Thursday, October 26, 2006

An Exercise in Cynicism

EUR/USD 1.2652 Hi 1.2672 Low 1.2598
USD/JPY 118.83 Hi 119.19 Low 118.60
AUD/USD 0.7618 Hi 0.7640 Low 0.7603
EUR/JPY 150.34 Hi 150.49 Low 149.93

They came, they saw, they did nothing. Well I’m glad we got that over with. Although the dissection of the FED statement is just beginning and all the talking pin heads are labouring over what the exact placement of the commas mean. This morning on Bloomberg the view seemed to be that the FED is still sort of HAWKISH because it hasn’t ruled out further rate hikes. Subliminal message: don’t sell the USD because the FED could move into HIKE mode any time.

Right, so the FED is sort of HAWKISH only it’s keeping rates on hold while it talks about the fact that “economic growth has slowed” and the idea that inflation is “likely to moderate over time”. In order to be DOVISH the FED would have to be talking about what? Economic free fall and deflation? Obviously.

What’s interesting about all this is how incredibly focused markets have become on MONETARY policy. This is not really a surprise, given that economic management at the Government level is so clueless. We don’t actually know what we’re doing here, guys, so if you don’t mind could you just adjust monetary policy ALL the time while we work on our next election strategy. What we have is Government economic policy driven by election cycles, with all sorts of unintended long term economic consequences. And short term economic policy in the hands of a bunch of unelected officials who think that it is rational, even necessary, for interest rates to be the only real policy lever out there.

Governments everywhere have created a policy no-man’s land and into the void step the Central Banks of the world. So if you want to make any investment or economic decisions at all the only thing to watch is the interest rate cycle. Why we pay the politicians is beyond me.

The USD got sold off a bit following the FED statement. But essentially the FED gave the market nothing new to go on.

The longer term trend for the USD will continue to be determined by international capital flows and underlying economic fundamentals. Short term we have a market all revved up to sell the USD, an election on November 7 and the potential for a short sharp squeeze of USD bears. That doesn’t mean that the USD is in a new bull trend, but it does mean that short term traders need to pick their levels carefully. EUR/USD is expected to hold above 1.2600, dips below should be bought. Similarly USD/JPY is unlikely to sustain a rally above 119.00. Given the very high current level of EUR/JPY, downside for USD/JPY is more promising in the short term than upside for EUR/USD.

Yesterday saw the release of yet more unimpressive economic data. Home Sales were weaker than expected. The weak residential Real Estate Market, the high level of accumulated Household Debt in the States and the pivotal position of the American Consumer for the health of the U.S. economy all point to a continuation of the sit on hands FED. Bernanke has gone with REFLATE and be damned, but no-one at the FED can afford to come right out and say it. Not when the U.S. is looking to pull in USD 3 billion per day from overseas "investors".

OIL 61.37
GOLD 594.50

Well there are all sorts of explanations out there, but essentially OIL and GOLD are up. Some commentators have gone as far as to suggest that the inevitable rally in the GOLD price is being held back until AFTER the November 7 election. Those naughty GOLD cartel market manipulators are at it again.

I’m not sure that the average Joe really cares enough about the price of GOLD or the USD to make the November 7 election a big deal for Gold Cartel Inc., if it exists. And I’m not sure that anything but an outright collapse of the USD is likely to have much impact on U.S. financial markets, U.S. mortgage rates and Middle America’s bottom line, but the story sure gives a good idea about the level of paranoia and suspicion out there at the moment.

And right now NOBODY trusts the politicians. Nobody sees any trick so low that politicians aren’t willing to give it a whirl if it means better results at the very next election. That goes for politicians everywhere. Or is there a nation out there somewhere NOT led by people willing to make dirty back room deals with just about anyone in return for short term political gains?

The upshot of all this is that even if OIL has come off its highs and U.S. Stock markets have gone through the roof, the American electorate is not exactly cheering. Politicians will have to start working on their credibility because the spill-over impact of a little fiddling with financial market aggregates doesn't seem to be delivering the desired results.

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