Wednesday, August 02, 2006

Perpetual War and DoubleSpeak

EUR/USD 1.2792 / 95 Hi 1.2837 Low 1.2774
USD/JPY 114.55 / 59 Hi 114.92 Low 114.21
AUD/USD 0.7638 / 42 Hi 0.7684 Low 0.7629
EUR/JPY 146.53 / 57 Hi 147.02 Low 146.38

You have to hand it to Tony Blair, he really has George Orwell down pat. Blair (no relation to Eric) is currently in the U.S. saying all the right things. He has condemned the Israeli decision to lay waste to an entire country in its attempt to find two kidnapped Israeli soldiers and called for an immediate cease fire. Er, no. Not quite. There are other people doing that. Blair is sticking to the PARTY LINE.

What Blair is doing is laying the ground work for the next stage of the conflict. The "Neo-Con" grand plan for the Middle East is unfolding as we watch. Quote: "We need to make clear to Syria and Iran that there is a choice: come in to the international community and play by the same rules as the rest of us; or be confronted." Right. And what does that mean ? Well for starters: "their deliberate export of instability, their desire to see wrecked the democratic prospect in Iraq, is utterly unjustifiable, dangerous and wrong."

So if you thought it was the U.S.A., with their rag-tag Coalition of the Willing (when you have Uzbekistan with you, you know you're on the right side), which invaded Iraq, devastated the infrastructure, fired the entire public service in one fell swoop and disbanded the armed forces and in so doing created the conditions of chaos that we now see, you were wrong.

But more from Tony: "If they keep raising the stakes, they will find they have miscalculated." So could Iran please stop the aerial bombardment of Lebanon !! Or something like that. Boy, the boy is good. Well not good in the moral sense but he's certainly shameless, which comes to pretty much the same thing these days. I'm not sure which is more scary: a man who believes his own lies or a an unrepentant liar. Either way Tony Blair is a pretty scary political animal, capable of ignoring reality, selling the electorate what has already been decided and defending the indefensible. And so the current offensive in Lebanon goes on while the U.K. and the U.S. block all calls for an immediate cease-fire.

Meanwhile in the real world, economic data is pointing to slower growth in the States. But hey Paulson is on the case, talking things up. Inflation is back, but Bernanke says he's not worried. The view generally seems to be that we are near the end of the road with rate hikes in the States. This might be a somewhat optimistic assessment of the facts, but even this dovish view has had a limited impact on the USD. FOREX Markets are holding ranges. Signals are conflicting and more information is required.

Tomorrow the ECB is expected to hike. Australia hiked today. There is talk of the need to raise rates in the U.K.. Japan is not done yet.

Tighter monetary policy in Europe may be the catalyst for a break out of current ranges on FX Markets, but I wouldn't count on it. A lot will depend on the guidance Trichet gives the market. For now the spin coming out of the States has pretty much everyone convinced that the status quo, bar a little adjustment of the Chinese Yuan, is just fine. The Europeans certainly aren't keen to see the EURO skyrocket: exports would get hit and the outstanding export performance of countries like Germany are the key for a sustainable economic recovery on the Continent. While the Japanese have fought JPY appreciation in the past by buying bucket loads of USDs. Unfortunately for the fans of Status Quo, the underlying fundamentals suggest that a fairly sharp readjustment in currency parities is not only necessary but inevitable. The question is only: when? Or actually: what will be the trigger?

Although tighter monetary conditions will hit hardest in debtor countries, Stock Markets in the States are holding up in the face of some fairly fearsome head winds. Year to date gains in the States have been modest, at best, but the bears aren't getting much satisfaction either. We are in the eye of the storm, waiting for someone to blink. My money is with the bears.

Oil 75.80
Gold 662.50

Although stocks seem to be buying into the Best Case Scenario, OIL and GOLD are going with the deteriorating GEOPOLITICS. Given the leadership that is currently coming out of the U.S. and the U.K., GEOPOLITICS will stay on the agenda for a while longer and OIL and GOLD will stay bid.

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