Tuesday, September 05, 2006

It's the Carry Trade

EUR/USD 1.2842 Hi 1.2873 Low 1.2818
USD/JPY 115.76 Hi 116.22 Low 115.56
AUD/USD 0.7702 Hi 0.7720 Low 0.7684
EUR/JPY 148.66 Hi 149.45 Low 148.24

There wasn't a lot of news overnight and, with little else to go on, the market is still focusing on interest rates: WILL they WON'T they? Guys, who cares? Interest rates are only important if capital flows are driven exclusively by interest rate differentials. And they're not, at least not always. And they are not now. 2005 was the year of the carry trade, with a little follow through into 2006. THAT's OVER. In fact, all these speculative, interest-rate financed carry trades look vulnerable right now. That's what important.   

Regardless of the facts, ever so slightly disappointing news in Europe (the Services Purchasing Managers Index, together with the OECD report released this morning which suggested that inflationary pressures in Europe remain contained) have seen expectations for further rate hikes in Europe soften and the EURO weaken (a little). Let's all rush out and sell the EUR/USD just to liven things up. After all the U.S. is set to keep hiking like crazy, even with elections coming on, a softie in charge of the FED, and an economy teetering on the edge of RECESSION. Right.

In other data European Retail Trade numbers for July beat expectations by a LOT. But the view on the street is that the numbers are OLD, growth has peaked and the ECB will have to adjust its aim because the world is about to end. We will have a couple of minor ECB figures talking today in Europe. Being boring and Old Europe and all that expect the usual drivel about "vigilance" and doing the right thing to make sure we don't see those nasty kind of liquidity driven bubbles which are so popular in the United States. Europe doesn't really go in for quick-fixes and easy money and the EEC has TARGETS which Government's must strive to meet. No rushing off and spending willy nilly on wars and space programmes. We are talking selling off State-owned assets (Italy) and tax hikes (Germany). Constable PLOD does economic policy.

The States gets back from holidays today. A couple of minor statistics are due for release and the market will wait for more soothing news from Ben Bernanke Wednesday. While a limited amount of short covering can be expected to see very short term gains in the USD, the USD bear trend is expected to continue over the remainder of the week. Yesterday's JPY targets have already been met. The JPY uptrend is not over. Initial resistance is seen at 116.00, with 116.50 likely to hold. The target for the USD/JPY is now 115.00 but position squaring could see volatility before we get there. EUR/USD is more range-bound but the bullish trend can be expected to continue. Our previous targets (1.2900 for 1.3000) remain unchanged.

OIL 68.02
GOLD 636.80

GEOPOLITICS have kinda fallen off the map for the moment. The only thing going on in Politics is the gleeful monitoring of George W.'s dismal poll ratings and fevered speculation about whether Blair can be forced out before the British Voting Public does it for him. Being delusional it seems that Tony thinks he can hang on and explain why his failure to call for an immediate cease fire in Lebanon was all a dreadful misunderstanding. Maybe a couple of earnest, long-winded speeches which put everyone to sleep will do the trick. A couple of phoney Tonys and, hey presto, crisis over.

Meanwhile, there is talk of prisoner exchanges between Palestine and Israel. Does this mean that the Israeli's will finally release the entire Palestinian Government which it kidnapped months ago?? Bet that won't get any headlines on FOX NEWS. And Hezbollah is trying to make the Bush Administration's mishandling of the New Orleans crisis even more galling by rushing to rebuild Lebanon asap, despite the fact that Israel is still holding siege to the country.

So, for now, the price of OIL has fallen a little. Which is what it was supposed to do when the U.S. invaded Iraq, according to Mr. Rupert Murdoch. Funny how the PEACE DIVIDEND works out better than the WAR PREMIUM. For as long as we don't have a blow-up in the Middle East, OIL prices are expected to remain soft. But the "Neo-Cons" are still out there, so don't get too relaxed about that one.

GOLD continues to benefit from global disappointment in the Bush's Administration to handle anything from a crisis to ordinary everyday economic management. And with unlikely to change over the next couple of years, at least, GOLD bears should trade cautiously. The only thing on their side is the hope that the Plunge Protection Team might really be able to corner the market. But, unless the move into GOLD is purely speculative, which it isn't, this is unlikely. GOLD: onwards and upwards.

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