Tuesday, August 08, 2006

Waiting for Ben

EUR/USD 1.2829 / 32 Hi 1.2856 Low 1.2805
USD/JPY 115.09 / 13 Hi 115.30 Low 114.90
AUD/USD 0.7595 / 99 Hi 0.7643 Low 0.7585
EUR/JPY 147.66 / 70 Hi 147.97 Low 147.36

Well the whole world is lining up to watch the next big non-event: the FED PAUSE. And today's the day. Or at least that's what the market is hoping for. Though you wouldn't know from watching the USD. There was no real USD follow-through selling after the weak NFP numbers release Friday. Everyone is sitting on the side-lines wiating for the next big trend. It could go either way.

In one corner we have the massive U.S. external funding requirement, weak U.S. economic fundamentals and an unpopular U.S. Foreign Policy. In the other corner we have the mysterious PPT, the reluctance of the U.S.'s trading partners to accept a weaker USD (which means propping up the BUCK with Central Bank USD buying) and the off-chance that Bernanke's FED may pull a rabbit out of the hat today and hike. To say that the stand-off has become excruciating is an understatement. The feeling is that we are at some kind of turning point, it's just that nobody knows quite what that means for the FX market.

So, for the time being, range trading is the only thing that's happening out there. Nobody knows what to do with interest rate differentials. Do we trade economic growth rates here? Inflation? Employment? Do Housing numbers count? If the FED stands pat then the USD might see some more selling pressure but with so many questions still unresolved in the wider world (including where we are going with the various wars that are raging and will global economic growth hold) we are unlikely to see a new trend on the back of a PAUSE. Same deal, unfortunately, with a HIKE. Because a HIKE today just might be the LAST ONE for a while. Which would leave us pretty much where we are today: with not all that much new information to go on.

A HIKE today - largely because it's not really what the market is expecting - could provide the market with a bit more SHOCK VALUE and lead to a short term spike in the value of the USD. A NEW TREND though is unlikely. Sigh.

Stocks in Asia recovered over night, European stocks haven't done as well. In Europe all eyes will be on the U.S. as the market looks for direction. The real new concern in the markets is that inflationary pressure will force Central Banks to keep hiking (even as growth slows). And that new concern is what is keeping a lid on stocks. This new view is BAD NEWS FOR STOCK MARKETS and that could be only new trend we have in Financial Markets for a while.

Oil 76.61
Gold 655.00

OIL hasn't really done anything too spectacular either. And considering that we have a Civil War in Iraq (although Rumsfeld is still mulling over that one), a fairly major war underway between Lebanon and Israel which has the potential to spread, that the "Iranian Nuclear Question" is still unresolved and that a B.P. Pipeline just busted and won't be repaired any time soon, the fact that OIL is just sitting there is a fairly remarkable market phenomenon. So maybe all the bullish news is already in the market.

The chorus of voices calling USD 100 on OIL has been deafening lately. And still the price goes nowhere. Either we see OIL break out to the upside in fairly short order or profit taking is likely to emerge as disappointed bulls exit the market.

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