Friday, August 18, 2006

Focus on Crosses - AUD vulnerable

EUR/USD 1.2827 Hi 1.2879 Low 1.2836
USD/JPY 115.57 Hi 116.11 Low 115.44
AUD/USD 0.7601 Hi 0.7625 Low 0.7592
EUR/JPY 148.27 Hi 148.97 Low 148.11

We don't have a lot of new news to work with. Michigan Sentiment is out in the States today, but it's not market moving stuff. The view on the street is that we are headed for some kind of economic downturn in the States. So far only the most benign impact of this new view is showing up on financial markets: bond prices are rallying, the short end of the yield curve remains bid, stocks continue to see buying interest and the on FX markets the majors have remained range bound.

FX markets can be expected to continue focusing on the crosses. A weaker global economic outlook and profit taking in commodities is expected to see the AUD see further selling pressure. Given that the pressure being brought to bear by the American Administration on the Chinese to revalue their currency is having a knock-on effect on the JPY, the cross with the most downside potential is the AUD/JPY. The near term target for this cross is now 0.8700. And EUR/AUD can be expected to continue its climb. Our target of 1.700O remains unchanged. Selling on AUD crosses should see the AUD/USD come under pressure, for as long as the USD remains range bound. A break below 0.7600 will open the way for a test of 0.7500 in fairly short order.

Oil 70.67
Gold 625.00

Talk of economic slowing and the move towards still tighter monetary policy, and the negative impact on growth which is likely to result, are not helping commodity prices. Given that commodities have been flavour of the month for every passing speculator for quite a while, there is room to go as the rush to the exit continues. But this is nasty, margin-driven stuff, and moves continue to be brutal. This is not a trader's market it is a market for snipers. OIL has weakened in tandem. More downside is possible. For now, the selling into commodity rallies is the way to go, but only nimble players should even try to get involved. USD 70 is holding in OIL. Should that hold, expect a bounce.

GOLD continues to see profit taking and, if market talk of manipulation is to be believed, the idea is to push GOLD prices down further. The powers-that-be are working as hard as they can to fight the emergence of an alternative global reserve. There is considerable vested interest in maintaining the USD's status as the global reserve currency of choice. A test of USD 600 is possible.

The longer term outlook positive outlook for GOLD, however, remains unchanged. The colossal failure of the Bush Administration in Public Finance, International Trade and Foreign Policy has only accelerated the decline in international confidence in the value of the USD. GOLD is emerging as a new global reserve of choice and, until it becomes clear which currency is likely to pick up the mantle from the USD, GOLD will continue to benefit. Longer term players, who are prepared to wear market volatility, should buy on dips.

Thursday, August 17, 2006

In a USD Bear Market Sell the Crosses

EUR/USD 1.2871 Hi 1.2879 Low 1.2836
USD/JPY 115.31 Hi 115.93 Low 115.17
AUD/USD 0.7657 Hi 0.7691 Low 0.7653
EUR/JPY 148.47 Hi 148.84 Low 148.27

First the Data. Retail Sales numbers released today in the U.K. for July fell 0.3%, the first fall in six months. But the real concern is the level of debt accumulated in the Consumer Sector and what that will mean for the economy going forward. With the Consumer Sector contributing two thirds of total economic activity in Britain, a struggling Consumer Sector is bad news for the economy. Same goes for the States where the voices calling a recession are increasing in number. Data released yesterday confirmed that a slow down in the Housing Sector is underway. Indeed, all the data pertaining to the Household Sector in the States looks poor.

What do we know? Well we know that the Anglo economies are unusually dependent on Consumption to fuel growth. We also know that in these economies the Consumer Sector has accumulated record levels of debt. This was OK while the global interest rate environment was benign. But now global interest rates are starting to rise, across the board. So the chances of recession in Anglo economies is as high as they have ever been. A pause in interest rate hikes is unlikely to be enough to pull these economies out of a sharp slow down. The upshot is that an adjustment in currency parities can be expected.

Uncle Sam, mindful of its extraordinary dependence on foreign capital inflows, is still talking up the USD. So easier targets for now can be found on the crosses. Not that we are not currently in a USD bear market, it's just that the crosses are less likely to see manipulation. So Euro/GBP remains a buy. Short term target still 0.6800 for 0.6850 on a break. AUD/JPY is a sell above 88.50. Short term target: 88.00 - a break opens the way to 87.50. Eur/AUD is also a buy below 1.6750. Medium term target at 1.7000, short term target: 1.6850. The Eur/JPY is not a focus in this kind of market. The only focus really should be: selling debt-laden, deficit economy currencies against currencies with positive external accounts. Sell high debt nations against nations with little or no foreign debt.

Stock markets for now are going with the idea that weaker growth will see the early end of interest rate hikes. Everyone is ignoring the weak economic fundamentals behind the outlook for a PAUSE. This can't last and when the focus starts to be on underlying economic weaknes, the correction in Stock Markets, particularly in Anglo markets, could be severe. So being fast on your feet here is essential. You don't want to be the last guy out the door.

Oil 70.82
Gold 640.00

The prospect of a recession in the Anglo economies has seen the price of OIL fall. There is a possibility that the exit of speculators from commodity markets in general, as fear of recession grows, will see further prices falls across the board. Among other considerations, this will be negative for the AUD, which remains a better sell on the crosses than against the beleaguered USD.

GOLD however continues to hold. Concern about the status of the USD as the global reserve currency of choice, about the international standing of America and the Bush Administration and the absence of a clear alternative global reserve currency continues to fuel the GOLD rush. Longer term the outlook for GOLD remains positive, inflation or no inflation. Ultimately this move in GOLD is not about inflation. It's about the USD.

Wednesday, August 16, 2006

After the Hat Trick

EUR/USD 1.2771 Hi 1.2796 Low 1.2768
USD/JPY 116.24 Hi 116.29 Low 115.91
AUD/USD 0.7632 Hi 0.7658 Low 0.7627
EUR/JPY 148.50 Hi 148.59 Low 148.21

Well the hat-trick was achieved: the cease-fire, the re-opening of the Alaskan oil supply and the FED PAUSE. WOW!! The U.S. Stock Market has seen some relief. As of yesterday's close the Dow Jones is up nearly 5% YTD, the S&P nearly 3% and the Nasdaq 100 is down nearly 7% YTD. Which I guess is better than an all out Bear Market, but only just. The OIL price has dipped slightly, the USD is holding. The big problem is that the benefit to the Bush Administration has so far been negligible. Bush's popularity hasn't even got up off the carpet. The concern now is that the Bush Administration decides that it doesn't care. After all there is NO RISK for the Bush Administration. Bush won't be in the next legislature, nor Cheney, nor Rumsfeld.... so there is NO DOWNSIDE for these guys. Why worry what the electorate thinks? Who cares about the Blogosphere? Think about what a Bush Administration still held in check by its concern with popularity achieved. Now try to imagine what a Bush Administration unleashed from concerns with popularity could achieve. Keep that in mind as we move forward.

A trigger happy U.S.A. is still seen as the greatest risk for peace in the world. The talk in Middle East is that the Bush Administration has adopted the principle of pre-emptive war that is absolutely contradictory to the principle of peace. Yes, we have noticed. And the target is still Iran.

Yesterday's release of PPI data in the U.S.A. had the market cooing that the FED PAUSE really marks the end of interest rate hikes in the States. This, together with the slight softening in OIL prices, helped the Stock Market Bulls come out of their pens. The market can run with the interest rate story only for as long as the recession story doesn't get any bigger. And only for as long as the interest rate pause doesn't impact the performance of the USD in a significant way. Should the USD start to see REAL SELLING pressure then there will be a risk that IMPORTED INFLATION brings back talk of INTEREST RATES hikes. But we are some way off that now. First, because so far the USD is pretty much holding and second, because imported inflation would take time to show up in the data. So for now stocks will toss between: no more hikes and economic slowdown.

Data due to be released today could be interesting. While all the STOCK MARKET BULLS will be watching for signs that inflation is dead when CPI is released, the BEARS will be watching the Housing data. Nobody thinks that the housing market in the States is going anywhere but down. The consumer is already fully loaded with debt, the U.S. employment market is starting to show signs of stress, home sales are falling and taking house prices with them. The U.S. consumer is not in a good place right now and there is simply no room for consumers to increase their leverage to pay for further consumption. Any increase in consumption will have to be fuelled by rising incomes, or by using up savings. So don't hold your breath. Given that consumption now accounts for a staggering 70% of the U.S. economy, weak consumption is going to hit overall economic growth hard. A BULL MARKET in stocks will have to fight the U.S. economy all the way.

The USD is trading the interest rate outlook. Retails Sales Friday convinced the market that maybe another rate hike was in the pipeline. Yesterday's inflation numbers changed all that. Today's data is likely to point to further weakness in housing. Inflationary numbers are unlikely to be as soft as yesterday's PPI data. Take away the statistical noise and there is a clear picture of softer U.S. economic activity. Further USD weakness is a matter of time.

While the U.S. Administration fights the USD bears (PPT and all that), the British Administration has no such constraint. And the same forces which are acting on the U.S. economy are at work in Britain: higher rates are eating away into the consumer sector. Economic weakness is starting to show just as old Europe fights back. The EUR/GBP has bottomed. Anything under 0.6750 should be bought. The very short term target for the Eur/GBP is 0.6850. More upside from there is expected. The GBP is the poor man's alternative when being USD bearish is not delivering.

Oil 72.96
Gold 637.00

Further USD weakness will undermine the bearish case for OIL and GOLD. While there is still potential for a correction, this is not a long term trend. Those looking to ride the correction in GOLD and OIL should exercise caution.

Monday, August 14, 2006

This Peace Will Hold

We have a chorus again. This time the chorus is not forecasting OIL to reach USD 100 in the next five minutes. No, this time the chorus is telling us that the shaky U.N.-brokered cease fire in Lebanon is not going to hold. The reasoning is pretty much this: how can Israel withdraw until Hezbollah disarms and how can Hezbollah disarm until Israel withdraws. And then there is the nit-picking about the wording of the U.N. resolution. We are told it will all end in tears.

Wars were ever thus. And cease fires the same. At some point both parties wake up to the fact that peace is actually a better deal. And then there is peace. There is only one bunch of guys this wouldn't suit: the American "Neo-Cons". But peace suits the Hezbollah and it suits the Israelis. The Hezbollah have every interest to support the peace. They are busy rushing around telling everyone who will listen that they stopped one of the world's greatest armies. In any case, the Hezbollah's kidnapping of two Israeli soldiers was never meant to start WWIII. If a prisoner exchange can be brokered, as was the original intent of the kidnappers, the Hezbollah emerge as heroes. This is a good a place to be as they can wish for.

And it seems that the Israelis have woken up to a much greater strategic risk: the possibility that the Government that comes to power in the U.S.A. in 2008 comes to power with a broad anti-war policy platform. Ned Lamont's recent victory in the Connecticut Primary can not be easily dismissed. If Israel were to find itself, at the behest of the "Neo-Cons", in the middle of a major conflagration right at the time when the American public votes against war, that might not be such a great place to be.

The reality of the Israeli position is that they are isolated in a hostile environment and their one major ally is the U.S.A. which, in spite of indications to the contrary, is a democracy which may decide at any time that providing Israel with a never-ending stream of weapons and funding is no longer part of the game plan. Given this risk, the best deal for the Israelis is to try and come up with a peace which they can live with while they still have access to Uncle Sam's weapons and money. That time is now.

Apart from the 1,000 or so people who were killed in this recent skirmish and the USD 2 billion or so of infrastructure which was damaged for no good reason, the people who have really come out of this with nothing but egg on their faces are "The Neo-Cons". With no real allies in the region (Saddam is gone, they lost Iran when they lost the Shah, they don't have Syria, or Jordan in their back pocket. They still have Turkey, but should Turkey join the EEC that alliance will lose its central role in Turkey's politics. They say they have Saudi Arabia, but what kind of ally and supporter sets up OPEC and then sells you oil at USD 75 a barrel?) the Americans only ever really had Israel. And they held on to Israel by working on its sense of paranoia and isolation. It made the perfect ally. With the right politicians in place you could set armies marching and achieve your strategic regional aims. Or so it seemed.

If Israel has finally worked out that the U.S. alliance costs more than its worth, then they may just prefer a peace which is manageable while they can get it. The Israeli politicians with the closest ties to the Bush Administration may fight this peace and call for further hostilities but if the Israeli people don't back them, then it's really over. This leaves the "Neo-Con" plan for retaking the Middle East in disarray. If there can be peace in Lebanon and a broader peace with Israel in the region then the neo-colonialists will be locked out of the region for a very long time. Israel will no longer need them and no-one else in the region wants anything but their heads on platters.

Divide and conquer has been the battle cry of colonialists everywhere. But then it really was about time that such anachronistic thinking was archived forever.

At Ease and Unwind

EUR/USD 1.2742 Hi 1.2765 Low 1.2709
USD/JPY 116.48 Hi 116.71 Low 116.15
AUD/USD 0.7661 Hi 0.7682 Low 0.7653
EUR/JPY 148.43 Hi 148.56 Low 147.87

Economic data released in Germany today, following the strong economic data released on Friday in France and Italy, points to further rate hikes in Europe this year. The ECB is expected to take rates to at least 3.5% (from 3% currently). And that has upset the USD bulls. Retail Trade numbers released on Friday in the States re-ignited talk of rate hikes in the States (with the favourite date for a hike September 20). The strong European Data released today and Friday confirms that growth is strong in the Euro Zone. With rates likely to rise further in Europe USD gains have been contained. The only factor in favour of the USD bulls right now is the fact that the market is
short USDs
Which is a point in favour of the USD, it just doesn't make for a huge new trend.

Markets are a chatter about the massive short USD positions out there. And the big question is: will they be unwound? The USD bulls are gearing up for another shot. Inflation due out in the States this week will be poured over to see if another rate hike can be justified. Any signs that the inflation beast has not been beat will be taken as confirmation that the FED will have no choice but to hike. (Which may or may not be the case. Bernanke certainly seems relatively relaxed about the inflationary threat.) So we are still trading on interest rate differentials. This is a bit like trading on old news. 2005 is long gone and the news at the margin is that rates are headed higher across the globe and economies which rely most on debt-financed growth will be hit hardest. Those economies are Anglo-Saxon. Which makes it hard to make a case for longer term strength in the USD.

Meanwhile GEOPOLITICS may take a back seat for a while. There is a cease fire in Lebanon and talk that the Israelis are no longer so keen to be the stooges for the Bush Administration's proxy war on Iran. With the chances high that the "Neo-Cons" will go the way of the Dodo at the next U.S. election, buying into the Neo-Cons Plans in the Middle East might just be a hard sell in Israel. It well may be that some Israelis feel that they have just two years to defeat their enemies in the area. It could also be that using the next two years to inflame hostility in the Middle East might not be an attractive option to Israelis. If that is the case, the cease fire will hold and the Neo-Cons will have to go back to the drawing board. The proxy war is over.

Stock markets are trading on peace and cheaper OIL and ignoring growth and higher interest rates for the time being. In any case rates are still historically at very low levels in both Japan and Europe and growth is not normally dependent on debt financing in either of these high-saving areas. In that environment there is room for stocks to rally, even if interest rates are set to move higher. The outlook for Anglo-Saxon stock markets is somewhat more problematic. The last five years of growth in these economies has been financed by an explosion of debt in the household sector and the associated rise in residential real estate markets. Both those engines of growth will suffer in a higher interest rate environment.

Oil 73.69
Gold 639.80

The failure of OIL and GOLD to make new highs at the height of the conflict in Lebanon, and despite the underlying bullishness of both markets, opens the way for a test of the downside this week in the wake of the implementation of the cease fire in Lebanon. The greatest potential downside is in GOLD, which is essentially a commodity of choice, not necessity. The initial downside target for gold is USD 620. A break would open the way for a move to USD 600.

While unwinding of speculative positions will see OIL also test the downside, the underlying global demand and ongoing concerns about supply suggest that downside potential is limited. A test of USD 70 is possible, but further weakness would need to be backed up by signs of slowing global economic activity. So far, while there are signs that Anglo-Saxon economies will slow in the second half of 2006 and into 2007 in response to higher rates, global economic growth remains steady.

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