Friday, August 04, 2006

There is Only Good News

EUR/USD 1.2877 / 80 Hi 1.2886 Low 1.2777
USD/JPY 114.28 / 32 Hi 115.57 Low 114.25
AUD/USD 0.7649 / 53 Hi 0.7655 Low 0.7585
EUR/JPY 147.16 / 20 Hi 147.39 Low 146.19

In a world where nothing bad happens, where there is spin available to explain everything, there can be no bad news for the market. And so it goes. Today NFP confirmed that a slow down in economic activity is underway in America. The market was looking for 135K and got 113K. Unemployment rose to 4.8% from 4.6%. This series is pointing to deteriorating labour conditions, in line with all the other indicators which suggest that the economy in the U.S.A. is under pressure from rising interest rates and higher OIL prices. But this is good news. We only do good news. And it is good news because it means that Bernanke will not raise rates on August 8. Stock Markets, for now, are going with the all news is good news scenario. Which is fun if you like alternative realities and think bad news is a downer. Makes sense. There is a Party Animal in the White House and everyone is happy. And if they're not, they should be. Don't be the last out the door at this party, it could be a costly exercise in real world economics.

The FOREX market isn't looking at things in quite the same light. Interest rates, or at least the hope that interest rate differentials would continue to remain USD favourable, are pretty much the only USD favourable bit of information out there. Yesterday the ECB hiked rates, but Trichet's guidance - although pointing to more rate hikes down the road - was so gloomy with regard to the longer term outlook for the economy that he knocked the stuffing out of the EURO bulls, for a time. That time is over. The already weakened USD is looking increasingly vulnerable.

On August 8 Bernanke could decide to be fashionable and be a bit "pre-emptive" (everyone is doing it). That is he could do what the FED has done at every single meeting for the last 17 meetings: he could hike. If he does Stocks won't like it. But if he doesn't the USD won't like it. Hey nothing like a little conundrum to keep you busy. If Bernanke hikes August 8 it means the U.S. has stared down its massive external funding requirement and BLINKED. So a hike might not save the USD. Or it might save the dollar for a short time.

The chances that the U.S. can pursue its current domestic and foreign policies and come up smelling like roses is so infinitesimally small that it doesn't bear thinking about. The near term target for the EUR/USD is 1.3000. The USD/JPY target of 112.00 hasn't changed. Trading on crosses is not all that important. This is a USD downmove and should be traded as such.

While NEWS Corp (pretty much alone in the Universe) keeps trotting out the line that Blair and Bush are ready to back an immediate cease-fire (immediate being a fairly elastic concept in some quarters) the Israeli army has escalated its attack on Lebanon. The immediate cease-fire thing, which has been touted around, has got to fall into the same category as the "U.S. plans to reduce troop numbers in Iraq". It gets some good press, reduces the pressure on our fearless leaders and is total rubbish. The idea being that you can continue to lie to the electorate for as long as you like until you decide to switch your story, provided you come up with a sufficiently plausible explanation. The right explanation in Iraq is likely to be: unexpected foreign interference in the "democracy project" and, uh-um, Civil War, means that U.S. troops will have to stay a while longer. Hey, prove me wrong.

Oil 75.10
Gold 664.00

Anyway while financial markets in the U.S. buy the spin, OIL and GOLD aren't taking any notice. We have: the return of inflation, a USD which is in all sorts of trouble, civil war in Iraq, a major conflagration in Lebanon which is expected to spread to Syria and Iran in fairly short order and a bunch of shady weirdos trying to take over the world. There really is no reason NOT to buy GOLD or to expect the price of OIL to fall.

In a world with no bad news it's a bit hard to explain just why GOLD and OIL are going up. But they are. And here the trend really is your friend.

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