Friday, September 15, 2006

The Benign View

EUR/USD 1.2643 Hi 1.2737 Low 1.2631
USD/JPY 117.60 Hi 117.79 Low 117.34
AUD/USD 0.7515 Hi 0.7564 Low 0.7507
EUR/JPY 148.74 Hi 149.86 Low 148.67

Today's U.S. Inflation data came out right on the nose. Up just 0.2% for both Core and Headline Inflation in August. This brought the annual rate of Headline Inflation to 3.8% and Core Inflation to 2.8%. With FED FUNDS at 5.25% and a slow down under way in the States, there seems to be no need to hit the panic button. Analysts are already chattering about the fact that today's numbers don't include recent fall in the price of fuel. So it looks like luck is with Ben Bernanke. The FED is not expected to hike next week. November 7 elections suggest that a hike on October 24/25 is unlikely (too fraught with political difficulties). That leaves December 12 as the last possibility for a rate hike this year. Chances are there will be NO FURTHER RATE HIKE in the States this year. The FED will have time to assess the extent of the current economic slow down and its impact on inflation before they make their next move. The DOVISH Bernanke FED is sitting pretty.

Stock Markets are happy. While the FED PAUSE may have a lot to do with slowing economic conditions for now the only thing that counts is that rates aren't going anywhere in the short term. What's more the exodus from Commodities by speculative players isn't over. And as falling commodities prices feed into lower inflationary pressure, the case for a FED PAUSE will only get stronger. And that can be said without even considering the fall out from the Housing Market slow down on Consumer Spending.

This adds up to a fairly benign economic environment: slower growth, falling inflationary pressure and stable short term interest rates. That is certainly what the NEGATIVE YIELD CURVE is currently factoring in.

So far the USD hasn't seen any real selling pressure, despite the fact that the "rising interest rate" prop has been taken away. EUR/USD is seeing selling pressure and the USD/JPY remains mysteriously dead in the water. With the G-7 scheduled for the weekend it's the USD/JPY which should be watched. The EUR/JPY remains near record highs. This continues to cap EURO rallies as European Central Banks are in the trenches fighting off further gains. The U.S. and the Europeans are lined up. The G-7 is here and political pressure means that the end of the JPY carry trade is near. USD weakness will start with USD/JPY. But it won't stop there.

OIL 62.97
GOLD 582.50

GOLD and OIL continue to fall. This is not over yet. Weaker global growth, contained inflationary pressures, together with the unwinding of speculative positions suggest that SELL THE RALLY remains the way to go.

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