Wednesday, May 02, 2007

Exhaustion Sets In

EUR/USD 1.3577 Hi 1.3612 Low 1.3559
USD/JPY 120.15 Hi 120.22 Low 119.52
AUD/USD 0.8249 Hi 0.8285 Low 0.8218
EUR/JPY 163.16 Hi 163.23 Low 162.47

In the theatre of the grotesque that international politics has become the American Congress is tussling with the American President about maybe having a target date for withdrawal of U.S. combat forces from Iraq. No-one, of course, is talking about withdrawing the forces of occupation. EVER. That was never part of the game plan.

And no-one is bothering to consult the Iraqi people because their wishes and interests and deaths are simply irrelevant. It might be their country, but who cares? The Iraqis don't vote in the U.S. and that's where all the decisions are being made. Concepts like "self-determination", "freedom" and "democracy" make good sound bites, reinforce American self-image, and if used correctly can ensure that politics-as-usual is the order of the day.

Eventually a political compromise of sorts will be reached in Washington and both Republicans and Democrats will feel that they have stood up for what is right, which is a pretty remarkable achievement considering the fact that U.S. forces have been responsible for destroying an entire country for no particular reason. Or rather for reasons that keep shifting around: WMD, Saddam Hussein, the Endless War on Terrorism, Bringing Freedom and Democracy to those less fortunate. Yada, yada, yada.

A little bit of self-serving myth-making combined with just enough fear mongering and the U.S. electorate is up for anything. Provided, of course, that all reporting from the killing zone is rigorously controlled. It is. And anyway Mr. Joe Average doesn't really want to know.

So there is the U.S. Military Game Plan and then there is the palatable narrative necessary to sell the Game Plan to the American public. The only real requirement being that Mr. Joe Average must be able to continue with life as usual while U.S. Armies are out conquering the world. So that means: a) no draft and b) that a semblance of economic prosperity must be maintained.

So a big part of being able to get away with marching into other countries with guns is ensuring that U.S. Stock Markets remain buoyant, ney frothy, and that U.S. interest rates don't rise too aggressively. Should it, at any point, become clear that there is a cost to be paid for these wars of aggression in terms of domestic living standards then the game would be over. Kill as many Iraqis as you want to just so long as life in the U.S. goes on per usual.

Thus far costs to Mr. Joe Average have been relatively contained. U.S. GDP growth has fallen a bit and employment growth is anemic. But disappointing economic data can and will and has been blamed on the bursting of the Housing Bubble. In fact, the bursting of the U.S. Housing Bubble is a convenient scapegoat. Any really bad news can be palmed off as housing related, otherwise it's business as usual. With the U.S. Stock Market Indices breaking records and recording multi-year highs (with the obvious exception of the Technology sector) the Bush Administration can push ahead with its plans. The Republican Party may be polling badly but no-one in Bush's inner circle is standing for re-election so that's not a problem.

That said, proceeding with wars without upsetting the broad U.S. electorate is a fine balancing act. And one which so far the Bush Administration seems to be reasonably good at. Protests have been contained. No riots on campus. They might not be popular but there are no signs that the Bush Administration will be stopped. They have Fox News in their back pocket, the PPT working for them on Financial Markets and electoral apathy is way stronger than the outrage of bleeding-heart liberals that no-one listens to anyway. Perfect.

Still markets are starting to show signs of fatigue. The EUR/USD uptrend is looking tired. Recent data out of Europe has been less stellar than expected. The zing has gone out of the AUD/USD uptrend. Which is still a good leading indicator for the USD. When the AUD/USD starts to weaken it's usually the first signal for a more general USD uptrend. So we could be in for a bout of USD short covering. After all I heard for the first time today an analyst calling for EUR/USD to hit 1.4500 this year. That's quite a call after quite a move. And it could be just another sign that this little USD downtrend is over. For a while.

The only trend which doesn't look like it's in trouble, yet, is the USD/JPY upmove. But all the other carry trades look vulnerable. And in a market driven by speculators JPY short covering could be brutal.

Theoretically there is no reason why a USD recovery should be bad for U.S. Stocks, however, it must be noted that the USD has been under pressure throughout the rally in the U.S. Stock Market. That doesn't mean that a weak USD and a strong U.S. Stock Market are necessarily correlated. But it doesn't mean they aren't, either.

OIL 64.22
GOLD 676.00

And the GOLD uptrend is also starting to look tired. Any further strength in the USD is likely to encourage further selling. Commodity markets, in general, look tired. Everyone is still talking about how great growth prospects look. But then analysts are usually the last people to notice a new trend.

Labels: , ,

This page is powered by Blogger. Isn't yours?