Thursday, August 24, 2006

Range Trading and Risks - the U.S. is still in Trouble

EUR/USD 1.2830 Hi1.2841 Low1.2748
USD/JPY 116.31 Hi116.61 Low116.22
AUD/USD 0.7639 Hi0.7644 Low0.7697
EUR/JPY 149.26 Hi149.49 Low148.53

Economic data confirmed what we already know: the U.S. economy is in trouble, growth in Europe is still relatively steady. Recent semi-official statements by the guys in charge have created some confusion on the market. And tomorrow Bernanke will have another shot. Which could be fun, though there isn't much chance that Bernanke will start talking about the need to hike. Obviously the 1970s passed him right by. But then Bernanke is a Bush appointee and there are elections in November to consider. Right now, the Bush Administration can't afford any gloomy economic forecasts, especially not from the FED Chairman. So, as per usual, Bernanke can be expected to paint a rosy picture: inflation will fall as DOMESTIC economic conditions "soften". The USD is not at risk. The U.S. Balance of Payments Deficit is not a problem, and neither is that giant hole called the Federal Government Deficit. Yada, yada, yada. Yeah, we know.

Yesterday's Housing Stats released in the States confirmed that the economy is indeed "softening" under the weight of the 17 rate hikes which the FED has delivered so far. Hardly a surprise. The market, up till now, had been going with the feel-good idea that weak economic activity would bring FED hikes to an end. Now concerns about recession, stagflation and the general economic incompetence of the Bush Administration are starting to have an impact. Today sees the release of Durable Goods numbers for August. These are unlikely to be as weak as the Housing Figures. But neither are they expected to be positive. New Homes Sales, which are also up for release, are expected to be dire. Another non-surprise.

Meanwhile, data released in Europe has been somewhat more positive: Q2 GDP data released in Germany today was strong and the IFO Business Confidence Index seems to be holding pretty close to 15 year highs, despite higher domestic interest rates and the stronger Euro. The ZEW Confidence of Investors in Germany has taken something of a hit recently but this is in line with international Investor Sentiment indicators. Cash hoarding is everywhere.

The big question going forward is: which economies will suffer the most as the U.S. economy tanks? The short answer is: the export-orientated economies. Asia's entire economic policy strategy has been an imitation of Japan's economic strategy. And that strategy is export orientated. Full stop, the end. So growth in Asia will suffer unless Asian economies can replace the U.S. market. The target, of course, will be Europe. It remains to be seen, however, if Asian exporters can successfully switch out of the U.S. and into Europe.

Of the European economies Germany, at present, relies most heavily on exports to fuel economic growth. The bulk of German exports, however, are destined for other European markets. So the loss of the U.S. export market will be felt less keenly. So the less short answer is: Asia will suffer more economic damage than Europe will as the economy weakens in the United States.

But back to the markets. The USD bulls have made their move. Ranges have held. Now we get to try the USD downside. Unless FEAR starts to spread to other U.S. markets (that is we need to see the U.S. Stock Market take a hit) ranges are expected to hold. For now trading crosses (with trailing stops) remains the recommended market strategy. Although there has been a certain amount of market choppiness our targets remain unchanged for EUR/AUD: 1.7000 and for EUR/GBP: 0.6850. AUD/JPY has not performed as expected and, for now, the more compelling Euro-positive story is the safer bet. Let's make one thing clear, however, the USD remains in a bear trend and should be sold on any strength.

The outlook for Stocks is still tricky: rising rates, GEOPOLITICS on the back burner - but still there - and the potential for a MAJOR SHOCK on currency markets (the USD could easily take a major hit some time soon). Of the global markets, the U.S. Stock Market looks the most vulnerable at present. But upside for all global Stock Market looks limited from here. The poor policy choices of the Bush Administration, the huge cost of the war for the United States, ongoing global rate hikes and the spike in OIL and commodity prices should all start to hit home soon.

Oil 71.42
Gold 633.10

GOLD is holding steady, which given ALL THE RISKS out there at the moment, is hardly a surprise. The long term bull market in GOLD is not expected to turn around any time soon. For that to happen you would need to see skilled economic management in the United States and there is just no sign that the Bush Administration even knows where to look for that.

All quiet on the OIL market. And without another major flare up in the Middle East that is not expected to change. OIL means GEOPOLITICS right now. The growth story will hit later. But only once the Middle East STOPS being front page news. With the "Neo-Cons" in the Whitehouse that isn't likely in the short term. So we have range trading. FOR NOW.

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