Friday, August 04, 2006

There is Only Good News

EUR/USD 1.2877 / 80 Hi 1.2886 Low 1.2777
USD/JPY 114.28 / 32 Hi 115.57 Low 114.25
AUD/USD 0.7649 / 53 Hi 0.7655 Low 0.7585
EUR/JPY 147.16 / 20 Hi 147.39 Low 146.19

In a world where nothing bad happens, where there is spin available to explain everything, there can be no bad news for the market. And so it goes. Today NFP confirmed that a slow down in economic activity is underway in America. The market was looking for 135K and got 113K. Unemployment rose to 4.8% from 4.6%. This series is pointing to deteriorating labour conditions, in line with all the other indicators which suggest that the economy in the U.S.A. is under pressure from rising interest rates and higher OIL prices. But this is good news. We only do good news. And it is good news because it means that Bernanke will not raise rates on August 8. Stock Markets, for now, are going with the all news is good news scenario. Which is fun if you like alternative realities and think bad news is a downer. Makes sense. There is a Party Animal in the White House and everyone is happy. And if they're not, they should be. Don't be the last out the door at this party, it could be a costly exercise in real world economics.

The FOREX market isn't looking at things in quite the same light. Interest rates, or at least the hope that interest rate differentials would continue to remain USD favourable, are pretty much the only USD favourable bit of information out there. Yesterday the ECB hiked rates, but Trichet's guidance - although pointing to more rate hikes down the road - was so gloomy with regard to the longer term outlook for the economy that he knocked the stuffing out of the EURO bulls, for a time. That time is over. The already weakened USD is looking increasingly vulnerable.

On August 8 Bernanke could decide to be fashionable and be a bit "pre-emptive" (everyone is doing it). That is he could do what the FED has done at every single meeting for the last 17 meetings: he could hike. If he does Stocks won't like it. But if he doesn't the USD won't like it. Hey nothing like a little conundrum to keep you busy. If Bernanke hikes August 8 it means the U.S. has stared down its massive external funding requirement and BLINKED. So a hike might not save the USD. Or it might save the dollar for a short time.

The chances that the U.S. can pursue its current domestic and foreign policies and come up smelling like roses is so infinitesimally small that it doesn't bear thinking about. The near term target for the EUR/USD is 1.3000. The USD/JPY target of 112.00 hasn't changed. Trading on crosses is not all that important. This is a USD downmove and should be traded as such.

While NEWS Corp (pretty much alone in the Universe) keeps trotting out the line that Blair and Bush are ready to back an immediate cease-fire (immediate being a fairly elastic concept in some quarters) the Israeli army has escalated its attack on Lebanon. The immediate cease-fire thing, which has been touted around, has got to fall into the same category as the "U.S. plans to reduce troop numbers in Iraq". It gets some good press, reduces the pressure on our fearless leaders and is total rubbish. The idea being that you can continue to lie to the electorate for as long as you like until you decide to switch your story, provided you come up with a sufficiently plausible explanation. The right explanation in Iraq is likely to be: unexpected foreign interference in the "democracy project" and, uh-um, Civil War, means that U.S. troops will have to stay a while longer. Hey, prove me wrong.

Oil 75.10
Gold 664.00

Anyway while financial markets in the U.S. buy the spin, OIL and GOLD aren't taking any notice. We have: the return of inflation, a USD which is in all sorts of trouble, civil war in Iraq, a major conflagration in Lebanon which is expected to spread to Syria and Iran in fairly short order and a bunch of shady weirdos trying to take over the world. There really is no reason NOT to buy GOLD or to expect the price of OIL to fall.

In a world with no bad news it's a bit hard to explain just why GOLD and OIL are going up. But they are. And here the trend really is your friend.

Thursday, August 03, 2006

Welcoming Back STAGFLATION

EUR/USD 1.2811 / 14 Hi 1.2835 Low 1.2740
USD/JPY 114.92 / 96 Hi 115.21 Low 114.53
AUD/USD 0.7612 / 16 Hi 0.7652 Low 0.7584
EUR/JPY 147.25 / 29 Hi 147.39 Low 146.19

The BOE and the ECB both moved to hike rates today. Comments by Trichet made it clear to the market that the ECB views current monetary policy settings in the Euro Zone as accommodative. Further rate hikes this year look likely, though Trichet gave no indication about the timing of the next move. He made it clear that the brief of the ECB is to preserve "price stability" and that the risks for inflation remain to the upside.

At the same time Trichet wasn't particularly optimistic about the outlook for economic growth in the medium to longer term. For Trichet all the longer term risks for growth are to the downside. He mentioned specifically the risks to growth coming from higher OIL prices, the potential for existing Global Imbalances (read massive Current Account imbalances) to upset world growth, and the risk of the return to Protectionism in the wake of the failed Trade Talks at the DOHA round.

Even given this view, Trichet said that the ECB will continue to "remove monetary policy accommodation". So we will have higher rates, driven by higher prices and, potentially, weak economic activity. Stagflation, ladies and gentlemen, is back.

European Stock Markets were upset by the joint move by the ECB and the BOE, but it was the surprise nature of the BOE (or at least the fact that the market had not anticipated a move) that really saw the bears come out of hibernation. The Footsie saw the most damage (down 1.62% on the day - and now up just 3.87% for the year). While the BEAR hasn't really been tearing stock markets apart, you only have to look at YTD performances of most markets to see that the overall picture remains weak.

Given Trichet's analysis, the outlook for the economy, company profits and Stocks Markets generally isn't inspiring. Although he mentioned that there could be upside surprises (that is for the moment he can't think of any really positive news) all the longer term economic risks the ECB sees on the horizon are to the downside. Oh the joy, the joy. And what a spectacular contrast to the relentless cheerleading about the economy (and everything else) we are getting out of the States.

Tech Indices in the States are leading the Bears. As always.

The FOREX Market doesn't really know what to do with this assessment. The outlook for higher rates has given the EURO a small boost. Nothing spectacular, and range trading is expected to continue until we have some new information. Tomorrow we have NFP out in the States. This one piece of crummy data will be analysed to death as every economic commentator out there tries to figure out if the FED will hike on August 8. The market is looking for around 140k. Anything wide of the mark could see volatility hit the roof, but one piece of data doesn't really mean that much.

Oil 74.90
Gold 654.00

GEOPOLITICS isn't any better but it's kinda same old, same old. People are dying in Lebanon and now Tony Blair is suggesting that a cease-fire could happen sooner rather than later. Certainly Bush and Blair could do with the boost in the polls that any kind of solution in Lebanon would bring. So maybe they will engineer something. Israel, despite denials to the contrary, is in no position to cross Uncle Sam. Don't know where that would leave the "Neo-Cons" and their bizarre plans for world domination. But you know, you win some you lose some. A boost in the polls in time of the November elections in the States might be worth delaying Armageddon for. Though I wouldn't count on it.

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Wednesday, August 02, 2006

Perpetual War and DoubleSpeak

EUR/USD 1.2792 / 95 Hi 1.2837 Low 1.2774
USD/JPY 114.55 / 59 Hi 114.92 Low 114.21
AUD/USD 0.7638 / 42 Hi 0.7684 Low 0.7629
EUR/JPY 146.53 / 57 Hi 147.02 Low 146.38

You have to hand it to Tony Blair, he really has George Orwell down pat. Blair (no relation to Eric) is currently in the U.S. saying all the right things. He has condemned the Israeli decision to lay waste to an entire country in its attempt to find two kidnapped Israeli soldiers and called for an immediate cease fire. Er, no. Not quite. There are other people doing that. Blair is sticking to the PARTY LINE.

What Blair is doing is laying the ground work for the next stage of the conflict. The "Neo-Con" grand plan for the Middle East is unfolding as we watch. Quote: "We need to make clear to Syria and Iran that there is a choice: come in to the international community and play by the same rules as the rest of us; or be confronted." Right. And what does that mean ? Well for starters: "their deliberate export of instability, their desire to see wrecked the democratic prospect in Iraq, is utterly unjustifiable, dangerous and wrong."

So if you thought it was the U.S.A., with their rag-tag Coalition of the Willing (when you have Uzbekistan with you, you know you're on the right side), which invaded Iraq, devastated the infrastructure, fired the entire public service in one fell swoop and disbanded the armed forces and in so doing created the conditions of chaos that we now see, you were wrong.

But more from Tony: "If they keep raising the stakes, they will find they have miscalculated." So could Iran please stop the aerial bombardment of Lebanon !! Or something like that. Boy, the boy is good. Well not good in the moral sense but he's certainly shameless, which comes to pretty much the same thing these days. I'm not sure which is more scary: a man who believes his own lies or a an unrepentant liar. Either way Tony Blair is a pretty scary political animal, capable of ignoring reality, selling the electorate what has already been decided and defending the indefensible. And so the current offensive in Lebanon goes on while the U.K. and the U.S. block all calls for an immediate cease-fire.

Meanwhile in the real world, economic data is pointing to slower growth in the States. But hey Paulson is on the case, talking things up. Inflation is back, but Bernanke says he's not worried. The view generally seems to be that we are near the end of the road with rate hikes in the States. This might be a somewhat optimistic assessment of the facts, but even this dovish view has had a limited impact on the USD. FOREX Markets are holding ranges. Signals are conflicting and more information is required.

Tomorrow the ECB is expected to hike. Australia hiked today. There is talk of the need to raise rates in the U.K.. Japan is not done yet.

Tighter monetary policy in Europe may be the catalyst for a break out of current ranges on FX Markets, but I wouldn't count on it. A lot will depend on the guidance Trichet gives the market. For now the spin coming out of the States has pretty much everyone convinced that the status quo, bar a little adjustment of the Chinese Yuan, is just fine. The Europeans certainly aren't keen to see the EURO skyrocket: exports would get hit and the outstanding export performance of countries like Germany are the key for a sustainable economic recovery on the Continent. While the Japanese have fought JPY appreciation in the past by buying bucket loads of USDs. Unfortunately for the fans of Status Quo, the underlying fundamentals suggest that a fairly sharp readjustment in currency parities is not only necessary but inevitable. The question is only: when? Or actually: what will be the trigger?

Although tighter monetary conditions will hit hardest in debtor countries, Stock Markets in the States are holding up in the face of some fairly fearsome head winds. Year to date gains in the States have been modest, at best, but the bears aren't getting much satisfaction either. We are in the eye of the storm, waiting for someone to blink. My money is with the bears.

Oil 75.80
Gold 662.50

Although stocks seem to be buying into the Best Case Scenario, OIL and GOLD are going with the deteriorating GEOPOLITICS. Given the leadership that is currently coming out of the U.S. and the U.K., GEOPOLITICS will stay on the agenda for a while longer and OIL and GOLD will stay bid.

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Tuesday, August 01, 2006

To FED or Not to FED - That is the Question

EUR/USD 1.2737 / 40 Hi 1.2783 Low 1.2719
USD/JPY 115.27 / 31 Hi 115.39 Low 114.48
AUD/USD 0.7606 / 10 Hi 0.7667 Low 0.7596
EUR/JPY 146.85 / 89 Hi 146.91 Low 145.89

And suddenly there are doubts. Will the FED keep rates steady on August 8 after all ? Today's inflation numbers have shaken the market out of its complacency. Perhaps the FED will move after all ? There is no doubt that economic activity in the States is slowing. What is in question is if a slower economy will bring inflation down without any help from the FED. Bernanke, in recent testimony, more or less suggested that this will, indeed, be the case: Demand will slow in response to the rate rises that have already taken place; given weaker domestic demand, U.S. Companies will be unable to pass on price increases related to rising costs and, therefore, inflation will slow. Bernanke's entire analysis is based on the happy idea that there is no outside world. If the U.S. was isolated from the outside world and did not rely on foreign imports, foreign savings, foreign OIL, foreign commodities and did not export to foreign markets, his analysis would be close to the mark. Because the U.S. is not a closed economy (though admittedly less open than many others) his analysis sucks.

In the real world there are lags and dangers which can see activity slow while Price Pressures remain high. STAGFLATION by any other name ?

Dangers ? Like what ? Like for instance rapidly rising commodity prices, record high OIL prices and higher import prices as the USD comes under pressure. Global commodity prices have gone through the roof, OIL prices are at record levels. So far we have not seen all that much pressure on the dollar. Despite its massive external funding requirement, its abysmal trade deficit and the less-than-popular Foreign Policy of the Bush Administration, for the time being the USD is only hovering NEAR to recent lows against the EURO and the JPY. There have been no signs of panic selling.

But the risk is still out there. Which is why U.S. Treasury Secretary, Paulson, has started making noises about a strong USD being in the interest of the U.S., INDEED. Paulson What he means is that the U.S. needs to keep those capital inflows coming.

So what is the FED to do ? In this environment the prudent policy maker would move to hike. To complicate matters there are Congressional Elections on November 7. And there are three FED meetings before then: August 8, September 20 and October 24/25. Political considerations suggest that an October hike is off the agenda. That leaves only August and September, and September is touch and go. So, should there be any doubts that the inflation is a risk, or that offshore investor confidence in the USD is falling, then a move in August makes sense. Later would get complicated.

The market, though, had all but factored in a DEAD FED. Which is why today's inflation numbers have taken such a toll. (The Numbers) Out of nowhere - well not really out of nowhere, but the market was happy to play along with Bernanke's rosy picture - there is suddenly the idea that the FED may be forced to keep hiking even while economic activity slows. Oh dear. And yes the market is on to something here. 'Cause that is the most likely outcome of the present policy dilemma. The U.S. can't afford a currency crisis. In fact, right now the U.S. can't afford anything much at all. More downside for stocks is on the way. And they still haven't solved the conflict in the Middle East.

What's more there is simply no sign that the Bush Administration's agenda is anything less than an escalation in current hostilities. Iraq is a mess. The Israeli attack on Lebanon is broadening with tacit U.S. support and massive U.S. arms shipments. There are signs that the conflict will spread to Syria soon, even in the face of Israeli reluctance to attack Syria. Iran comes later. And the U.N. has never looked more powerless or pointless.

Escalation in the Middle East is not going to be good for inflation. And although the current situation may well force the FED to hike, that does not mean that the USD bulls can return to the market. What we are seeing is some short term position squaring. Anyone with a longer term view should take this opportunity to short the USD. The USD is still in trouble. BIG TIME.

Oil 74.70
Gold 649.50

With the neo-con plans for the Middle East proceeding unimpeded, OIL is hovering just under its recent record. All the signs point to plans for increased hostilities on the part of the Israelis. BBC The Hizbollah and the Syrians are expected to respond in kind. I'm not sure exactly what the longer term objectives of the neo-cons are, but in the short term higher OIL prices are a given. Geopolitical uncertainty, rising inflationary pressures and the big question mark about the USD will see GOLD continue to benefit.

Monday, July 31, 2006

Peace in Our Time - Just Kidding

EUR/USD 1.2769 / 72 Hi 1.2785 Low 1.2738
USD/JPY 114.30 / 34 Hi 114.85 Low 114.17
AUD/USD 0.7649 / 53 Hi 0.7676 Low 0.7641
EUR/JPY 145.95 / 99 Hi 146.57 Low 145.72

Just as it looked like we could all get happy clappy, the Israeli defense minister told the world that Israel would "expand and strengthen" its attack on Hezbollah. Well that's a surprise, not. While Bush and Rice distract the American public with press conferences, and courtesy calls to the Middle East, Israel is back in the business of pulverizing Lebanon. The 48 hour cease-fire which Israeli called was only meant to allow Lebanese civilians the opportunity to leave Southern Lebanon. After which, anyone left in the area REALLY will be deemed a terrorist. And now the cease-fire has been cancelled.

War crimes aside, where is this going? What do we know? First, Israel is bleating on about the Iranian and Syrian-made missiles used by the Hizbollah in the current conflict. Let's leave aside the need for independent verification for a moment. According to this logic if the Hizbollah find that U.S.-made missiles are being used by the Israelis then ipso-facto the U.S. becomes a legitimate target for the Hizbollah. Right? And Israel has been armed to the teeth by the U.S., which makes the U.S. party to this conflict. Got that? The never ending War on Terror coming soon to a town near you. Sound good to you? Not that anyone in Lebanon has sought to make that particular connection. Yet. But what's good for the goose is good for the gander.

That's not the point, though. What is the point is that Israel is working on its public justification for an attack on Syria. Syria is on high alert. Cross border skirmishes are already taking place between Syria and Israel. Israel is mobilizing thousands of reservists and Bush and Co. are making the appropriate noises about Peace being a great idea in principle, only NOT YET. The fix is in. LINK The widening of the conflict is expected to happen within days. Though it does seem that some sort of provocation will be required. SPECIAL OPS anyone??

Syria is first on the list. Iran comes later. The guys behind this know that they have to move fast before public opinion in the West becomes too enraged, or before anyone at the U.N or anywhere else can cobble together a viable PEACE PLAN. So it will happen fast.

Meanwhile Tony Blair has touched base with his minders in California. Rupert Murdoch (aging Media Mogul with a plan, king maker extraordinaire, the guy who had Yo Blair as his special guest at the News Corporation shin dig on Hamilton Island before his tabloids famously instructed the compliant British Public to "Vote Labour") is pleased with his boy. Tony is sticking to his lines. The need to delay a cease-fire in the Middle East is being explained, obfuscated, spun..... whatever it takes. The reasons to justify an escalation will come later. Gulf News

Back in Britain there is unrest in the house but everyone remembers what happened to Robin Cook, the guy who resigned over Britain's decision to join the Coalition of the Willing's attack on Iraq: he's dead. There may be dissent in The Labour Cabinet but no-one is stepping out of line quite yet. Once-upon-a-time the British had back bone, but that was long before tits on page three.

Meanwhile the data looks mixed. U.S. GDP numbers released Friday failed to match up to expectations, but the market is making the best of it. Focus is relentlessly on the FED pausing in August. Though some are hinting at market manipulation ahead of the U.S. elections in November. LINK Can this get any better? The best spy novel in history is being written in real-time!! Maybe the PPT is better at its job than we think.

Overall data in the U.S. is pointing to weakening economic conditions with talk of a 2007 recession. The U.S. consumer is getting crushed by the rising cost of financing a massive debt burden. And higher OIL prices don't help. Company Profits have held up fine so far but there is a limit to how far you can squeeze wages, even if you let the entire Mexican population cross the border (which is not an election-winning policy). Other inputs costs are rising (you may have noticed what has happened to commodities lately), housing is in trouble, domestic demand is folding...... with elections due in early November (even with the PPT on the case) the Bush Administration will be leaning hard on Bernanke to hold his fire. And it doesn't look like you have to lean too hard on Ben to make him keel over. So that's that. It doesn't mean a pausing FED can save the U.S. economy. Stock market bulls really have their work cut out for them.

In Europe the ECB is expected to move rates higher this Thursday. With the market expecting the FED to stand pat, the shift in interest rate differentials will bolster the case for USD bearishness. This shift in itself will not be enough to see the EURO/USD break through recent highs. Buy the rumour, sell the fact, but don't think any EURO weakness is a new trend. The USD downtrend was briefly interrupted by the FED in 2005 and it will take a lot more than interest rates this time 'round to get USD bulls to come out to play. The long term USD downtrend is far from over.

Oil 73.94
Gold 647.80

The mess in Lebanon and Iraq, which now appears likely to spread to Syria and Iran in fairly short order, is not helping the bearish case for OIL. Hugo Chavez, the democratically elected leader of Venezuela - OIL exporter and potential target for U.S. aggression - has just placed a rather large weapons order with Russia. LINK If you are going to be pre-emptive these days, you may as well be pre-emptively defensive. Things being as they are.

So the chances that another source of cheap oil becomes available in the short term is small. And GOLD stays bid. Which is not a surprise, given current circumstances.

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