Thursday, August 24, 2006

Range Trading and Risks - the U.S. is still in Trouble

EUR/USD 1.2830 Hi1.2841 Low1.2748
USD/JPY 116.31 Hi116.61 Low116.22
AUD/USD 0.7639 Hi0.7644 Low0.7697
EUR/JPY 149.26 Hi149.49 Low148.53

Economic data confirmed what we already know: the U.S. economy is in trouble, growth in Europe is still relatively steady. Recent semi-official statements by the guys in charge have created some confusion on the market. And tomorrow Bernanke will have another shot. Which could be fun, though there isn't much chance that Bernanke will start talking about the need to hike. Obviously the 1970s passed him right by. But then Bernanke is a Bush appointee and there are elections in November to consider. Right now, the Bush Administration can't afford any gloomy economic forecasts, especially not from the FED Chairman. So, as per usual, Bernanke can be expected to paint a rosy picture: inflation will fall as DOMESTIC economic conditions "soften". The USD is not at risk. The U.S. Balance of Payments Deficit is not a problem, and neither is that giant hole called the Federal Government Deficit. Yada, yada, yada. Yeah, we know.

Yesterday's Housing Stats released in the States confirmed that the economy is indeed "softening" under the weight of the 17 rate hikes which the FED has delivered so far. Hardly a surprise. The market, up till now, had been going with the feel-good idea that weak economic activity would bring FED hikes to an end. Now concerns about recession, stagflation and the general economic incompetence of the Bush Administration are starting to have an impact. Today sees the release of Durable Goods numbers for August. These are unlikely to be as weak as the Housing Figures. But neither are they expected to be positive. New Homes Sales, which are also up for release, are expected to be dire. Another non-surprise.

Meanwhile, data released in Europe has been somewhat more positive: Q2 GDP data released in Germany today was strong and the IFO Business Confidence Index seems to be holding pretty close to 15 year highs, despite higher domestic interest rates and the stronger Euro. The ZEW Confidence of Investors in Germany has taken something of a hit recently but this is in line with international Investor Sentiment indicators. Cash hoarding is everywhere.

The big question going forward is: which economies will suffer the most as the U.S. economy tanks? The short answer is: the export-orientated economies. Asia's entire economic policy strategy has been an imitation of Japan's economic strategy. And that strategy is export orientated. Full stop, the end. So growth in Asia will suffer unless Asian economies can replace the U.S. market. The target, of course, will be Europe. It remains to be seen, however, if Asian exporters can successfully switch out of the U.S. and into Europe.

Of the European economies Germany, at present, relies most heavily on exports to fuel economic growth. The bulk of German exports, however, are destined for other European markets. So the loss of the U.S. export market will be felt less keenly. So the less short answer is: Asia will suffer more economic damage than Europe will as the economy weakens in the United States.

But back to the markets. The USD bulls have made their move. Ranges have held. Now we get to try the USD downside. Unless FEAR starts to spread to other U.S. markets (that is we need to see the U.S. Stock Market take a hit) ranges are expected to hold. For now trading crosses (with trailing stops) remains the recommended market strategy. Although there has been a certain amount of market choppiness our targets remain unchanged for EUR/AUD: 1.7000 and for EUR/GBP: 0.6850. AUD/JPY has not performed as expected and, for now, the more compelling Euro-positive story is the safer bet. Let's make one thing clear, however, the USD remains in a bear trend and should be sold on any strength.

The outlook for Stocks is still tricky: rising rates, GEOPOLITICS on the back burner - but still there - and the potential for a MAJOR SHOCK on currency markets (the USD could easily take a major hit some time soon). Of the global markets, the U.S. Stock Market looks the most vulnerable at present. But upside for all global Stock Market looks limited from here. The poor policy choices of the Bush Administration, the huge cost of the war for the United States, ongoing global rate hikes and the spike in OIL and commodity prices should all start to hit home soon.

Oil 71.42
Gold 633.10

GOLD is holding steady, which given ALL THE RISKS out there at the moment, is hardly a surprise. The long term bull market in GOLD is not expected to turn around any time soon. For that to happen you would need to see skilled economic management in the United States and there is just no sign that the Bush Administration even knows where to look for that.

All quiet on the OIL market. And without another major flare up in the Middle East that is not expected to change. OIL means GEOPOLITICS right now. The growth story will hit later. But only once the Middle East STOPS being front page news. With the "Neo-Cons" in the Whitehouse that isn't likely in the short term. So we have range trading. FOR NOW.

Wednesday, August 23, 2006

Back to the Future. No, Just Back to the 1970s

EUR/USD 1.2819 Hi1.2836 Low1.2783
USD/JPY 116.32 Hi116.57 Low116.07
AUD/USD 0.7650 Hi0.7668 Low0.7616
EUR/JPY 149.14 Hi149.31 Low148.76

Jack Guynn and Michael Moskow spooked the U.S. Stock market yesterday by suggesting (again) that the battle with inflation is not over and, more ominously, that allowing inflation to rise a little so that economic growth doesn't hit a brick wall IS NOT THE WAY TO GO. Suddenly the FED PAUSE is not a slam dunk.  And the markets didn't like it.  Mr Guynn would like us to consider what we have learnt over the past 40 years.  Indeed.

Let's start in the Middle East.  The establishment of the state of Israel and the shipping in of hundreds of thousands of foreign nationals into Palestine wasn't  welcomed by the people already in situ.  Not that it mattered much.  Supporting the establishment of the state of Israel suited the Americans and the British and it gave them a bullet-proof ally in the region, which was volatile and OIL RICH.  The OIL, of course, being the major attraction.  Naturally wars followed.  With the support of the U.S.A. Israel emerged victorious from war after war.  In 1967 the Israelis fought and won the 6 day war.  The Arab world was not happy. 

Then in 1969 the Nixon Administration came to power in the United States.  (Interestingly, both Rumsfeld and Cheney cut their political teeth in the Nixon Administration.)  Economic know-how wasn't the strong point of this Government.  Spending on the Vietnam War had made a big hole in the Federal Government's Finances.  Inflation had emerged as a problem.  Inflationary fiscal and monetary policy had seen a blow-out in the U.S. Balance of Payments.  Although still fixed to the price of GOLD, the USD was under threat. In 1971 Richard Nixon broke the USD's link to GOLD and the USD collapsed. 

On October 6 1973 Egypt and Syria launched an attack on Israel: the Yom Kippur war.  With American support the Israelis won, again.  On October 16 OPEC decided a 17% increase in the price of OIL, taking it all the way up to US$ 3.65 a barrel. Then, on October 17 the Arab members of OPEC announced an embargo on OIL sales to the United States.  This embargo was later extended to U.S. allies.  This was payback for the U.S. support of Israel during the Arab-Israeli wars. In response, it has since been reported, that the United States considered simply invading Saudi Arabia or Kuwait or Abu Dhabi and taking over the OIL fields.  The idea was that control over OIL would be a panacea for all the woes which were afflicting the U.S. economy. Doesn't this whole scenario sound terribly familiar?

By the end of this crisis the price of OIL had rocketed to US$12 a barrel.   The Arab world had discovered a powerful bargaining chip and the key to their economic prosperity.  From there it was a short step to remove the potentates who had been installed at the behest of the Anglo-American OIL conglomerates.  On January 16, 1979 the Shah of Iran fled the country. The price of OIL hit US$ 25 in 1979.  And the Anglo-Americans weren't happy.  

In January 1981 President Ronald Reagan was elected.
  And guess who should pop up: Cheney, Rumsfeld, and George Bush Snr. And so began the long sorry history of the Anglo-American support for another potentate in the Middle East: Saddam Hussein.  Not that that particular episode is getting a lot of air time at the moment.  Nevertheless with Saddam Hussein in power a war was launched against Iran.  And the OIL price pushed still higher. 

Then we had the relative calm of the Clinton Administration (1993-2001).  The U.S. Federal Government Deficit was brought under control, the stated policy of the Clinton Administration with regard to the USD was the "Strong Dollar Policy" and the price of OIL actually FELL. What's more, without a major conflict in the Middle East to galvanize OPEC, the organisation itself started to look shaky.  There were predictions that the price of OIL would languish for years. And then Al Gore lost the election. Oil was trading at around US$ 24 a barrel and the U.S. Federal Government was in surplus. In 2001 George W. Bush was elected President and things started to fall apart fairly rapidly after that. 

Cheney and Rumsfeld are back in the driving seat.  Iraq has been invaded.  There is talk that the U.S. actively goaded Israel to escalate hostilities with Lebanon and Iran is in the cross hairs of our dear friends, the "Neo-Cons".  The U.S. currenct account deficit is massive.  The U.S. Federal Government Deficit is similarly appalling.  The USD is under threat.  The price of OIL has more than trebled and the only solution on offer is more regional aggression in the Middle East.  Nothing like sticking to your game plan, even if it doesn't work.  Like a dog to its vomit, so returneth a fool to his foolishness.  What we do know about these people, if history is any guide, is that they simply have no idea of what effective economic management requires.  They prefer the allure of supposed quick fixes.  This does not bode well for the U.S. economy going forward, for the USD or for global Stock Markets.

One question for these guys: why can't you just buy OIL like the rest of us?

Oil 72.30
Gold 634.70

If what we should be watching is the 1970s then remember that GOLD moved from USD 35 to USD 125 in fairly short order.  GOLD bears beware.  

Tuesday, August 22, 2006

The March to War Won't Save the USD

EUR/USD 1.2846 Hi 1.2900 Low 1.2831
USD/JPY 116.05 Hi 116.38 Low 115.80
AUD/USD 0.7635 Hi 0.7639 Low 0.7610
EUR/JPY 149.10 Hi 149.71 Low 149.05

Far as I can tell this is what is going on: the recent Israeli assault on Lebanon according to Hersh was aimed at degrading the capacity of the Hezbollah to attack Israel during the upcoming U.S. and/or Israeli attack on Iran. (Too bad about the damage and the dead). The media blatter about Iran bears watching in the march to war. And the current showdown with the Iranians over their nuclear programme is very important. The Iranians are being a bit naive here. They seem to believe that: a) the "Neo-Cons" are not that crazy and b) that an increasingly anti-war mood in the States will stop the rush to the next war. They miss the point. The Bush Administration doesn't mind massaging public opinion when it can. But if public opinion is unfavourable it's no big deal: they proceed anyway. Democracy is just not important to these people. They are not looking to get the chads out of the waste paper bins any time soon. What is important is maintaining the appearance of democracy. The reality on the ground is of no consequence. Which is why, I guess, it's OK to call Pakistan an ally and a democracy while you defend the occupation of Iraq by saying: "if we ever give up the desire to help people who live in freedom, we will have lost our soul as a nation". Well not lost exactly, more sold to the highest bidder.

The Iranians are playing a dangerous game with dangerous people. Trying to out-crazy the crazies is fraught with all kinds of pitfalls. On the other hand, even if the Iranians back down that doesn't mean the U.S. won't go ahead and attack. After all Saddam Hussein backed down on the eve of the U.S. invasion and that changed nothing. Pretty much the only thing that might stop these people is some kind of Bastille Day in the States. There have been rumbles about discontent in the Pentagon but so far no sign of an outright insurrection. The world waits.

The Investor Confidence Index released today in Germany disappointed the market and scared the Euro bulls a little. Although the current climate can be expected to take a toll on confidence, underlying economic data remains strong in Europe. Those who think that Europe is destined to go under if the American economy goes under, should re-examine their perspective. The world changes, the game moves on. Once-upon-a-time China and India were not economic forces to be reckoned with. OPEC nations were poor, under colonial domination and without a game plan. And the EEC was considerably smaller: six nations versus the current twenty-five. Yesterday Wolfgang Manchau commented in the Financial Times that: "The eurozone may not follow each US upturn, but it surely follows most downturns". Oh yeah? I know there are people out there who are prepared to bet their life on straight-line correlations. These were the guys betting that traffic congestion would see London neck-high in horse manure. Then the motor vehicle was invented.

It remains to be seen if the U.S.A. will be able to export its home-grown recession. A devaluation in the USD would go some way to achieving that, but it would likely only compound the U.S. economic crisis by forcing up the cost of financing the U.S. Government Debt. That is: Treasuries would take a hit. The effect on the U.S. economy would be simple: it's called crowding out. Government demand would crowd out growth in the rest of the economy. And when that happens domestic economic conditions turn ugly.

Tomorrow's U.S. data on Housing is expected to merely confirm what we know: the global rush to tighten monetary policy will squeeze those economies dependent on consumer driven debt finance THE HARDEST. That means: the U.S.A., the U.K., Australia and New Zealand. Confidence about the future may have taken a hit in Germany but the U.S.A. is already living that future. Take the opportunity to buy EUR/USD while you have it. The march to war has not increased USD bullishness and it is not likely to. All it has done is confirm the view internationally that the U.S. is currently being run (badly) by a bunch of crazies.

The USD downtrend is not over. The Stock Market correction is not over. You can buy bonds, but not USD denominated bonds, unless currency risk means nothing to you.

Meanwhile the British have made a breakthrough, or so they would have us believe. They have actually charged (I mean really charged) some of the people who were arrested for the alleged plot to blow-up airlines. The rest of the people who were arrested are still in limbo land. And the evidence: well they found hydrogen peroxide in these households. And bits of electrics. And quite a lot of internet bragging. Passports and plane tickets though seem to have been a bit thin on the ground. Now we know why we need to tighten up Civil Liberties. You can't have people running around willy-nilly with hydrogen peroxide. Anyway they got to these people, just in time. No, not really. Well before they bought their plane tickets anyway.

I guess I don't really mind the whole conspiracy to dominate the world thing: the tie-in between the mainstream media, big business and our fearless leaders. What really makes me gag is the slap-dash incompetence of the whole exercise. I mean guys, if you are going to go over to the dark side could you at least try and be professional about it. Right now your performance is just embarrassing.

Oil 72.56
Gold 633.60

The Middle East crisis marches on. And the case for being bearish GOLD or OIL is looking weaker every day.

Monday, August 21, 2006

GEOPOLITICS, the USD and Market Wobbles

EUR/USD 1.2888 Hi 1.2907 Low 1.2823
USD/JPY 115.58 Hi 115.83 Low 115.32
AUD/USD 0.7626 Hi 0.7638 Low 0.7580
EUR/JPY 148.97 Hi 149.15 Low 148.47

Data out this week is unlikely to have mind boggling market consequences. The States will see new numbers on Housing Sales. No-one expects the numbers to paint a positive picture of what is happening in the Real Estate market over there. While statistical noise may occasionally confuse, that particular bubble is being unwound and more bad news about residential home sales and house prices can be expected. This is not even close to being over. European data is expected to be more positive. Trade data for June was released today for the Euro Zone. A €2 billion trade surplus was announced versus an expected €1.2 bn deficit. While Business Confidence may take a hit as a result of rising European interest rates and the rise in the Euro, overall economic data in Europe is expected to continue pointing to a cyclical economic recovery.

Meanwhile GEOPOLITICS appears to be back. The Israelis have been busy "arresting" officials in GAZA. And no-one seems to know (or care about) what has to the elected Palestinian officials already in Israeli "custody". There have been Israeli raids in Lebanon, the Israelis say they are ready for more combat, the U.N. Peace Keeping force is out there somewhere, we just don't know where, and the Iranians are busy testing rockets. Great. The "Neo-Cons" must be beside themselves with joy and anticipation.

Now we have to wait and see if this is just more posturing or if more violence is in the offing. More violence would not be good news for financial markets.

Stock markets in Asia took a hit today. A weaker USD, the move by the Chinese to tighten rates, the prospect of a further increase in the oil price if the Middle East crisis deteriorates further, have all taken a toll. European stock markets look similarly fragile. The outlook for U.S. stock markets is not any better, with some commentators openly talking about the possibility of a crash. Slowing economic activity, rising interest rates, rising inflationary pressures, high commodity prices and GEOPOLITICS which look as bad as they've looked in a long, long while: make for one fairly ugly picture for global stock markets.

The USD remains under pressure. Given the current world environment the name of the game is: RISK REDUCTION. And, with its massive external funding requirement, its poor political leadership, and the prospect of lots more economic weakness in the States the USD is a RISK. For now Summer and market manipulation is keeping the USD within ranges but any real trouble on any front (Political or Economic) is likely to increase market jitters and the USD can be expected to suffer as a direct result.

Oil 71.91
Gold 631.00

The return of GEOPOLITICS and the softer tone of the USD have seen a modest bounce in OIL and GOLD. This week is likely to be crucial for both markets. With the USD still under pressure and GEOPOLITICS looking complicated, a failure to break decisively through recent lows is likely to encourage more buying interest. GOLD remains in a longer term bull market. The only question is: is the current correction in the price of GOLD over yet, or not?

GOLD remains in a long term bull market. The U.S. economy just doesn't have what it takes to offer the world a global reserve currency. And currency alternatives are thin on the ground.

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