Tuesday, April 24, 2007

Digging In

EUR/USD 1.3576 Hi 1.3590 Low 1.3548
USD/JPY 118.79 Hi 118.97 Low 118.24
AUD/USD 0.8262 Hi 0.8343 Low 0.8233
EUR/JPY 161.30 Hi 161.52 Low 160.22

The massacre at Virginia Tech briefly and conveniently took the heat off the Bush Administration at a very awkward moment. It even provided George W. with a much needed photo opportunity. But now it's back to business and the business is bad. The Bush Administration's strategy, if you can call it that, is simply to dig in: face down critics, refuse to concede that the wrong men have been given the wrong jobs and that the results are catastrophic. Bush is hoping to brazen it out. He is standing behind Gonzales, his beseiged Attorney General. Another unpopular Bush Administration appointee Wolfowitz is refusing to resign from the World Bank, despite calls for his resignation from every quarter. And it looks like an attempt is being made to quietly archive the problem of Karl Rove's 5 million missing e-mails. The idea is if you don't talk about it, it goes away. It's a dumb strategy but then that's no surprise.

On a positive note, the Democrats have been broadly supportive, of the Bush Administration that is. They pay lip service to change but don't change anything. A little voter appeasing rhetoric has been thrown around but otherwise nothing has changed on Capitol Hill. The Vermont movement to impeach President Bush is moving forward with glacial speed. It remains a moot point if anything can or will be done before the natural expiry of George W.'s term. The Democrats have been very careful to step gingerly around this issue. No-one can quite figure out why. Are they simply waiting for the Bush Administration to implode? Or are there dirty back-room deals afoot? In any event, it's same old, same old in the political arena in Washington. Bush is digging in, strategies are set in stone and weird "neo-con" objectives are still the order of the day. This is not good news.

As a result no progress is expected or likely in Iraq. There is no sign that U.S. Foreign Policy is headed for a rethink. In any case GEOPOLITICS is not the focus right now, given the trouble engulfing the Administration domestically. The neo-cons are lying low for the moment but the strategy for world domination remains in place. More conflicts lie ahead.

Meanwhile the nature of the U.S. economic slow down is becoming clearer. The economic numbers released last week were poor and statistics are expected to be equally uninspiring this week. The Housing Market bubble has popped but further damage is forecast as foreclosures hit prices and confidence. In addition, weak Capital Spending is emerging as a factor to watch in the economic slow down. Pundits are waiting for March Durable Goods Orders to confirm that the slow down is spreading. The market is expecting Orders to register an increase of 2.5% but the longer term trend looks weak. Similarly Q1 GDP numbers are likely to confirm that growth is slowing to under 2.0%. The optimists will see all this bad economic news as a sign that the FED will cut rates. Which would, of course, FIX everything. Ha. Ha. But look for the FED to quash those hopes tomorrow with the release of the Beige Book on the state of the economy. The FED can be expected to focus on inflation, not growth. There's nothing much that anyone can do to boost growth in the States in short term and a rate cut could easily trigger a currency crisis. And a currency crisis would make things considerably worse.

So no news really. Except that there are signs that the CARRY TRADE is losing its allure. One of the most popular carry trades, the AUD, got hit hard overnight. USD/JPY is holding, sort of. But any sustained exodus from the CARRY TRADE or simply any move to close risky and speculative positions in what is an increasingly dangerous market is likely to hit the USD/JPY. All up there is no real reason to be positive USD, despite the substantial depreciation we have already seen. More is on the way. USD/JPY looks likely to test 118.00 again soon. ANd it's only a matter of time before it breaks. Down that is.

Treasuries are going with the slow down scenario. And yields are likely to fall further in the short term. The longer term outlook depends on Offshore Investor confidence in the USD and in the U.S. Administration. Hence, no-one should get the idea that a big new BULLISH trend is about to start. If you want to buy Bonds buy them in Europe.

The real interest, though, lies with Stocks. Stocks have continued to rise as Central Banks tightened rates and as economic conditions falter. That trend is at risk. And when the Stock market rally finally turns, as it must, then the Bush Administration will really be in trouble. No-one likes a loser and Bush is starting to look like a big loser on every front.

OIL 65.75
GOLD 694.40

The GOLD market rally continues for all the usual reasons. A test of USD 700 lies ahead.

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