Friday, February 02, 2007

Rigging the Market

EUR/USD 1.2924 Hi 1.2968 Low 1.2912
120.43 Hi 121.21 Low 120.39
AUD/USD 0.7752 Hi 0.7758 Low 0.7724
EUR/JPY 156.65 Hi 157.04 Low 155.50

There are a few ideas in the market right now. The most widely accepted idea is that the JPY will go down forever because interest rate differentials make speculating against the JPY profitable. This idea suggests that JPY selling will continue as more and more speculators come into the market to borrow JPY so that they can speculate profitably on other markets. So there will always be JPY sellers and their speculative activity will always be profitable.

In the event that fabulous new speculative plays do not instantly present themselves new JPY sellers will come into the market anyway to enjoy the YIELD benefits of the carry trade. Where all these new speculators are coming from I have no idea. At any rate there is no end in sight. This is the trade of the century and the trend is your friend. The USD/JPY will just keep rising. Only it isn't right now. Just a better opportunity to buy? I don't think so. Unless you are exceedingly lucky and exceedingly nimble.

For the whole thing to work market volatility must be contained and speculative investments made with borrowed JPY must continue to be profitable. Both of these conditions are big asks. Still that's the received wisdom out there.

And nobody expects the G-7 to do much about JPY weakness and nobody expects the Japanese to repatriate any money. EVER. And the whole market seems to be sitting the same way. So we have an accident waiting to happen.

OIL 59.33
GOLD 654.90

The Financial Times led on Thursday last week with an article suggesting that "an expert panel" recommended that the IMF should sell USD 6.6 bn worth of GOLD and invest the proceeds in higher-yielding assets as part of a strategy to put its finances on a sound, long-term footing". The IMF is reportedly having a hard time financing its activities. The USD 6.6 bn represents pretty much ALL the IMF's GOLD reserves. The only two members of this "expert panel" mentioned in the article were: Alan Greenspan and Jean-Claude Trichet.

Alan Greenspan is also the guy who kindly suggested that flexible interest rate mortgages might be a good idea. This when the FEDS FUNDS rate was at an all time low. Since then, mostly under the direction of Alan Greenspan, the FEDS FUNDS rate has risen 17 consecutive times. Evidently Greenspan's advice was aimed at giving the FED more control over the economy. If you have a flexible rate mortgage rate and the FED moves that impacts your bottom line DIRECTLY. IF you have borrowed fixed you are once removed from what the FED does with interest rates. So whatever Greenspan was aiming at he wasn't aiming to give sound financial advice to Mr. Joe Average. At the very least his advice and his timing were terrible.

And Trichet is the man who has now decided that, rising commodity prices or falling commodity prices, rising inflation or falling inflation, interest rates must keep rising in the EuroZone. Just because. Of course the ECB will wait until after the French Presidential election. Then some tacky econometric justification will be dusted off and used to explain what a whizz-bang institution the ECB really is. And none of you can understand the intricacies of Monetary Policy anyway so just take our word for it: rates have to rise. Trichet doesn't have quite the same kind of transparently dodgy track record as Alan Greenspan but then he works in Europe where a lack of transparency has deeper roots.

Now the IMF would not be the first semi-Government institution to sell GOLD. The Reserve Bank of Australia got the ball rolling and the GOLD bear market started back in the 1990s, much to the consternation of Australia's GOLD miners. The justification was much the same. I wonder if detailed accounts have been published with regard to just how well that little RBA investment strategy has played out? I doubt it.

As far as I am concerned the IMF could close up shop altogether. There is absolutely no evidence that the IMF has ever achieved anything but the pauperization of many Third World and Non Aligned Nations across the globe. Oh and the employment of a whole army of bureaucrats who earn TAX FREE SALARIES, enjoy endless perks and sleep perfectly well despite the fact that they have reduced entire populations to virtual slavery. Another mission accomplished.

But that is not the point. The point is the panel produced this dubious recommendation which was conveniently published on the front page of the Financial Times and then, lo and behold, just as NFP data was released in the States on Friday, a wave of GOLD selling hit the market in tandem with a wave of EUR/USD selling. And now there are dark mutterings of an attempted manipulation of the GOLD price. It would seem that the PPT and other shadowy forces are at work again. Someone has to stop the forces of evil coming up with an alternative to the USD as the global reserve currency. Otherwise whatever would become of the Project for the New American Century? Quite.

The GOLD bulls, however, have not been deterred. Confidence in the Bush Administration is not exactly at an all time high and holding the USD is increasingly looking like a very risky longer term strategy. The game is not over but at least we have a fairly good idea of who the players are.

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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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