Tuesday, April 17, 2007
USD Trouble Not Troubling Stock Market Bulls - For Now
EUR/USD 1.3579 Hi 1.3597 Low 1.3524
USD/JPY 119.26 Hi 119.85 Low 119.11
AUD/USD 0.8374 Hi 0.8389 Low 0.8314
EUR/JPY 161.99 Hi 162.20 Low 161.32
As the USD INDEX teeters dangerously close to new lows there was concern in some quarters that a wrong word or two at the weekend G-7 shindig would send it (the USD that is) plummeting into oblivion. Not that anyone ever actually reads these G-7 statements. But should a headline have emerged which suggested that the YEN was undervalued (which it is) ensuing weakness in the USD/JPY could easily have pitched the USD over the edge. Not surprisingly the G-7 Communiqué stayed well away from the YEN "issue" preferring to note that "volatility and disorderly movements in exchange rates are undesirable for economic growth". Well amen to that.
Everyone, including the G-7, knows that the USD/JPY is being sustained by speculators clocking up CARRY POINTS and hoping the BoJ stands pat. And the BoJ, like the ECB, has suggested that there are no interest rate hikes in the offing in Japan until June, or so. So all's well that ends well. The USD/JPY has managed to hold on to the gains that it managed in thin pre-Easter trading conditions, just after Non-Farm Payrolls were released. (Hmmmm.) So long as the "authorities" don't start making ugly noises about the USD/JPY, or rather about YEN weakness, then the CARRY Trade is not seen as a major risk by the market.
The market's attitude to risk at the moment can be summed up in one word: complacency. Although the cheerleading from the IMF and the G-7 doesn't hurt any. Every time the big boys get together they give themselves a big pat on the back for having managed all the risks out there and then tell everyone not to worry. And that's exactly what the market is doing: not worrying. So records are being set on Global Stock Markets even as lots of very big problems persist. No-one wants to be a party pooper.
Still the USD/JPY hasn't done a lot on the back of all of this. We had a small post G-7 spike which was immediately sold off and now the USD/JPY looks queasy. Capital Flow data released yesterday was not comforting. Capital Inflows into the States were down for February. Unfortunately the U.S. Funding Requirement has not fallen recently so there was a short fall. That is: in February the U.S. did not attract enough new foreign capital to meet its funding requirement and keep the USD stable.
Unless we see significant new capital inflows into the States then the USD is headed lower. The G-7 kept the USD, or at least the USD/JPY, from taking a major hit but the reprieve for the USD may well be temporary. Once the USD/JPY selling catches up with the USD selling we are seeing on practically every other front the USD will really be in trouble. And the BUCK is not exactly performing all that well right now.
For now Stock Market BULLS are ignoring all this. Indeed, Stock Market BULLS are ignoring quite a lot of things these days. They are ignoring the fact that Central Banks of the world are in tightening mode. Inflation data out in Britain today suggests there is NO ROOM for an ease and another RATE HIKE in the U.K. may be on the cards. Trichet has all but pencilled in a EuroZone RATE HIKE for June. And hopes of a RATE CUT in the States looks premature at best. Though the first sign of weak U.S. economic data seems to be enough for the Stock Market BULLS to assume that a RATE CUT is coming. And soon.
How the FED is supposed to deliver a RATE CUT as other Central Banks are HIKING and when the USD is clearly at risk escapes me. Artfully trying to sustain the USD with cleverly timed intervention is not a long term option. So at some point either the FED will need to HIKE RATES to support the USD or the USD will suffer a major depreciation. Or both. Neither is likely to be positive for the U.S. Stock Market.
OIL 64.19
GOLD 695.20
The price of GOLD just keeps going up. So somewhere out there in the Universe risk aversion is building. The move into GOLD is insurance: insurance against a USD collapse, insurance against another ugly but not improbable GEOPOLITICAL mess (Iran, Asia) and insurance against some kind of Financial Market upset. Stock Market BULLS should be keeping a close eye on GOLD because it's telling a story which the cheerleaders seem to be ignoring. Most of the market may be going with COMPLACENCY but some players are not. And those players are moving real money into GOLD.
USD/JPY 119.26 Hi 119.85 Low 119.11
AUD/USD 0.8374 Hi 0.8389 Low 0.8314
EUR/JPY 161.99 Hi 162.20 Low 161.32
As the USD INDEX teeters dangerously close to new lows there was concern in some quarters that a wrong word or two at the weekend G-7 shindig would send it (the USD that is) plummeting into oblivion. Not that anyone ever actually reads these G-7 statements. But should a headline have emerged which suggested that the YEN was undervalued (which it is) ensuing weakness in the USD/JPY could easily have pitched the USD over the edge. Not surprisingly the G-7 Communiqué stayed well away from the YEN "issue" preferring to note that "volatility and disorderly movements in exchange rates are undesirable for economic growth". Well amen to that.
Everyone, including the G-7, knows that the USD/JPY is being sustained by speculators clocking up CARRY POINTS and hoping the BoJ stands pat. And the BoJ, like the ECB, has suggested that there are no interest rate hikes in the offing in Japan until June, or so. So all's well that ends well. The USD/JPY has managed to hold on to the gains that it managed in thin pre-Easter trading conditions, just after Non-Farm Payrolls were released. (Hmmmm.) So long as the "authorities" don't start making ugly noises about the USD/JPY, or rather about YEN weakness, then the CARRY Trade is not seen as a major risk by the market.
The market's attitude to risk at the moment can be summed up in one word: complacency. Although the cheerleading from the IMF and the G-7 doesn't hurt any. Every time the big boys get together they give themselves a big pat on the back for having managed all the risks out there and then tell everyone not to worry. And that's exactly what the market is doing: not worrying. So records are being set on Global Stock Markets even as lots of very big problems persist. No-one wants to be a party pooper.
Still the USD/JPY hasn't done a lot on the back of all of this. We had a small post G-7 spike which was immediately sold off and now the USD/JPY looks queasy. Capital Flow data released yesterday was not comforting. Capital Inflows into the States were down for February. Unfortunately the U.S. Funding Requirement has not fallen recently so there was a short fall. That is: in February the U.S. did not attract enough new foreign capital to meet its funding requirement and keep the USD stable.
Unless we see significant new capital inflows into the States then the USD is headed lower. The G-7 kept the USD, or at least the USD/JPY, from taking a major hit but the reprieve for the USD may well be temporary. Once the USD/JPY selling catches up with the USD selling we are seeing on practically every other front the USD will really be in trouble. And the BUCK is not exactly performing all that well right now.
For now Stock Market BULLS are ignoring all this. Indeed, Stock Market BULLS are ignoring quite a lot of things these days. They are ignoring the fact that Central Banks of the world are in tightening mode. Inflation data out in Britain today suggests there is NO ROOM for an ease and another RATE HIKE in the U.K. may be on the cards. Trichet has all but pencilled in a EuroZone RATE HIKE for June. And hopes of a RATE CUT in the States looks premature at best. Though the first sign of weak U.S. economic data seems to be enough for the Stock Market BULLS to assume that a RATE CUT is coming. And soon.
How the FED is supposed to deliver a RATE CUT as other Central Banks are HIKING and when the USD is clearly at risk escapes me. Artfully trying to sustain the USD with cleverly timed intervention is not a long term option. So at some point either the FED will need to HIKE RATES to support the USD or the USD will suffer a major depreciation. Or both. Neither is likely to be positive for the U.S. Stock Market.
OIL 64.19
GOLD 695.20
The price of GOLD just keeps going up. So somewhere out there in the Universe risk aversion is building. The move into GOLD is insurance: insurance against a USD collapse, insurance against another ugly but not improbable GEOPOLITICAL mess (Iran, Asia) and insurance against some kind of Financial Market upset. Stock Market BULLS should be keeping a close eye on GOLD because it's telling a story which the cheerleaders seem to be ignoring. Most of the market may be going with COMPLACENCY but some players are not. And those players are moving real money into GOLD.
Labels: Central Banks in Hiking Mode, G-7 Communiqué, USD at risk
