Tuesday, December 12, 2006

Just Don't Mention the DOLLAR

EUR/USD 1.3241 Hi 1.3270 Low 1.3225
USD/JPY 116.91 Hi 117.05 Low 116.69
AUD/USD 0.7857 Hi 0.7878 Low 0.7842
EUR/JPY 154.82 Hi 155.07 Low 154.53

Funny how market views can change overnight. Although there are no real signs that the U.S. economy is about to turn the corner suddenly the market chatter is about if and when the FED will hike and not if and when the FED will ease. And Bernanke gets another shot at things today. Everyone expects him to blatter on about the upside risks for inflation. Inflationary pressures, which he PREVIOUSLY expected to see subside as the economy "cooled", are suddenly a BIG RISK. Bernanke's EUREKA moment seems to have occurred on November 28. Which is interesting. That would be right after Thanksgiving. Right after the USD started to slide. Not that anyone is mentioning the USD. That would be too scary. No-one wants a "disorderly" market. Translation: a crash. So let's go softly, softly on this one guys and hope things pan out.

Not even Trichet DARES mention the exchange rate. In fact at his recent Press Conference Trichet jumped through hoops trying NOT to mention the exchange rate. The EURO, oh that, next question please. And the Central Banks are certainly NOT talking about the massive currency intervention in support of the USD which happened on Friday. Following the release of so-so U.S. Non-Farm Payrolls and pretty bad December Consumer Sentiment numbers from the University of Michigan. No, everyone is being hush, hush about all that. The line being pushed is that the USD, after initially SELLING OFF, turned the corner Friday because the NFP numbers were great (they weren't) and because Paulson said (AGAIN) that "a strong dollar is in our nation's interest". He may as well have said: "being rich is in our nation's interest". Indeed it is but getting rich is slightly more complicated than that. Same goes for the USD. Having a strong USD may well be in the interests of the U.S.A. but ensuring that it remains so is just slightly more complicated than delivering a few well timed statements and some unpublicised Central Bank intervention.

At the FOMC pow-wow today a rate hike is unlikely, but not impossible. And Bernanke is unlikely to linger on any of the scary signs that "things" in the U.S. aren't so great. No talk of the Sub-Prime Lenders who are hitting the wall, no talk of declining credit quality in the U.S., no talk about the Residential Real Estate Market implosion, or the worrying rise in Inventories, or reported weak Retail Sales this holiday season. And though even Alan Greenspan is suggesting that the USD decline has further to go, Bernanke is NOT expected to mention the exchange rate. No. What he will talk about is inflation, the upside risks to price pressures and the need to, maybe, hike rates some time in the near future. As a Debtor Nation the U.S. now has to set its Interest Rates to suit Foreign Investors. Which is normal, it's just news in the U.S. and it's news to the Mr. Joe Average. So expect some fancy footwork as the Powers-That-Be try and explain this unpleasant turn of events to the man in the street. Slowing growth, steady or rising short term rates: welcome back STAGFLATION.

This is not a good environment for Stocks. Though no-one seems to have noticed. Yet.

Meanwhile back at the White House crisis talks continue. The crisis, of course, is IRAQ. The great big new idea is: Iraq's neighbours need to take over while the U.S. gets the hell out. This idea seems to have been generated without much in the way of consultation with Iraq's neighbours. But then strategic planning never was a George W. forté, so same old, same old. The upshot is that while Iraq's neighbours do have an interest in seeing the carnage and disruption stop they are unlikely to get involved without an incentive. And the incentive on the table is: Israel. Yes, after Cheney was summoned to Saudi Arabia at Thanksgiving Israel suddenly announced a withdrawal from Gaza. Now, this could have been just a bizarre coincidence but in the murky area of International Relations there are rarely any coincidences.

As all this unfolds no-one is concentrating on economic policy. Well, except for Henry Paulson who is off to China to try and convince them that what China really needs is a WEAKER USD, whoops make that a STRONGER Chinese Yuan. The fundamentals remain USD negative. The question remains: how short is the market? The answer is: very short. And the Central Banks are still lurking. That's about the most positive thing that can be said for the USD right now. We may see slightly more USD "strength", er USD short covering, in the very near term. As always, longer term players should SELL the USD rally.

OIL 61.34
GOLD 634.10

And while every economic analyst out there is quietly REVISING DOWN their forecast for U.S. economic growth, the Commodity Markets are seeing some SELLING again. More selling pressure is likely. Over at Morgan Stanley Stephen Roach is sticking to his forecasts and they are, of course, all a bit grim. The upshot though is that DEMAND for commodities is likely to "moderate" over the next 12 months or so. Bad news for AUD bulls and bad news for OIL bulls.

Over the longer term USD weakness should provide a real base for GOLD to outperform other assets. The short term is slightly more tricky.

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