 1.2888 Hi 1.2907 Low 1.2823
USD/JPY 115.58 Hi 115.83 Low 115.32
AUD/USD 0.7626 Hi 0.7638 Low 0.7580
EUR/JPY 148.97 Hi 149.15 Low 148.47

Data out this week is unlikely to have mind boggling market consequences. The States will see new numbers on Housing Sales. No-one expects the numbers to paint a positive picture of what is happening in the Real Estate market over there. While statistical noise may occasionally confuse, that particular bubble is being unwound and more bad news about residential home sales and house prices can be expected. This is not even close to being over. European data is expected to be more positive. Trade data for June was released today for the Euro Zone. A €2 billion trade surplus was announced versus an expected €1.2 bn deficit. While Business Confidence may take a hit as a result of rising European interest rates and the rise in the Euro, overall economic data in Europe is expected to continue pointing to a cyclical economic recovery.

Meanwhile GEOPOLITICS appears to be back. The Israelis have been busy "arresting" officials in GAZA. And no-one seems to know (or care about) what has to the elected Palestinian officials already in Israeli "custody". There have been Israeli raids in Lebanon, the Israelis say they are ready for more combat, the U.N. Peace Keeping force is out there somewhere, we just don't know where, and the Iranians are busy testing rockets. Great. The "Neo-Cons" must be beside themselves with joy and anticipation.

Now we have to wait and see if this is just more posturing or if more violence is in the offing. More violence would not be good news for financial markets.

Stock markets in Asia took a hit today. A weaker USD, the move by the Chinese to tighten rates, the prospect of a further increase in the oil price if the Middle East crisis deteriorates further, have all taken a toll. European stock markets look similarly fragile. The outlook for U.S. stock markets is not any better, with some commentators openly talking about the possibility of a crash. Slowing economic activity, rising interest rates, rising inflationary pressures, high commodity prices and GEOPOLITICS which look as bad as they've looked in a long, long while: make for one fairly ugly picture for global stock markets.

The USD remains under pressure. Given the current world environment the name of the game is: RISK REDUCTION. And, with its massive external funding requirement, its poor political leadership, and the prospect of lots more economic weakness in the States the USD is a RISK. For now Summer and market manipulation is keeping the USD within ranges but any real trouble on any front (Political or Economic) is likely to increase market jitters and the USD can be expected to suffer as a direct result.

Oil 71.91
Gold 631.00

The return of GEOPOLITICS and the softer tone of the USD have seen a modest bounce in OIL and GOLD. This week is likely to be crucial for both markets. With the USD still under pressure and GEOPOLITICS looking complicated, a failure to break decisively through recent lows is likely to encourage more buying interest. GOLD remains in a longer term bull market. The only question is: is the current correction in the price of GOLD over yet, or not?

GOLD remains in a long term bull market. The U.S. economy just doesn't have what it takes to offer the world a global reserve currency. And currency alternatives are thin on the ground.

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