Monday, November 27, 2006

Politics Enters the Equation

EUR/USD 1.3107 Hi 1.3177 Low 1.3085
USD/JPY 116.21 Hi 116.43 Low 115.38
AUD/USD 0.7775 Hi 0.7824 Low 0.7762
EUR/JPY 152.35 Hi 152.51 Low 151.82

Tony Blair has apologised for Britain’s role in the slave trade. Which is nice, particularly when you consider that the apology may improve his standing with the British public. The gesture proves his heart is in the right place. It’s not as if he will have to face any consequences or make amends. After all he had no direct role in the Slave Trade.

Blair might also consider apologising for the death of 650,000 Iraqi civilians, the destruction of Iraq and the failure of Britain to call for an immediate Cease Fire in the recent Israeli attack on Lebanon. In fact he could do more. To prove his heart really is in the right place and that he is really repentant regarding these "Crimes against Humanity" he could just go ahead and hand himself over to the "The Hague" for prosecution. He doesn’t have to worry too much: capital punishment is no longer sanctioned in Europe, even for war criminals. Such a gesture would certainly go some way to rebuilding his credibility. It would be more than a publicity-seeking empty gesture.

And the case against Donald Rumsfeld keeps getting clearer. According to recent reports he personally signed off on memos sanctioning torture and the flouting of the Geneva Convention. He better not plan on travelling outside of the U.S. too much in his declining years. He has already been ditched by Bush and there are lots of ambitious young prosecutors out there looking to make a name for themselves. Europe is probably not an ideal holiday destination for Rummy over the next decade or so.

But the news is not all bad. Rupert Murdoch is on the back foot. A fairly robust attack on Murdoch’s hold over the British media was launched by a miffed Richard Branson last week. And Murdoch has had to back off his lucrative endorsement of the O.J. confession interview and book deal. His reputation, which let’s face it is already dismal, has been further damaged. The bell tolls.

And the Israelis have announced a withdrawal from Gaza and a Cease Fire. Despite the subsequent launch of a Palestinian rocket into Israel they have also announced they will not respond to the provocation. Now that’s interesting. Last time a few of their soldiers were kidnapped they launched an all-out assault on Gaza and then another on Lebanon. The Lebanese assault went on for more than a month. The assault on Gaza just ran and ran and ran. The game plan suddenly seems to have changed. Right at the time that the U.S. is desperately looking for help to exit the Iraqi quagmire.

Bush may be talking about "not quitting" but wiser heads are searching for allies in the Middle East and finding that there are NONE willing to deal unless the U.S. meets certain conditions. The first condition appears to be a resolution in Palestine. Which means the Israeli attack dogs will have to back off, and they have.

With U.S. Traders and the PPT out for Thanksgiving, with U.S. economic data looking poor and after considerable warning from global Central Banks about DIVERSIFICATION, the USD got hit last week. And the USD and U.S. financial markets are still vulnerable. George W. currently has to deal with a very unpleasant foreign policy agenda, largely of his own making, an open revolt domestically against the Iraqi engagement and, at this juncture, what the Bush Administration can not afford is a major meltdown in the domestic economy and/or on U.S. financial markets.

Now can the Israeli withdrawal after the sudden USD sell-off be just a co-incidence? Or is someone pressing some buttons in order to drag the U.S. and its recalcitrant allies to the negotiating table. After all the mess in Iraq has already cost the Bush Administration one election and, quite possibly, Bush his legacy, which was never going to be brilliant. Now the U.S. desperately needs to find a way out and it needs help. So concessions will have to be made and Israel's expansionist agenda is likely to be sacrificed as political realism takes over from half-baked, neo-colonialist plots.

The USD is still under a cloud. Though the BoJ has suddenly realised the risks of a major JPY appreciation and is now playing down the possibility that rates will rise in Japan anytime soon. Given that the export sector is providing all the momentum for growth in Japan at the moment, that is no surprise. The jawboning has seen a slight recovery in the USD/JPY. This has left the EUR/USD to take all the strain. The Europeans won't be happy. The PPT is back at their desks. Both the PPT and the ECB are likely to enter the market to slow further USD depreciation Round one of USD weakness is over. A small USD bounce is likely but given the magnitude of problems currently being faced by the U.S.A., both at home and abroad, there is no need to do more than take profit on short USD positions. The scope for further substantial USD downside from here into Year End is still huge.

The real story of the day is: STOCKS LOOK LIKE THEY HAVE PEAKED worldwide. Stocks going forward will have to contend with:

1) Slowing global economic growth
2) Overall tighter global monetary policy conditions
3) Ugly geopolitics
4) Rising wage pressures
5) Increased volatility on FX markets

That adds up to some fairly fearsome headwinds.

OIL 59.56
GOLD 644.30

The OIL market is waiting to see just how bad the U.S. economic slow down will be. Should real signs of economic weakness start to appear in Japan and China there will be little scope for a price rise in OIL, despite the reduction in output planned by OPEC and current USD weakness.

GOLD, on the other hand, should remain bid. Signs of real stress on financial markets and further USD weakness will both accelerate the rush to GOLD. Investors are looking for safe havens when there aren't any. Should both USD weakness and financial market strain prove mere holiday distractions then the climb in the price of GOLD is likely slow. For real gains in the price of GOLD from current levels we need to see cracks appear and financial market volatility rise. There is every reason to believe that those cracks will appear right on time.

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