Thursday, February 01, 2007

Cheering as The Fed Weighs "Additional Firming"

EUR/USD 1.3008 Hi 1.3041 Low 1.3007
USD/JPY 120.55 Hi 120.93 Low 120.43
AUD/USD 0.7756 Hi 0.7770 Low 0.7735
EUR/JPY 156.84 Hi 157.52 Low 156.78

Yesterday the Stock Market in the U.S. cheered the FED, which did nothing and said nothing. Bernanke and his boys note that the U.S. has seen "somewhat firmer economic growth". They also note that a "stabilization" in the housing market has "appeared". Bit early to tell, don't you think Ben old chap? Unless every Joe Average gets a pay rise pretty soon, or finds a brand new job with the growing military sector, rising mortgage rates and falling house prices don't exactly add up to a positive Housing Market. I guess stabilization is as good as it could possibly get. Still, we move on. The residential housing market has not yet suffered an outright collapse. So everything is pretty OK and "the extent and timing of any additional firming" in interest rates, that is A RATE HIKE, will be left to the data to establish.

Still the market cheered. U.S. Bonds and Stocks. Which if you think about it is a bit strange. If the FED is likely to be accommodative (unlikely) then that might be good news for Stocks and bad news for the USD but it wouldn't be good news for Treasuries. It appears that the market just wanted to get the FED meeting out of the way so it could buy something, with the exception of the USD of course.

There were no real signs in yesterday's statement that the FED is leaning towards ACCOMMODATION, regardless of what the PINHEADS would like to believe. The FED is talking "ADDITIONAL FIRMING". But nobody's listening.

While the domestic U.S. Financial Markets did their thing yesterday the USD didn't perk up at all. And even the USD/JPY carry trade looks like it could be at risk. At least the BoJ seems to think so. The word is that the BoJ is worried about the potential impact of an sudden exodus from the carry trade. Well yes that would be tricky. Especially since the only thing holding up the Japanese economy right now is the Export Sector. So much for sustainable economic recovery and broadening Japanese domestic demand. Blah, blah, blah. All those cheery noises seem to have disappeared off the radar screen. And the Japanese are still waiting for their pay rises.

Meanwhile back in loony-land George W. is making pointed threats towards Iran. Yeah that's right George my lad that 's just what the world needs right now: another war. But no-one seems to be worried, except maybe the Israelis who are reportedly not all that excited about yet another front in the War on Terror right on their doorstep. Financial markets aren't showing any signs of concern at all. Another War, more funding required, more violence and the possibly ugly consequences for the price of OIL have all left the market totally unfazed. Everyone know that derivatives will solve everything, unless of course derivatives make everything infinitely worse.

Still lets stick with the major trends. The USD is weakening. And there is no conceivable reason to expect that trend to turn around in a hurry, even if Bernanke suddenly decides to hike rates aggressively. Which is also unlikely. Bernanke was chosen particularly for his bland capacity to deliver nothing. Which is precisely what he has done. Although some cheer this as a talent what has happened to the price of GOLD since the arrival of Bernanke at the FED would suggest otherwise.

The other major trend is that U.S. Treasuries are in trouble. The U.S. Treasury funding requirement keeps growing and overseas investors are choking on the Treasuries they already have. That is if they are not actively liquidating.

Oh and Stocks are on a roll pretty much everywhere. Because everyone knows there are no risks out there. Corporate governance has been excellent, the higher echelons of Government are in good hands (ha ha), and we have the Central Bankers we truly deserve. So the bullish Stock Market trend is certainly a sustainable, long term trend.

OIL 57.78
GOLD 659.40

The softness in the USD and the search for alternative safe havens is keeping the money coming into the GOLD market. I guess the guys at the shady PPT are not happy but the wave of money looking for a home which is maybe safe just keeps on coming. A break above the recent high will pave the way for a test of the multi-year high in GOLD. After all the crazies are still in charge in Washington. Congress is a mess, the American public doesn't know, doesn't care and still can't find Iraq on a map, so it's all systems go for George W. and his band of loonies. As a prelude to conflict watch for some rousing speeches from George W.'s best buddy, Tony Blair. George can't really give speeches so he leaves it to his favourite poodle, who reportedly can. And when it comes to Double Speak (aka spin) nobody does a better job then Tony.

The Apocalypse would be good for GOLD. After all if you have to put your faith in paper money during the Apocalypse whose would you choose? Exactly. So the power is with GOLD buyers which makes me wonder what happened to all those GOLD shorts GOLDMAN was reportedly sitting on?

The potential for another major conflict in the Middle East some time before April has kept the OIL price from falling below USD 50. The market is nervous but right now no-one wants to be a seller. Which, given the GEOPOLITICAL situation, is no surprise.

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