Tuesday, April 10, 2007

Competitive Devalutation Anyone?

EUR/USD 1.3428 Hi 1.3442 Low 1.3349
USD/JPY 119.06 Hi 119.38 Low 118.74
AUD/USD 0.8233 Hi 0.8253 Low 0.8157
EUR/JPY 159.91 Hi 160.13 Low 159.03

The USD is sliding and right on cue the PUNDITS are finding all the reasons why this is actually good news. In fact this news couldn't be better. A weaker USD will make the United States more competitive. Of course, why didn't I think of that? And so the USD depreciation will help support economic growth in the face of a sliding residential housing market, foreclosures, a bankrupt U.S. consumer and weak corporate spending.

Since when is the U.S. an export-led economy? Well it isn't. Yet. An export-led economic recovery could take some time. Like maybe 20 years while the U.S. figures out how to make things that other people want to buy. I mean apart from weapons. But hey exporting WAR suddenly makes sense. Soon everyone will be clamouring for bigger and better guns. If armed conflict can be spread to every corner of the globe a new U.S. export market will open up. Problem solved. Too bad about the depleted uranium. Though looking on the bright side, as we must, eventually (when all the new born are either retarded or have feet instead of arms) there won't be any more wars. Deformity has its benefits. Wait till the PUNDITS get on to that one.

The British Navy doesn't seem to let intellectual disabilities get in the way of recruitment. The recent British Naval press conference, aimed presumably at convincing everyone just how naughty the Iranians are, actually confirmed to everyone who was interested that it doesn't matter how stupid you sound or look the British Navy can find a place for you. The heavily choreographed press conference of British Sailors was a staggering piece of theatre. I'm not sure if they meant everyone to laugh, but that's sure what happened. Let's hope they don't start bombing in an attempt to make up for looking, well, mostly harmless.

Trichet, reportedly, is also looking on the bright side. The rise in the EURO will curb EXPORTS, er no, I mean INFLATION. Which is good. Low inflation is good because, er, it makes us more competitive. Only not in this case. But it will mean that further INTEREST RATE rises won't be necessary. Except maybe in this case. No, we have to keep raising rates. M-3 is looking ominous. Everyone agrees that means that inflation is likely to rise. Well except for the Banque of France. But Trichet doesn't work for the Banque of France any more so who cares what they say?

So the rise in the EURO is good just because. Eventually, when we can find a plausible explanation why a RISING EURO is good news we will get back to you. For now you are just going to have to believe that a higher EURO will keep inflation LOW and that it is good for you. But that doesn't mean we are through with raising rates. And don't get any funny ideas about sharing in all the good news via higher WAGES. Because that is NOT part of the plan. OK? And did anyone tell you that the ECB is independent so no-one can do anything about any of it and if I say something is GOOD then it is and if I say something is BAD then it is. Everything is going to plan. And that's final.

In this world of good and better news the USD is expected to keep sliding against everything except the JPY. The CARRY TRADE is still out there. Otherwise there doesn't seem to be much between the USD and the deep blue sea. No-one in the States wants to see the BoJ suddenly come across as all gun-ho on monetary policy. So the release of BoJ minutes will be analysed carefully. Hint: the BoJ is still in tightening mode. The CARRY TRADE might not be the best idea on the planet in that environment.

Meanwhile U.S. Treasuries look very sick indeed, which is why no-one is talking about the relentless rise in Treasury Yields out in PUNDITLAND. They are all waiting for the YIELD CURVE to turn positive at which point they will all be able to talk about how a POSITIVE YIELD CURVE is a Leading Indicator of economic activity. We are not there yet. For now short term rates are still higher than long term rates in the States. But the curve is getting more POSITIVE every day as Treasuries sell off.

The outlook? More of the same. The USD slide is not over. The sell-off on the U.S. Treasury market is not over. Middle East risk is still out there. And the Stock Market is buying into every single rosy scenario on offer.

OIL 61.65
GOLD 684.30

All the good news and the helpful USD slide has not dampened enthusiasm for GOLD. We haven't reached multi-year highs yet but that looks like where we are heading. All we need now is a reason from PUNDITLAND which explains why all this GOLD buying is actually a positive sign. Explaining the move into GOLD as a vote of confidence in the "powers-that-be" will take some work. So it could take some time to come up with some plausible SPIN. Once the PUNDITS bow to the inevitable and start telling us why the rise in the price of GOLD is good news, all that will be standing in the way of higher prices will be the PPT, and they haven't been kicking any goals recently. GOLD at USD 800 anyone?

The price of OIL is still in a holding pattern waiting for either ARMAGEDDON in the Middle East or the RECESSION in the States to finally hit. Russians continue to report that the plans for ARMAGEDDON haven't been shelved yet. And the guy in the Trainspotter outfit is still getting his face on television. The NUCLEAR issue looms. It's way too early to bet that the Anglo-American attack dogs have been called off. So, until we have more information, the holding pattern will continue.

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