Thursday, October 26, 2006
An Exercise in Cynicism
EUR/USD 1.2652 Hi 1.2672 Low 1.2598
USD/JPY 118.83 Hi 119.19 Low 118.60
AUD/USD 0.7618 Hi 0.7640 Low 0.7603
EUR/JPY 150.34 Hi 150.49 Low 149.93
They came, they saw, they did nothing. Well I’m glad we got that over with. Although the dissection of the FED statement is just beginning and all the talking pin heads are labouring over what the exact placement of the commas mean. This morning on Bloomberg the view seemed to be that the FED is still sort of HAWKISH because it hasn’t ruled out further rate hikes. Subliminal message: don’t sell the USD because the FED could move into HIKE mode any time.
Right, so the FED is sort of HAWKISH only it’s keeping rates on hold while it talks about the fact that “economic growth has slowed” and the idea that inflation is “likely to moderate over time”. In order to be DOVISH the FED would have to be talking about what? Economic free fall and deflation? Obviously.
What’s interesting about all this is how incredibly focused markets have become on MONETARY policy. This is not really a surprise, given that economic management at the Government level is so clueless. We don’t actually know what we’re doing here, guys, so if you don’t mind could you just adjust monetary policy ALL the time while we work on our next election strategy. What we have is Government economic policy driven by election cycles, with all sorts of unintended long term economic consequences. And short term economic policy in the hands of a bunch of unelected officials who think that it is rational, even necessary, for interest rates to be the only real policy lever out there.
Governments everywhere have created a policy no-man’s land and into the void step the Central Banks of the world. So if you want to make any investment or economic decisions at all the only thing to watch is the interest rate cycle. Why we pay the politicians is beyond me.
The USD got sold off a bit following the FED statement. But essentially the FED gave the market nothing new to go on.
The longer term trend for the USD will continue to be determined by international capital flows and underlying economic fundamentals. Short term we have a market all revved up to sell the USD, an election on November 7 and the potential for a short sharp squeeze of USD bears. That doesn’t mean that the USD is in a new bull trend, but it does mean that short term traders need to pick their levels carefully. EUR/USD is expected to hold above 1.2600, dips below should be bought. Similarly USD/JPY is unlikely to sustain a rally above 119.00. Given the very high current level of EUR/JPY, downside for USD/JPY is more promising in the short term than upside for EUR/USD.
Yesterday saw the release of yet more unimpressive economic data. Home Sales were weaker than expected. The weak residential Real Estate Market, the high level of accumulated Household Debt in the States and the pivotal position of the American Consumer for the health of the U.S. economy all point to a continuation of the sit on hands FED. Bernanke has gone with REFLATE and be damned, but no-one at the FED can afford to come right out and say it. Not when the U.S. is looking to pull in USD 3 billion per day from overseas "investors".
OIL 61.37
GOLD 594.50
Well there are all sorts of explanations out there, but essentially OIL and GOLD are up. Some commentators have gone as far as to suggest that the inevitable rally in the GOLD price is being held back until AFTER the November 7 election. Those naughty GOLD cartel market manipulators are at it again.
I’m not sure that the average Joe really cares enough about the price of GOLD or the USD to make the November 7 election a big deal for Gold Cartel Inc., if it exists. And I’m not sure that anything but an outright collapse of the USD is likely to have much impact on U.S. financial markets, U.S. mortgage rates and Middle America’s bottom line, but the story sure gives a good idea about the level of paranoia and suspicion out there at the moment.
And right now NOBODY trusts the politicians. Nobody sees any trick so low that politicians aren’t willing to give it a whirl if it means better results at the very next election. That goes for politicians everywhere. Or is there a nation out there somewhere NOT led by people willing to make dirty back room deals with just about anyone in return for short term political gains?
The upshot of all this is that even if OIL has come off its highs and U.S. Stock markets have gone through the roof, the American electorate is not exactly cheering. Politicians will have to start working on their credibility because the spill-over impact of a little fiddling with financial market aggregates doesn't seem to be delivering the desired results.
USD/JPY 118.83 Hi 119.19 Low 118.60
AUD/USD 0.7618 Hi 0.7640 Low 0.7603
EUR/JPY 150.34 Hi 150.49 Low 149.93
They came, they saw, they did nothing. Well I’m glad we got that over with. Although the dissection of the FED statement is just beginning and all the talking pin heads are labouring over what the exact placement of the commas mean. This morning on Bloomberg the view seemed to be that the FED is still sort of HAWKISH because it hasn’t ruled out further rate hikes. Subliminal message: don’t sell the USD because the FED could move into HIKE mode any time.
Right, so the FED is sort of HAWKISH only it’s keeping rates on hold while it talks about the fact that “economic growth has slowed” and the idea that inflation is “likely to moderate over time”. In order to be DOVISH the FED would have to be talking about what? Economic free fall and deflation? Obviously.
What’s interesting about all this is how incredibly focused markets have become on MONETARY policy. This is not really a surprise, given that economic management at the Government level is so clueless. We don’t actually know what we’re doing here, guys, so if you don’t mind could you just adjust monetary policy ALL the time while we work on our next election strategy. What we have is Government economic policy driven by election cycles, with all sorts of unintended long term economic consequences. And short term economic policy in the hands of a bunch of unelected officials who think that it is rational, even necessary, for interest rates to be the only real policy lever out there.
Governments everywhere have created a policy no-man’s land and into the void step the Central Banks of the world. So if you want to make any investment or economic decisions at all the only thing to watch is the interest rate cycle. Why we pay the politicians is beyond me.
The USD got sold off a bit following the FED statement. But essentially the FED gave the market nothing new to go on.
The longer term trend for the USD will continue to be determined by international capital flows and underlying economic fundamentals. Short term we have a market all revved up to sell the USD, an election on November 7 and the potential for a short sharp squeeze of USD bears. That doesn’t mean that the USD is in a new bull trend, but it does mean that short term traders need to pick their levels carefully. EUR/USD is expected to hold above 1.2600, dips below should be bought. Similarly USD/JPY is unlikely to sustain a rally above 119.00. Given the very high current level of EUR/JPY, downside for USD/JPY is more promising in the short term than upside for EUR/USD.
Yesterday saw the release of yet more unimpressive economic data. Home Sales were weaker than expected. The weak residential Real Estate Market, the high level of accumulated Household Debt in the States and the pivotal position of the American Consumer for the health of the U.S. economy all point to a continuation of the sit on hands FED. Bernanke has gone with REFLATE and be damned, but no-one at the FED can afford to come right out and say it. Not when the U.S. is looking to pull in USD 3 billion per day from overseas "investors".
OIL 61.37
GOLD 594.50
Well there are all sorts of explanations out there, but essentially OIL and GOLD are up. Some commentators have gone as far as to suggest that the inevitable rally in the GOLD price is being held back until AFTER the November 7 election. Those naughty GOLD cartel market manipulators are at it again.
I’m not sure that the average Joe really cares enough about the price of GOLD or the USD to make the November 7 election a big deal for Gold Cartel Inc., if it exists. And I’m not sure that anything but an outright collapse of the USD is likely to have much impact on U.S. financial markets, U.S. mortgage rates and Middle America’s bottom line, but the story sure gives a good idea about the level of paranoia and suspicion out there at the moment.
And right now NOBODY trusts the politicians. Nobody sees any trick so low that politicians aren’t willing to give it a whirl if it means better results at the very next election. That goes for politicians everywhere. Or is there a nation out there somewhere NOT led by people willing to make dirty back room deals with just about anyone in return for short term political gains?
The upshot of all this is that even if OIL has come off its highs and U.S. Stock markets have gone through the roof, the American electorate is not exactly cheering. Politicians will have to start working on their credibility because the spill-over impact of a little fiddling with financial market aggregates doesn't seem to be delivering the desired results.
Tuesday, October 24, 2006
A Little More Market Hysteria Coming Soon
EUR/USD 1.2575 Hi 1.2580 Low 1.2525
USD/JPY 119.14 Hi 119.67 Low 119.08
AUD/USD 0.7582 Hi 0.7591 Low 0.7558
EUR/JPY 149.81 Hi 150.06 Low 149.62
So here we all are, sitting on our hands waiting for the FED to sit on its hands. What fun. But in the absence of any real news we can always pour over the statements. And we will. Ad nauseum. Bernanke may be sitting back and waiting to see how the economic sands shift over time, but markets need news and in the absence of news: THEY MAKE IT UP.
So now, after chattering about the possibility that the FED would EASE monetary policy some time early in 2007, the market is now chattering about the possibility of a RATE HIKE. Boredom can do strange things. Indeed, after assorted comments from FEDERAL RESERVE board members the market is now near hysterical about the possibility of a HIKE. The inflationary threat is not over!! Deflation is not the problem any more!! And the American economy might just be running at capacity pretty darn soon, with all sorts of awful consequences for prices!! So it’s not EASE, it’s not PAUSE, no forget all that, it’s HIKE, HIKE, HIKE!!! And the target: well how does a 6% FED FUNDS rate sit with you?
And all this in the space of three weeks during which the FED didn’t meet and didn’t do anything and economic statistics out of the States have been, well, rather grim.
But it certainly gave the DOLLAR BEARS something to distract them. And boy, do they need it. Even in far off lands there is talk about the possibility that, er-uhm, the USD’s position as the international reserve currency might be, how shall we say, under threat. And should the Chinese choose to park their money elsewhere in the future could they please telegraph their intentions well ahead of time so as to allow every speculator, Hedge Fund, Central Bank, exporter, importer and sundry FX operators everywhere to position themselves accordingly. Yeah sure. In your dreams Mr. Costello. The man needs to get out a bit more.
So in one corner we have EVERY SINGLE COLUMNIST on earth suddenly waking up to the fact that the USD’s status as a international reserve currency might be starting to look a little shaky and in the OTHER, we have the possibility that the FED may, at some point, provided the U.S. economy and inflation start to perk up, raise interest rates further. Maybe. Quite frankly, it’s not much to go on. It gives the market a little colour, a small range to trade and something to do while we wait for the FED to decide to do nothing tomorrow.
Meanwhile, the really interesting trend is what is happening on the U.S. Treasury market. And that trend doesn’t look good. And it’s that trend which gives a better indication of what is really going on with international capital flows. In case you have missed it or had a double lobotomy recently, it’s the international capital inflows to the U.S. Treasury market which was keeping the whole thing afloat. The sell-off in U.S. Treasuries, although it may just be an indication of another couple of dozen HEDGE FUNDS hitting the wall, could be a harbinger of things to come for the USD.
The USD had only one thing going for it: CAPITAL INFLOWS. And, of late, pretty much ALL of the capital inflows which the U.S. managed to attract came from CENTRAL BANKS buying USDs and parking these FX RESERVES in the U.S. Treasury market. Now, if that has stopped or is likely to stop, then ipso facto the USD is going under and there is nothing that the PPT, the Henry Paulson Strong Dollar Policy or anyone else can do about it. And if, in addition, speculators start to jump all over the USD down TREND then the trend could accelerate quite rapidly. We do, after all, have 9,000 HEDGE FUNDs looking for a profitable trade out there. And if they find one they can't afford to miss it. Not this year.
OIL 59.40
GOLD 585.00
GOLD and OIL, like everyone else in the world, is waiting to see what happens to the USD. No-one really cares what is going on with inflation, the economy or international trade. The real concern stoking the fires of every DOOMSDAY preacher out there is the USD.
If the USD goes under then GOLD and OIL are going higher. By a lot.
One note of caution: in my experience when the chorus reaches a CRESCENDO they are usually wrong. So I am slightly perturbed to find that the entire journalistic universe has suddenly discovered that the economic fundamentals behind further USD strength are simply non-existent. That is if you discount the possibility that the U.S. issues an ultimatum to China and others along the lines: buy U.S. Treasuries or we will send you back to the stone age. And such an ultimatum, even for the current U.S. Administration, would probably be a step too far.
That said, if you had to place a bet, despite the unfortunate CRESCENDO, the longer term outlook for the USD looks poor. And Henry Paulson just snuck out while the U.S. goes into election mode. So you have two choices right now: stay out or sell the USD. And only one of those choices is a potential money maker.
USD/JPY 119.14 Hi 119.67 Low 119.08
AUD/USD 0.7582 Hi 0.7591 Low 0.7558
EUR/JPY 149.81 Hi 150.06 Low 149.62
So here we all are, sitting on our hands waiting for the FED to sit on its hands. What fun. But in the absence of any real news we can always pour over the statements. And we will. Ad nauseum. Bernanke may be sitting back and waiting to see how the economic sands shift over time, but markets need news and in the absence of news: THEY MAKE IT UP.
So now, after chattering about the possibility that the FED would EASE monetary policy some time early in 2007, the market is now chattering about the possibility of a RATE HIKE. Boredom can do strange things. Indeed, after assorted comments from FEDERAL RESERVE board members the market is now near hysterical about the possibility of a HIKE. The inflationary threat is not over!! Deflation is not the problem any more!! And the American economy might just be running at capacity pretty darn soon, with all sorts of awful consequences for prices!! So it’s not EASE, it’s not PAUSE, no forget all that, it’s HIKE, HIKE, HIKE!!! And the target: well how does a 6% FED FUNDS rate sit with you?
And all this in the space of three weeks during which the FED didn’t meet and didn’t do anything and economic statistics out of the States have been, well, rather grim.
But it certainly gave the DOLLAR BEARS something to distract them. And boy, do they need it. Even in far off lands there is talk about the possibility that, er-uhm, the USD’s position as the international reserve currency might be, how shall we say, under threat. And should the Chinese choose to park their money elsewhere in the future could they please telegraph their intentions well ahead of time so as to allow every speculator, Hedge Fund, Central Bank, exporter, importer and sundry FX operators everywhere to position themselves accordingly. Yeah sure. In your dreams Mr. Costello. The man needs to get out a bit more.
So in one corner we have EVERY SINGLE COLUMNIST on earth suddenly waking up to the fact that the USD’s status as a international reserve currency might be starting to look a little shaky and in the OTHER, we have the possibility that the FED may, at some point, provided the U.S. economy and inflation start to perk up, raise interest rates further. Maybe. Quite frankly, it’s not much to go on. It gives the market a little colour, a small range to trade and something to do while we wait for the FED to decide to do nothing tomorrow.
Meanwhile, the really interesting trend is what is happening on the U.S. Treasury market. And that trend doesn’t look good. And it’s that trend which gives a better indication of what is really going on with international capital flows. In case you have missed it or had a double lobotomy recently, it’s the international capital inflows to the U.S. Treasury market which was keeping the whole thing afloat. The sell-off in U.S. Treasuries, although it may just be an indication of another couple of dozen HEDGE FUNDS hitting the wall, could be a harbinger of things to come for the USD.
The USD had only one thing going for it: CAPITAL INFLOWS. And, of late, pretty much ALL of the capital inflows which the U.S. managed to attract came from CENTRAL BANKS buying USDs and parking these FX RESERVES in the U.S. Treasury market. Now, if that has stopped or is likely to stop, then ipso facto the USD is going under and there is nothing that the PPT, the Henry Paulson Strong Dollar Policy or anyone else can do about it. And if, in addition, speculators start to jump all over the USD down TREND then the trend could accelerate quite rapidly. We do, after all, have 9,000 HEDGE FUNDs looking for a profitable trade out there. And if they find one they can't afford to miss it. Not this year.
OIL 59.40
GOLD 585.00
GOLD and OIL, like everyone else in the world, is waiting to see what happens to the USD. No-one really cares what is going on with inflation, the economy or international trade. The real concern stoking the fires of every DOOMSDAY preacher out there is the USD.
If the USD goes under then GOLD and OIL are going higher. By a lot.
One note of caution: in my experience when the chorus reaches a CRESCENDO they are usually wrong. So I am slightly perturbed to find that the entire journalistic universe has suddenly discovered that the economic fundamentals behind further USD strength are simply non-existent. That is if you discount the possibility that the U.S. issues an ultimatum to China and others along the lines: buy U.S. Treasuries or we will send you back to the stone age. And such an ultimatum, even for the current U.S. Administration, would probably be a step too far.
That said, if you had to place a bet, despite the unfortunate CRESCENDO, the longer term outlook for the USD looks poor. And Henry Paulson just snuck out while the U.S. goes into election mode. So you have two choices right now: stay out or sell the USD. And only one of those choices is a potential money maker.
