Thursday, August 17, 2006

In a USD Bear Market Sell the Crosses

EUR/USD 1.2871 Hi 1.2879 Low 1.2836
USD/JPY 115.31 Hi 115.93 Low 115.17
AUD/USD 0.7657 Hi 0.7691 Low 0.7653
EUR/JPY 148.47 Hi 148.84 Low 148.27

First the Data. Retail Sales numbers released today in the U.K. for July fell 0.3%, the first fall in six months. But the real concern is the level of debt accumulated in the Consumer Sector and what that will mean for the economy going forward. With the Consumer Sector contributing two thirds of total economic activity in Britain, a struggling Consumer Sector is bad news for the economy. Same goes for the States where the voices calling a recession are increasing in number. Data released yesterday confirmed that a slow down in the Housing Sector is underway. Indeed, all the data pertaining to the Household Sector in the States looks poor.

What do we know? Well we know that the Anglo economies are unusually dependent on Consumption to fuel growth. We also know that in these economies the Consumer Sector has accumulated record levels of debt. This was OK while the global interest rate environment was benign. But now global interest rates are starting to rise, across the board. So the chances of recession in Anglo economies is as high as they have ever been. A pause in interest rate hikes is unlikely to be enough to pull these economies out of a sharp slow down. The upshot is that an adjustment in currency parities can be expected.

Uncle Sam, mindful of its extraordinary dependence on foreign capital inflows, is still talking up the USD. So easier targets for now can be found on the crosses. Not that we are not currently in a USD bear market, it's just that the crosses are less likely to see manipulation. So Euro/GBP remains a buy. Short term target still 0.6800 for 0.6850 on a break. AUD/JPY is a sell above 88.50. Short term target: 88.00 - a break opens the way to 87.50. Eur/AUD is also a buy below 1.6750. Medium term target at 1.7000, short term target: 1.6850. The Eur/JPY is not a focus in this kind of market. The only focus really should be: selling debt-laden, deficit economy currencies against currencies with positive external accounts. Sell high debt nations against nations with little or no foreign debt.

Stock markets for now are going with the idea that weaker growth will see the early end of interest rate hikes. Everyone is ignoring the weak economic fundamentals behind the outlook for a PAUSE. This can't last and when the focus starts to be on underlying economic weaknes, the correction in Stock Markets, particularly in Anglo markets, could be severe. So being fast on your feet here is essential. You don't want to be the last guy out the door.

Oil 70.82
Gold 640.00

The prospect of a recession in the Anglo economies has seen the price of OIL fall. There is a possibility that the exit of speculators from commodity markets in general, as fear of recession grows, will see further prices falls across the board. Among other considerations, this will be negative for the AUD, which remains a better sell on the crosses than against the beleaguered USD.

GOLD however continues to hold. Concern about the status of the USD as the global reserve currency of choice, about the international standing of America and the Bush Administration and the absence of a clear alternative global reserve currency continues to fuel the GOLD rush. Longer term the outlook for GOLD remains positive, inflation or no inflation. Ultimately this move in GOLD is not about inflation. It's about the USD.

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