Tuesday, October 24, 2006

A Little More Market Hysteria Coming Soon

EUR/USD 1.2575 Hi 1.2580 Low 1.2525
USD/JPY 119.14 Hi 119.67 Low 119.08
AUD/USD 0.7582 Hi 0.7591 Low 0.7558
EUR/JPY 149.81 Hi 150.06 Low 149.62

So here we all are, sitting on our hands waiting for the FED to sit on its hands. What fun. But in the absence of any real news we can always pour over the statements. And we will. Ad nauseum. Bernanke may be sitting back and waiting to see how the economic sands shift over time, but markets need news and in the absence of news: THEY MAKE IT UP.

So now, after chattering about the possibility that the FED would EASE monetary policy some time early in 2007, the market is now chattering about the possibility of a RATE HIKE. Boredom can do strange things. Indeed, after assorted comments from FEDERAL RESERVE board members the market is now near hysterical about the possibility of a HIKE. The inflationary threat is not over!! Deflation is not the problem any more!! And the American economy might just be running at capacity pretty darn soon, with all sorts of awful consequences for prices!! So it’s not EASE, it’s not PAUSE, no forget all that, it’s HIKE, HIKE, HIKE!!! And the target: well how does a 6% FED FUNDS rate sit with you?

And all this in the space of three weeks during which the FED didn’t meet and didn’t do anything and economic statistics out of the States have been, well, rather grim.

But it certainly gave the DOLLAR BEARS something to distract them. And boy, do they need it. Even in far off lands there is talk about the possibility that, er-uhm, the USD’s position as the international reserve currency might be, how shall we say, under threat. And should the Chinese choose to park their money elsewhere in the future could they please telegraph their intentions well ahead of time so as to allow every speculator, Hedge Fund, Central Bank, exporter, importer and sundry FX operators everywhere to position themselves accordingly. Yeah sure. In your dreams Mr. Costello. The man needs to get out a bit more.

So in one corner we have EVERY SINGLE COLUMNIST on earth suddenly waking up to the fact that the USD’s status as a international reserve currency might be starting to look a little shaky and in the OTHER, we have the possibility that the FED may, at some point, provided the U.S. economy and inflation start to perk up, raise interest rates further. Maybe. Quite frankly, it’s not much to go on. It gives the market a little colour, a small range to trade and something to do while we wait for the FED to decide to do nothing tomorrow.

Meanwhile, the really interesting trend is what is happening on the U.S. Treasury market. And that trend doesn’t look good. And it’s that trend which gives a better indication of what is really going on with international capital flows. In case you have missed it or had a double lobotomy recently, it’s the international capital inflows to the U.S. Treasury market which was keeping the whole thing afloat. The sell-off in U.S. Treasuries, although it may just be an indication of another couple of dozen HEDGE FUNDS hitting the wall, could be a harbinger of things to come for the USD.

The USD had only one thing going for it: CAPITAL INFLOWS. And, of late, pretty much ALL of the capital inflows which the U.S. managed to attract came from CENTRAL BANKS buying USDs and parking these FX RESERVES in the U.S. Treasury market. Now, if that has stopped or is likely to stop, then ipso facto the USD is going under and there is nothing that the PPT, the Henry Paulson Strong Dollar Policy or anyone else can do about it. And if, in addition, speculators start to jump all over the USD down TREND then the trend could accelerate quite rapidly. We do, after all, have 9,000 HEDGE FUNDs looking for a profitable trade out there. And if they find one they can't afford to miss it. Not this year.

OIL 59.40
GOLD 585.00

GOLD and OIL, like everyone else in the world, is waiting to see what happens to the USD. No-one really cares what is going on with inflation, the economy or international trade. The real concern stoking the fires of every DOOMSDAY preacher out there is the USD.

If the USD goes under then GOLD and OIL are going higher. By a lot.

One note of caution: in my experience when the chorus reaches a CRESCENDO they are usually wrong. So I am slightly perturbed to find that the entire journalistic universe has suddenly discovered that the economic fundamentals behind further USD strength are simply non-existent. That is if you discount the possibility that the U.S. issues an ultimatum to China and others along the lines: buy U.S. Treasuries or we will send you back to the stone age. And such an ultimatum, even for the current U.S. Administration, would probably be a step too far.

That said, if you had to place a bet, despite the unfortunate CRESCENDO, the longer term outlook for the USD looks poor. And Henry Paulson just snuck out while the U.S. goes into election mode. So you have two choices right now: stay out or sell the USD. And only one of those choices is a potential money maker.

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