Tuesday, March 06, 2007

Trichet's Bizarre Bundesbank Fixation

EUR/USD 1.31O3 Hi 1.3133 Low 1.3080
116.32 Hi 116.69 Low 115.20
AUD/USD 0.7729 Hi 0.7759 Low 0.7678
EUR/JPY 152.44 Hi 153.02 Low 150.72

Well it's gonna be another big week. Thursday the ECB will wheel out Trichet, who is widely expected to raise short term rates by 0.25 points. Now last conference Trichet talked about "STRONG VIGILANCE" and not "EXTREME VIGILANCE", so he may have some wriggle room there. All the code breakers will be back to work by the end of the week. Certainly raising rates in Europe when all the data points to falling inflationary pressures, a German Consumer who has stopped spending (and the Consumer side of the economy in Germany wasn't breaking any records before this news) and Global Financial Markets which look poised, well, poised on the brink of what could be a very nasty correction, could take more chutzpa than poor old Trichet has hidden up his double oxford cuffs. Although his bizarre fixation with the fat boys at the Bundesbank might be enough to see him through. He may hike anyway and damn the consequences. I hope he's got his retirement plans worked out because if he stuffs this up, and let's face it if history is any guide stuffing things up is what Central Bankers do, then a quiet retirement is the best he can hope for.

The Bundesbank, with its post-unification incompetence, essentially rang the death-knell for the European Monetary System (the EMS). Post-Bundesbank, Post-EMS, we have the Euro and the ECB. So if Foreign Exchange Markets really start seeing damaging volatility see it only as a stepping stone to something larger than the ECB. Maybe things are working out. It just depends on which game plan you are working with.

And then Friday we have Non-Farm Payrolls in the States. Now Non-Farm Payrolls is really a non-number. It's not relevant, it's not a leading indicator of economic activity, it's badly reported, it gets endlessly and massively revised but IT IS important. Why? Because Friday, and Non-Farm Payroll days in particular, are the moment of choice for hefty financial market intervention by the powers-that-be. This Friday is likely to set a lot of hearts racing. The number is not that important. Expectations are not that important. For the record the market is expecting a measly 100,000 increase in Non-Farm Payrolls in February. The Unemployment Rate is expected to remain broadly steady at 4.6%. These are mere details. Obviously job creation in the States is not healthy. The entire U.S. economy, apart from the Military Procurement Sector, is not healthy. We know that.

The important stuff is what the BIG GUNS are likely to try on Friday. And it's not hard to figure it out. They don't want financial market panic in the U.S., they don't want the USD to fall through the floor and they want offshore investors to continue financing the massive U.S. external financing requirement. Now, in the long run, it is unlikely that these guys will be able to pull off anything more than window dressing. The economic fundamentals and the political and corporate leadership in the United States are so bad that ultimately the piper will have to be paid in the form of a very bad recession, a huge cut back in domestic spending, higher interest rates and a lower USD.

But in the short term a little skull-duggery is always possible and should be factored in to any trading equations. And after the volatility of the past week or so, more volatility is a sure bet for Friday.

When the shady people from the PPT and the sovereign buyers move on Friday other players would do well to step back and let them do their stuff. If they manage to get a bounce in U.S. Stocks or the USD then that should be seen as a medium term selling opportunity. So say a little thank you, particularly if by some unfortunate coincidence you happen to be long USDs. The opportunities for dumping USDs are not going to increase over time. Take what you can get when you can get it. Same for stocks.

George W. and his little band seem to think they are very smart. Maybe they are. Maybe they can pull it all off. But once, not all that long ago, there was a guy called Cosimo de' Medici. He thought he was pretty smart too. He financed wars, both sides of long, entrenched foreign wars. A bit like Bush and Co. arming the Iranians secretly, as discovered during the Iran-Contra scandal, and financing and arming Saddam Hussein AT THE SAME TIME in the same war. The Medicis had this kind of deal going all over Europe. It was one of those great times in history. Torture was practised as a hobby. Like now.

Then one day these creditors told the Medici they weren't going to get their money back. Ever. At that point Florence, where the Medici's hung out, was pretty much Centre of the Universe. Cosimo de' Medici employed Artists and Alchemists and Scientists in an attempt to discover the secrets of the Universe. Then the money stopped coming in and the Medicis went bankrupt. Florence now is just this medium-sized town which lives off fat American tourists. Or did. They are hoping the Japanese will pick up the slack. And Centre of the Universe it is not.

Things happen faster these days. So we know where we are going, it's just a question of speed. George H.W. Bush once famously remarked that: "If the people knew what we had done, they would chase us down the street and lynch us." George, old boy, there is still time. Maybe he knows that. Maybe that's why he sobbed so publicly recently.

OIL 60.65
GOLD 646.00

Well the USD is in trouble. U.S. Stock Markets look ready to crack, U.S. Treasuries have barely rallied despite the weakness of the U.S. Stock Market but the one, the only, bright spot is that the price of GOLD has fallen. Hey, this is good news. See there really is no alternative to the USD. All you doubting Thomases out there will come back cap in hand and start buying the USD any day now. Or maybe not.

Still as the Yen Carry Trade suddenly looks like a very expensive way to finance speculation, all markets which have benefited by the increase in fictitious liquidity which this particularly dim financial manoeuvre has generated will see selling pressure. And GOLD is one of those markets. It was never the major beneficiary of the Carry Trade, but GOLD bulls should bear that in mind.

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