fxTalks

5. A prophetic interview with Sir James Goldsmith in 1994 Pt5

2011-08-24T10:19:00.001+02:00

Disaster Capitalism Targets U.S. and Europe

2011-08-08T23:17:00.003+02:00

The Obama Depression

2011-07-26T11:28:00.002+02:00

The U.S. Economy: Over the Cliff ?

2011-06-02T08:23:00.002+02:00

If at First You Don't Succeed

2011-03-07T17:07:00.020+01:00

EUR/USD 1.3985 Hi 1.4035 Low 1.3955
USD/JPY 82.09 Hi 82.38 Low 81.94
AUD/USD 1.0119 Hi 1.0184 Low 1.0116
EUR/JPY 114.80 Hi 115.25 Low 114.54

Moody's downgraded Greece again today. By a lot, I think. But I can't be bothered to look it up. Why would you? It's not like it actually matters or had much market impact. They got a couple of headlines on some U.S. based financial newswires but otherwise the markets didn't react. I think a Greek official dutifully expressed outrage or something. Because like Moody's is important. Ha. Ha. Well some of these Greek officials certainly like to play-up the issue, make a big deal, bang on about things and try to create a crisis. So you know, they got a few half-line headlines and maybe the Financial Tabloids will carry a story tomorrow. Not that it will matter.

The U.S. based rating agencies are playing a dangerous game. It's not looking stupid or biased or incompetent that's the problem. The real problem is that they become merely irrelevant. And then the game is up. No-one will care if they rate anything anywhere. Already this year they downgraded Japan. The net result? Well, embarrassing really.... for the ratings agency. The Japanese Yen fell for half a day or so. It was a minor fall, a half day correction really. And then? Well nothing. The Japanese Yen recovered and remains strong and the world went back to trying to figure out what is really going on.

Today the EUR/USD started out slightly weaker and then.... continued to climb. There was nary a sign of any USD safe haven buying. Not that there has been since all these supposed revolutions got going in North Africa. In fact the USD and the U.S. Treasuries just keep getting sold. I'm not sure what Plan B is? Do they think that maybe WWIII will trigger a rush into USDs? Maybe more downgrades? Lots of them? How many more can they do?

They could have another shot at it I suppose. They could downgrade every country, with the exception of the U.S. and the U.K. and other favoured nations, whoever they are, the only problem is that no-one will care. Which is nice really. Do a bad enough job for long enough and you become just another screaming loony confined to the edge of the markets. We have lots of those.... nutters with one theory or other that doesn't add up but sounds scary or interesting for a while. But markets are markets and if you lose people money often enough then you lose following/relevance..... whatever. You become just another nutter at the edge of the market. So nice work guys. Now you just look sort of boring and silly.

What really needs watching is stocks. The stock markets have all their ducks lined up: the end of fiscal stimulus, tighter monetary policy just around the corner pretty much everywhere, or at least no likelihood of easier monetary policy or further fiscal stimulus, the end of Ben Bernanke's little experiment with money printing, slowing world economic growth, higher oil prices, ongoing problems in the U.S. job market and a still collapsing U.S. housing market.... well find me some good news (and please don't bang on about mergers and acquisitions). So the next shoe to fall is, er, maybe already falling. It was nice while it lasted.

OIL 105.75
GOLD 1,434.40

The Middle East and North African unrest is giving the speculators an excuse to take OIL higher. So expect more record profits from Exxon and their kind. It's nice to know that some people make money no matter how much trouble there is in the world, or rather precisely because there is so much trouble in the world.

And GOLD, the anti-USD, the new global reserve currency, or rather the oldest global reserve currency ever.... keeps seeing safe haven buying. And this is a surprise? I think not.

How Thin is the Ice?

2011-02-09T10:58:00.032+01:00

EUR/USD 1.3672 Hi 1.3681 Low 1.3610
USD/JPY 82.43 Hi 82.66 Low 82.24
AUD/USD 1.0107 Hi 1.0151 Low 1.0091
EUR/JPY 112.72 Hi 112.80 Low 112.06

Well the narrative remains cool, calm, collected. We had that, you know, crisis thing but well, we threw a lot of (taxpayer) money at it and now things are coming along. Signs of economic recovery are everywhere, not least in the steady upward rise in U.S. Treasury Bond yields. Which is great. Really. Because it means that this Quantatitive Easing thing is working because, er, obviously now confidence is back and these, er, previously low long term rates have maybe fostered confidence and encouraged, er, borrowing and lending and all that groovy stuff that keeps the economy ticking over. You can tell this because er, U.S. Bond Yields are rising and this is a sign of confidence. QE was meant to get Bond Yields higher, right? Oh maybe not, but it doesn't matter, now that they are higher then we better figure out a way to explain why this really is a good thing and nothing to worry about. So higher Bond Yields means one thing and one thing only: a stronger economy. OK?

I like this as a narrative because it's the best that can reasonably be done with some pretty scary data.

Somehow, somewhere during this new era in global economic history the U.S. lost the foreign investor. You know all those nice, friendly, naive foreigners who believed the spiel about the USD being an international reserve currency and the safest place to put your money and blah, blah, blah. If you want proof then just follow this link, scroll down the page and click on Quarterly Analysis and Charts. That takes you to a nice little table which gives you some pretty scary numbers.

Something is up.

The U.S. Federal Reserve has been buying U.S. Treasuries like crazy over the past few months. So much so that according to the most recent data while China holds $896bn and Japan owns $877bn of U.S. Government debt, “By June [the Fed] will have accumulated some $1,600bn of Treasury securities". But the mad rush by the Fed to buy more Treasuries than, gulp, Japan and China combined, has failed to keep U.S. Bond Yields from rising. That is: all that Fed buying has failed to keep the U.S. Government Bond market from selling off. Net selling doesn't appear to be a flood quite yet but buyers have pretty much disappeared altogether and the U.S. Government keeps issuing paper.

But what does it mean?

Here's a clue: if you have been living off the largesse of someone else (read foreign investors) and if that someone else turns off the money tap (for whatever reason) then your standard of living is likely fall. How far and how fast it falls depends on how dependent you came to be on the money flow.

Right now the U.S. is going with the idea that it doesn't matter if foreign investors have turned off the money tap because all the FED has to do is print money. This is the Weimer Republic approach to money management. It's not like it hasn't been tried before. It's just that it doesn't work.

The next stage in this fabulous strategy is to send buckets of money to people in the post. I mean why bother doing anything at all if you can just print money? Why work? Why produce? Why save? Why invest? Why have an economy at all? All you need is a printing press and all your problems are solved.

Which is true actually if you can get foreigners, who are still working and producing, to hand over their goods in exchange for what you have been printing up willy nilly. And it worked pretty well for a while. But the game is up. Foreigners don't seem quite so happy to play the game any more.

Meanwhile with Helicopter Ben in charge back at the Fed, a surreal episode of the Hitchhikers Guide to the Galaxy is unfolding before our very eyes.

OIL 87.22
GOLD 1,363.10

The American Dream

2010-12-23T10:00:00.006+01:00

It's the Euro Debt Crisis, Stupid

2010-06-30T10:02:00.028+02:00

EUR/USD 1.2226 Hi 1.2238 Low 1.2165
USD/JPY 88.59 Hi 88.71 Low 88.38
AUD/USD 0.8536 Hi 0.8560 Low 0.8463
EUR/JPY 108.31 Hi 108.53 Low 107.67

Well, what you gotta love about the FT is it's remarkable consistency. As a paper they are there to paint a picture, to create a narrative. And they do. The facts are secondary but the narrative is crystal clear: whatever economic problems there may be out there in the world there is one unifying theme: it's all the fault of the European Sovereign Debt crisis.

Today, consistent with their mandate, the FT is leading with not one but two "Euro doom-and-gloom headlines". The first, in nice big bold letters is: Markets tumble on ECB loan fears. Right. No mention of the plunge reported yesterday in U.S. Consumer Confidence, which is probably attributable to the European Debt Crisis anyway. No mention of the major correction on the Chinese stock market. No mention of the strong rally which European stock markets registered Monday this week; a rally which was not replicated on U.S. markets...... No, the poor performance of global stock markets Tuesday was entirely the result of the dire state of the eurozone.

The Financial Tabloid's second (slightly smaller headline) today was: What will save the euro? Well nothing to worry about there, the FT's Wolfgang Munchau has the answer: Only a closer union can save the eurozone. Phew, glad they have the answers up their sleeve, I was beginning to think the Euro was a lost cause.

Now it doesn't bother me overly that these people continue to produce ponderous, all-knowing articles about the "crisis" in the eurozone after completely missing the imminent and obvious Anglo-Saxon "Credit Crunch" until well after the global economy was splattered all over its windscreen. What really bothers me is the lack of reporting of the basic facts. Basic facts are important. Opinions are a dime-a-dozen, largely superficial and of no great import to anybody. But facts count.

So let's get to some facts. As part of the FT's leading front-page article our friends Oakely, Mulligan and Atkins note that the euro tumbled "to an eight-and-half year low against the Japanese yen" yesterday. Well yes, indeed. And the USD/JPY hit another major low too. In fact the USD/JPY has been on the slide since the Credit Crunch started and looks likely to hit an all-time record low soon. So the low seen on the EUR/JPY is probably not that significant. Not that you'd notice from reading the FT.

One of the interesting little tidbits that I garnered from an ocean of opinion in another article yesterday, which was trying to make the point that Greek debt troubles parallels the subprime crisis (it was a laboured point and the parallels were shaky), was this: in June 1992 five year bonds in Greece yielded 8.25%. The government deficit was 11.5% of annual GDP and debt was 110%. Greece's rating at the time was triple B minus. Right. Sixteen years later in June 2008 the Greek deficit was 5% and accumulated government debt was 98% of GDP, even though Greece had been running government deficits in the interval.

HUH ??? How did they manage that? Well it happens all the time actually. Same thing happened in Italy. In Italy government debt to GDP ratios have been up around the 100% level for decades. It's part of the furniture.

And why were these basic facts on Greece interesting? Well for all the talk of "this is not sustainable", this will end in disaster etc. etc. etc. ad nauseum, it seems that even with relatively high yields, a massive level of accumulated government debt and ongoing deficits the Greek "situation" was sustainable in 1992 and, in fact, the history shows it was sustained.

You can, of course, make the case that: this time it's different but then we are right back to opinion and conjecture. The naysayers can have their opinions but the facts are facts and they speak for themselves. Please no more back-of-the-envelope calculations. No more straight-line projections, opinions and general blatter. Can we get back to reporting at least the data, maybe even the history and some facts.

Friday we have Non-Farm Payrolls. The market is not expecting good news. Yesterday when U.S. Consumer Confidence came out well under market expectations the markets sold the EUR/USD, which makes sense. Not. Well it didn't last. Everything, everywhere is not the fault of the European debt crisis. This boring refrain will run into trouble sooner or later. Euro bears beware.

OIL 76.11
GOLD 1,243.70

No new news

Scardey Cat and Boo

2010-06-29T15:59:00.046+02:00

EUR/USD 1.2189 Hi 1.2290 Low 1.2150
USD/JPY 88.43 Hi 89.40 Low 88.27
AUD/USD 0.8540 Hi 0.8702 Low 0.8506
EUR/JPY 107.80 Hi 109.86 Low 107.30

The Financial Times led today with a photo on page one. A nice big photo of a lightening strike hitting a Greek monument on a scary, dark night. This particularly informative piece was accompanied by a three line caption: Investors signalled alarm at Greece's planned return to capital makets next month. One economist said it was "a very odd thing to do" and warned that the high yields charged "could undermine confidence not just in Greece, but across the eurozone".

The caption does have a point. It is an odd thing to do, unless of course your real goal is to create a crisis. As part of a larger strategy aimed at undermining the Euro and Euro credit markets this "odd" auction makes perfect sense. And let's be perfectly frank: so far the Greeks have done a rather good job of messing up European debt markets. So credit where credit is due. For a small country with a relatively unimportant debt market, Greece has been extremely successful in creating a much wider European debt "crisis". Not, it appears, that they are happy with their success so far. So now they are having another shot at it.

And just how "odd" is this next auction? Pretty "odd" actually. Greece has seen no good news recently, indeed it has been downgraded again by one or other of the Ratings Agencies and Greek government bond yields have risen well above the 5% rate guaranteed by the ECB loan package. So the idea that this is the perfect time to test the markets seems, well, a little hard to justify. I have heard no cheering from the Ratings Agencies about how good the Greeks have been in trimming their deficit. Not that that is expected to happen. Ever. That's not the nature of the game. But financial markets don't seem to be cheering either.

That said, despite the rather unpleasant position in which Greece finds itself and the ominous noises about sovereign debt markets generally, the end-of-the world-as-we-know-it scenario has manifestly failed to unfold. Tardy but effective packages put in place by the plodding Euro Team has effectively ring-fenced the Greek crisis. That is, up till now. If the Greek Central Bank decides to by-pass all that and go directly to capital markets to roll over this piddling amount of debt then we could have a problem. With a little more hysteria from well-placed Financial Tabloids and ponderous articles by the usual suspects, not to mention sound bites by that bundle of joy, Nouriel Roubini (has this man the most dismal manner of any still-living human in the universe, or is it just me?) suggesting that the Euro's days are numbered, well, in days, then this next crisis might have legs.

We need the "odd" Greek auctions to go off badly, which is not that unlikely, and then we need at least some of the corporate press to run around screaming and waving their arms around about how awful it all is. Which is what they do best, at least of late. The Financial Times has become a tabloid and Rupert Murdoch now owns the Wall Street Journal. Expect more photo-journalism from both.

And in the midst of all this doom-and-gloom there are, of course, consolations. The Americans can and actually have tried to pin the failure of their economy to show signs of autonomous life on the "European sovereign debt crisis". In addition, if investors can somehow be persuaded that the Euro is doomed then maybe investment flows will shift towards that obviously fabulous safe-haven: the USD and more particularly the U.S. Treasury market.

Some success has been reported. Though there have been little sign of Japanese or Chinese buyers stepping up to finance Uncle Sam, of late U.K. buyers of U.S. Treasuries have shown a spike. Not much of a trend when you think about the state of the U.K.'s government deficit, not to mention the U.K.'s huge external deficit (ie. it's own savings deficit). We are not talking about a real and enduring source of cash here, but it's a start. Maybe.

But let's be optimistic. In July the Euro Zone will start to move into Summer mode. (Nice timing by the Greeks.) Volumes on financial markets are likely to fall and you never know what you can get away with in thin markets. It's worth a shot. Now the only problem with this strategy is the possibility that the Euro Team gets off it's collective backside and actually decides to turn up at said auction in order to stave off a further crisis in credit markets which would roil the banking sector, further disrupt credit markets generally and create a real economic crisis which, so far, despite all the valiant efforts of our heroes has actually failed to be created thus far. And I know you wouldn't know that from the headlines and the ponderous articles which have all been doom-and-gloom, particularly where the Euro Zone is concerned. The European economic recovery continues and, provided the Euro Team does not ignore the risks inherent in this new Greek move, then a gathering in the speed of recovery can be expected into year end.

Currency markets have been interesting. The real mover has been the JPY. Expect more of the same. My target for USD/JPY is 80.00 by year end. And what that tells you is that Japan as a source of finance for deficit nations is going the way of the dodo. Nothing is likely to change that particular fact and this is bad news for countries and/or currency areas which are running an external deficit. (Note to Euro doom-and-gloomers: the Euro is not running an external deficit.)

OIL 76.46
GOLD 1,235.40

With global economic growth looking strained the outlook for commodities remains ugly. OIL is unlikely to see strength. Assuming, of course, that we don't engineer another war in a sensitive area located somewhere in an OIL producing region. If OIL falls too far, there is always the attack on Iran which can be pulled off the shelves, dusted down and put into action. But there has to be quite a lot more massaging of public opinion to be done before we get there. For now the outlook for OIL is clouded at best.

GOLD, however, is another story. It's not inflation. We don't have any of that. The driving force behind the GOLD move is the rush to diversify away from the current international reserve currency: the USD. No other currency wants this dubious status because of the chronic currency over-valuation which results. So we haven't found one. Everyone is happy to talk about 'a basket'. The Chinese have been doing it and so have the Russians. But until someone, somewhere actually comes up with a basket the shift out of USD and into GOLD continues. A little diversifying into JPY might be in order. After all it is chronically under-represented in Central Bank holdings and the intellectual justification for it's absence is flimsy.

Meanwhile back at the ranch

2010-05-06T15:43:00.022+02:00

Last week, according to every tabloid-reading taxi driver on the planet, Greece was in big, big trouble because its government had run up unmanageable debts. It was a nasty situation and any reasonable person could only assume that other, frankly untrustworthy, Euro-Area governments were obviously in the same or similar situations. Stands to reason. The Greek government had circa € 25 billion to issue over the remainder of 2010 and there was great concern, nay panic, about whether or not it would have to pay high yields to do that. So we had a lot of rushing around and urgent meetings between very important people to draw up an emergency loan arrangement so that Greece could get through this 'crisis'. No-one wanted to test the market to see if Greece could find investors for the €8 billion or so of government debt it was scheduled to issue in May because that would be too scary. No-one wanted to go there. Or so we were told.

Meanwhile back on the farm, to precious little fanfare and almost no press, on May 3rd 2010 the U.S. Treasury issued its refunding schedule for the next three months. And it's a doozy. This quarter the U.S. Treasury expects to issue $340 billion in debt, $71 billion higher than announced in February. And in the quarter after this one Treasury expects to issue another $376 billion.

And there is clearly nothing to worry about because the U.S. Treasury market is the place to be if you need a safe haven. The sliding Euro, the scary state of world stock markets, the risk of 'contagion' from those frankly unsound European government bond markets could never impact the United States. Quite the reverse. Obviously the U.S. government bond market is in entirely a different league. Those nasty "U.S.-based" ratings agencies could never downgrade Uncle Sam. We know that because Timothy Geithner told us so. And Timothy Geithner has his eyes on the ball, always.

So we have nothing to worry about. After all U.S. Treasuries are on a roll. As of yesterday yields on 10 year paper were just a tad above 3.5%, which is fair if your government deficit is around 11.2% of annual GDP. Which is a whole lot better than the 13% or so that Greece was running. So no problem there. It's not like the U.S. relies on foreign investors to buy those bonds, so what's the problem?

Except as Niall Ferguson noted in the Financial Times on February 10 of this year: "the Fed is phasing out.... purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year."

Gulp. Can't we like get Moody's to, er, like just downgrade the whole entire rest-of-the-world, or something? Well it wouldn't hurt to try.

What is really going on?

2010-05-05T12:05:00.008+02:00

While the Europeans are distracted by the threat of 'contagion', some interesting details are emerging from across the pond. And it doesn't look good.

The official narrative remains unchanged: Europe is a dangerous place to keep your money. The economy in the U.S. is in recovery while the European economy is struggling (oh really?), the USD is safe and strong and the U.S. Treasury market is never likely to be hit by 'contagion'. Indeed, according to the official narrative, the U.S. can deal with its huge fiscal deficit and its external deficit just by printing money. The fact that the Weimer Republic option is bandied about as a real policy option beggars belief. And yet, and yet.....

the plot thickens.

U.S. bond markets have continued to rally, supposedly helped by a flight to safety, only that safety is starting to look more than a little dubious. How long? No idea. Not long.

Barbarians at the Gate

2010-05-02T12:05:00.093+02:00

EUR/USD 1.3315 Hi 1.3343 Low 1.3233
USD/JPY 93.91 Hi 94.57 Low 93.86
AUD/USD 0.9249 Hi 0.9323 Low 0.9245
EUR/JPY 125.07 Hi 125.95Low 124.30

First the facts: every single major OECD Government is running a deficit this year. Big ones. All those Governments must also return to the market in 2010 to roll over maturing debt. As for paying back debt, two words: ha ha. To even pay off interest on existing debt they would need to run a surplus equivalent to the interest bill. No-one is doing that. Government deficits are thus a combination of interest payments and all the new and exciting spending programmes they came up with recently. Government funding programmes are much bigger than that. Government funding programmes for 2010 include any debt maturing in 2010 and the deficit.

For the United States the 2010 funding programme amounts to 1.7 trillion USDs and next week the Fed will complete its U.S. bond buying programme. So the U.S. Government will no longer be able to count on buying from the U.S. Federal Reserve. It's crunch time. AGAIN.

So we have all these Governments borrowing. Big deal. It was ever thus. The crucial problem is that some countries have domestic savings to call on. Some do not. But everybody wants the money. So what to do? Well, when you haven't got a large domestic savings pool of your own you need to gain access to other people's money. Now the U.S. has been successful at that, to a point. The reserve currency status of the USD and the willingness of Asian countries to accumulate reserves in USDs kept the U.S. flush with funds, the USD supported and the U.S. economy on a roll through the Clinton and Bush Administrations. The rush in Asia to build foreign exchange reserves following the 1990s Asian crisis helped, a lot. But that rush is over and the U.S. still has this massive funding requirement. So what to do? Where else would savings potentially be available?

Well there aren't a lot of choices. It's not Latin America and it's not Africa. So that leaves Europe, specifically the Eurozone.

Germany runs one of the largest current account surpluses on the planet and there is only one way to do that: you have to export your savings. That's Balance of Payments 101, look it up.

Germans, for reasons best known to themselves, don't seem to be able to find investment opportunities for their savings at home. Why? I have no idea. If the money stayed at home maybe they they could use it to get the local property market off the floor or even discover the joys of home ownership. But no, Germans, perhaps as a result of their catastrophic currency management during the Weimer Republic, prefer to send their savings elsewhere. In the 1980s they were big on AUD-denominated bonds: high yields, nice country. That worked out well. Not. The AUD dropped, the Germans lost their shirts. Earlier this century they thought U.S. sub-prime looked good. Nice rating, safe country. Not. And then there was Europe, a flood of foreign money drove Greek Government yields to within a whisker of yields in Germany. Another good idea. Not.

The big focus of attention then is: Germany the cash cow. The unfortunate thing for countries without a large and reliable savings pool is this money has largely been directed towards other Eurozone countries. Spain and Greece saw money pouring in following the introduction of the Euro and this pushed their current account into deficit. Big time. Balance of Payments 101: if you import other people's money your current account moves into deficit. Just ask the Australians they know all about it.

And so there we have it: the Eurozone current account is pretty much in balance but within the Eurozone lots of German money is moving across borders, creating booms and busts and a certain amount of havoc in its wake. And this footloose pool of German savings is very exciting. The question is: how do non-Eurozone countries get their hands on it? NOW. When they really, really need it?

Well a Eurozone crisis might help.

And so to the crisis. In this kind of deficit/debt environment all you need to bankrupt a Government is to convince investors to stop turning up for Government bond auctions. If investors stop turning up any OECD Government at all (France, Germany, the U.S., the U.K., Japan....) would be unable to refund maturing debt and would be forced to default. So you need to get investors to stay away. You need to create a market panic. Which means you need control of the media and, crucially, the Ratings Agencies. If you have a clueless or complicit politician on hand it doesn't hurt either.

First pick your market: make it small and exposed to foreign investors. Foreign investors, especially institutional investors, are a lot easier to scare than say Japanese or Italian housewives. Institutional investors don't know, don't care and just want to make sure the pay checks keep coming in. If there's a panic, they're in it. For sure.

Get the clueless politician to make a few irresponsible statements about Government debt. Get the Ratings Agencies on it and send in the media attack dogs. Hopefully you get a market panic. And they did all that. Only every single Greek Government bond auction held in 2010 has been over-subscribed by a huge margin. Which is unfortunate for the cause. As long as investors keep turning up then a Government can keep funding itself. Yields might be high, they were before Greece joined the Euro and in normal market conditions higher yields would reflect two things: high Government debt levels and a reliance on foreign savings. Which is why Japanese Government bonds yields are so low. The Japanese Government has accumulated the equivalent of circa 180% of GDP in debt. Yields on 10 year Japanese Government debt currently stands at just 1.29%. Why? Because Japan has plenty enough domestic savings and doesn't need foreign investors. When Moody's downgraded Japanese debt to levels below Botswana in 2002 it had precisely no longer term impact. Nice try.

But back to Greece. All the Anglo-Saxon press expressed surprise at just how well Government bond auctions went in 2010. It was inconvenient. But they kept harping on how yields had risen. Back of the envelope calculations were bandied about. Everyone agreed that the situation was not sustainable. But it wasn't enough. So the clueless politician was called upon to complain about the rising cost of financing Government debt. I guess he wants yields to go back to near German levels. Which is a big ask when you have a large debt and rely on foreign capital to fund it. Still. No-one questioned this slightly loopy idea. It was accepted as the right idea, all the Greeks needed to do was tighten fiscal policy. Hard. That way in exchange for a catastrophic recession they could maybe bring down Government bond yields. A strange trade off: massively tighter fiscal policy in exchange for slightly lower domestic interest rates. The economy gets killed so you can pretend to be Germany. Right, I forgot this is the Euro area now so we are all pretending to be Germany.

The Anglo-Saxon press kicked into gear and the Ratings Agencies started to speed up downgradings. On the back of nothing in particular, except maybe the knowledge that the FED will complete its U.S. bond buying programme next week, there was an unseemly rush to downgrade Spain, Greece and Portugal. European Ministers were aghast. Slightly flat-footed but aghast. Noises about setting up their own agencies have been made.

The Spanish Prime Minister launched an investigation. The Spanish National Intelligence Center (CNI) is investigating "whether investors' attacks and the aggressiveness of some Anglo-Saxon media are driven by market forces and challenges facing the Spanish economy, or whether there is something more behind this campaign." And he was ridiculed of course. In the Anglo-Saxon press.

And so here we are: showdown. Can the Ratings Agencies deliver even more suitably targetted downgradings? Can the hysteria in the Anglo-Saxon press ratchet up a notch? Can investors be driven into the arms of the U.S. Treasury which will welcome them with open arms and offer a safe haven from all those nasty, big-spending loafers who occupy the Garlic Belt? Time will tell.

We've got the bomb

2007-10-26T09:54:00.002+02:00

"We've got the bomb and we sure don't want anyone else to have one unless we say so. Oh yeah."

Are we there yet?

2007-10-24T16:10:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.4240 Hi 1.4266 Low 1.4189
USD/JPY 114.05 Hi 114.95 Low 114.06
AUD/USD 0.8990 Hi 0.9047 Low 0.8993
EUR/JPY 162.41 Hi 163.89 Low 162.18

The official narrative is one of cautious optimism. (Well that is what they are paid for.) But the discussion has shifted focus. Now pretty much everyone expects the USD to devalue, with the exception of Jim O'Neill at Goldmans who is peddling the quaint idea that the small fall in the U.S. Trade Deficit will see USD buyers come rushing back. Why slightly reduced SELLING pressure associated with the slightly less negative trade performance of the United States should translate into actual USD buying is not clear. However, that was his story, at least up to a few weeks ago.

In the real world it's hard to identify much buying interest in the USD coming from anywhere. No-one wants to own USDs and it seems that lots of people are interested in getting rid of the USD assets they already own. So the big question now is: can the USD devaluation be managed in an ORDERLY fashion or not? As if that makes a big difference. Do you want the short, sharp blow to the head or would you prefer a lingering death?

The idea being that the "lingering death" option, while fatal for the U.S. economy as a whole, would allow U.S. Assets (read the Stock Market and U.S. Treasuries) to continue performing positively. Especially if the FED waves its magic wand at the end of the month, cuts rates and injects 'liquidity' back into the system. Liquidity being the buzz word. No-one knows what it is or what it means but everyone is pretty sure that if there is enough liquidity then the whole financial market house of cards can hold up even while households hit the wall all over the United States.

Of course, everyone also knows that cutting rates is risky because it could undermine offshore support for the USD. Which is why no-one is talking about the U.S. Current Account Deficit, which is big and scary, or the sad fact that Foreign Capital has started to head for the exits.

In July Net Foreign Capital Inflows were negligible and in August, well, Net Foreign Capital Inflows would have been more properly named Net Foreign Capital OUTFLOWS. Because that's what happened to the tune of USD 69.3 billion. So the U.S. in August 2007 failed to attract the foreign cash it needs to keep the USD stable and the show on the road by about, oh, around USD 140 billion. (The USD needs to attract around USD 70 billion in new money every month and it lost that amount instead.) This is not good news for the USD. In fact this is very bad news.

USD targets keep being adjusted to the downside with the only question being: orderly or complete panic? And in that friendly international market environment Ben Bernanke, the brave, must decide whether or not another rate cut can be delivered, seen as how the U.S. economy is starting to look like it needs life support.

The U.S. is dependent on foreign capital inflows and foreign capital inflows are hard to maintain if it becomes clear that the USDs you buy today are going to be worth quite a lot less tomorrow. Rate cuts make it harder still (to keep those flows coming) because they reduce the yield premium which is supposed to partially compensate for risk.

Well maybe Bernanke's up for the risk. And maybe asset markets will cheer him on but the USD sure won't and it hasn't exactly been looking perky lately. Another rate cut and the USD takes another hit and the question is: what will asset markets do then?

So far the scramble to reduce risk has seen U.S. Treasuries perform relatively well, particularly considering the, er, less than prudent fiscal management of George W. and company. Although the positive performance of U.S. Treasuries is only exciting if you are natural-born USD holder. If you live somewhere else, like say Japan or the EuroZone, the performance of U.S. Treasuries is unlikely to have set your hair on fire, once you factor in currency fluctuations or, if you prefer, USD depreciation.

OIL 85.35
GOLD 762.10

It is interesting to note that there are three world leaders who have an interest in getting the price of OIL as high as it can go: Putin, Ahmadinejad, and George W. Bush (who has well documented ties to the OIL industry). Funnily enough, these three leaders have been instrumental in escalating tensions in the Middle East. There have been veiled threats, talk of WWIII and so on and so forth. And guess what? The price of OIL has risen even in the face of less than spectacular outlook for global economic growth. Good job boys. Mission accomplished.

And a higher OIL price might keep shaky regimes in place and feather nests here and there, but it's going to do precious little to improve the general economic outlook. What the world saw in the 1970s and the 1980s were called OIL SHOCKS for a reason. Some people, though, got very rich and the same is happening today.

So where were we? Oh yeah, an imploding household sector in the U.S., capital flight from the USD, higher OIL prices (which certain people are quite happy to see remain high) and lots of dead bodies associated with the recent Sub-Prime Mortgage market fiasco. Only no-one knows where the bodies are buried. Risk aversion is going to remain on the agenda for quite some time, Ben Bernanke or no Ben Bernanke, and that's not good for asset markets.

Truth versus Lies on the U.S. Economy

2007-10-23T09:35:00.000+02:00

Senator Bernard Sanders confronts Greenspan and his positive spin on the American economy. Greenspan of course does not waver from the positive official narrative.

http://youtube.com/watch?v=nBnKh6B2cMw
Recorded on the 16th July 2003.

Damage Control

2007-09-05T14:34:00.003+02:00

EUR/USD 1.3588 Hi 1.3630 Low 1.3567
USD/JPY 115.69 Hi 116.49 Low 115.41
AUD/USD 0.8202 Hi 0.8291 Low 0.8182
EUR/JPY 157.16 Hi 158.65 Low 156.77

The hope that the Federal Reserve will cut interest rates is a bit like the hope that President Bush will reduce troop levels in Iraq. If you keep hinting that it's a possibility it takes some of the pressure off without you actually having done anything. The status quo stays the same. And right now the status quo is a problem.

Ben Bernanke got all sorts of pats on the back from the PUNDITS when he engineered his not-quite-an-interest rate cut on August 17. Buckets of ink have been used in newspaper columns explaining how the little problem with liquidity which financial markets experienced in August was just that: a little problem. And every delusional market commentator out there was spinning the line that now everything can go back to usual and Mrs. Watanabe can come galloping back with her carry trade prowess and save the USD and by extension, of course, U.S. financial markets and maybe even the beleaguered sub-prime market. To be fair there is not much else that can be done other than talk things up. It's called Damage Control.

And in as much that the USD/JPY is up from its recent lows the talkfest has been successful. But really if that's success then Iraq is great vacation spot right now.

Meanwhile back at the ranch Mr. Trichet gets to make an appearance this week and the consensus is that a rate hike, which had been pencilled in, is now off because even though the PUNDITS and Mr. Paulson and Ben Bernanke want us to believe that things are not as bad as they are, in fact, they are worse. Ponzi would have been proud. Me, I'm thinking Albania circa 1996.

Which I suppose explains the security detail which President Bush travels with. A bullet-proof, bomb-proof, chemical-proof limousine certainly comes in handy when the populace gets antsy. The populace isn't exactly happy right now. And the U.S. Housing Market collapse is only just getting into the swing of things. As for the sub-prime debacle which goes with it, no-one really know where that is going because no-one really knows who is going to end up holding the baby. What we do know is that Hedge Fund Land is in trouble, lots of banks all over the place are in trouble and this perverted derivative creation has spread like cancer. And it isn't over.

How bad can this get? Well how does unprecedented sound to you? Because that is where it is going. Of course some people are screaming that the FED must cut right now before we have financial market melt-down. Not that cutting rates will do anything much, except maybe speed up the collapse in the USD. Which I suppose would get things over quickly.

And that's just the Financial Market side of things. Add in the GEOPOLITICAL side of things and the situation is a shade worse. Actually that's not true. When you add in the GEOPOLITICAL side of things the situation is catastrophic. George W. and his cronies have been making noises recently about Iran. The idea is that sooner or later the U.S. is going to "take out" Iran. Cowboy style. And there are supposedly plans afoot and guns in place and what have you.

In the other camp with Iran are China and Russia. This is not good. President Putin has been issuing warnings and China has been making noises while delusional U.S. commentators suggest that China would never take the "nuclear" option (that is: dump its U.S. Treasuries) because that would mean mutually assured destruction.

Well maybe, maybe not. Certainly China would take a loss. But Chinese economic development is not a carbon copy of Japanese economic development. What China has managed to achieve over the past thirty years or so is essentially a transfer of technology. The Chinese have a big enough and an under-developed enough domestic economy to continue growing even if the U.S. market disappears off the radar. Especially now that they have achieved the technology transfer they so desperately needed. All that offshoring wasn't just about taking jobs away from the U.S. it was about taking factories to the Chinese. We are not talking mutually assured destruction we are talking U.S. bankruptcy. Which is slightly different.

So there we have it. The great USD sell off continues and U.S. Financial Markets are NOT going to be the place to be for quite some time. Armageddon? Well maybe the financial kind and "in one hour so great riches is come to nought." Watch this space.

OIL 74.89
GOLD 688.60

GOLD remains bid, which is hardly a surprise, and all the cowboy posturing from Bush in the Middle East is helping OIL stay bid in spite of increasing talk of a global economic slowdown. When will we they start talking recession I wonder?

At least Daddy's OIL friends will be pleased.

The End of Pretend Money

2007-08-01T08:31:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3654 Hi 1.3684 Low 1.3641
USD/JPY 117.83 Hi 118.73 Low 117.58
AUD/USD 0.8471 Hi 0.8542 Low 0.8444
EUR/JPY 160.87 Hi 162.23 Low 160.51

There was a hilarious line of thought going around the market recently which centred on the naive belief that if the Japanese decided NOT to raise rates in August then the Yen Carry Trade could be saved. In short the Happy Clappy crowd seemed to believe that Humpty Dumpty could be put back together and everything could go back to how it was. And how it WAS was pretty good with virtually free money from the Yen Carry Trade providing the 'liquidity' (read pretend money) for every speculative trade on the planet. The upshot being that speculative traders everywhere would, after this little 'correction', be able to get back to their rewarding momentum trades and we would all live happily ever after.

For good measure some deluded newspapers were spouting the view that Japanese housewives would help this along because of course Mrs. Watanabe and her friends had just come into a whole lot of new cash, or something. No-one was too keen to explore that line of thought in all its gory detail because it wouldn't stand up to much examination. But they threw it in just for good measure.

Meanwhile back in the real world what the Asians were actually discussing was what they could do with their trade earnings, of which there is rather a lot, if they decided not to keep lending the money to the Americans. The Asian Development Bank had got in on this. In Japan there were noises about how the large stash of cash currently sitting in U.S. Treasuries could be used to pay off the correspondingly large Japanese Government Debt. The Chinese were 'diversifying'. Nowhere in Asia was anyone talking about pouring even more money into what was essentially seen as a losing proposition. That is: exchanging real goods for ever larger quantities of small bits of green paper (aka the USD) which could only be exchanged for slightly larger bits of paper (aka U.S. Treasuries) which essentially meant exchanging real stuff for nothing much and certainly for nothing useful.

The Happy Clappy crowd missed that bit. But then they don't read the foreign press and they enjoy a self-delusional lifestyle generally. So while the Western Press fed anyone who would listen the line that Asia had no choice but to continue financing the U.S. economy and the U.S. Government the Asians were looking at their alternatives. And this shopping around for choices has been going on for a while now. This does not bode well for the USD/JPY and the Carry Trade and, of course, this is bad news indeed for people in Hedge Fund Land because funny money generated by the Carry Trade was how the people in Hedge Fund Land amplified their trades to the power of a billion. And this has unfortunate consequences when winning trades turn into losing trades. Like now.

But there is more. The Happy Clappy crowd was also led to believe that the melt down in the U.S. Housing Market could somehow be contained. It's only Sub-Prime, it's only a small share of the market, it doesn't matter and anyway who cares Ben Bernanke will come to the rescue. We hope. Only Helicopter Ben has discovered that he has exactly no lee-way when it comes to domestic interest rates because the real money is coming from overseas and overseas investors want to see the FED prop up the USD and to hell with the U.S. economy. That's a policy conundrum which seems to have finally registered with the FED, hence all the talk of inflation risk, which is really the USD collapse risk.

Where does it all lead? Well first off the USD/JPY downtrend has only just begun. When you think USD/JPY think down because that's where it's going.

And if the USD/JPY up trend is over and the Carry Trade is over, which they are, then this means that all this exciting 'liquidity' disappears and what we have is a credit crunch, which won't be good, particularly for economies which are debt dependent. The countries which will fare the worst as liquidity dries up are those countries which have seen a credit explosion in the past decade. Countries with low or no domestic savings, high domestic debt levels and no contingency plans are in for a very difficult time indeed. Think debt, think Anglo-Saxon economies, think crunch.

For a while it worked. Asians were encouraged to work very hard, produce goods to sell to the rich Westerners, bank the money and never spend it. In fact, they lent the money back to the Westerners in order to keep the whole process alive. But now questions are being asked and the issue is unlikely to be resolved in favour of those countries which are used to receiving large, never-ending capital inflows (aka as other people's money).

It was after all an American who said: 'You can fool some of the people all of the time and all of the people some of the time but you can't fool all of the people all of the time'.

And the Euro? Well the new French President, Mr. Nicholas Sarkozy, has been making loud noises about ECB monetary policy and the EURO uptrend, which he doesn't like. Not surprising really given the impact on the European economy. So the EUR/USD uptrend may have stalled but the EUR/JPY downtrend has just started and the real action will be in the big Carry Trade favourites: AUD/JPY, NZD/JPY and USD/JPY.

While the rush for the exits takes place U.S. Treasuries and Government Bond Markets are expected to outperform. Because the USD remains at risk, however, the U.S. Treasury market is expected to underperform other Government Bond Markets. By quite a bit.

OIL 78.00
GOLD 673.40

The focus for now is not on GOLD or OIL. Both are reasonably bid but action on other markets is likely to take the heat out of these. In the longer term GOLD is likely to outperform while OIL takes a hit as global economic conditions worsen. And incidentally the outlook for Stocks just keeps getting worse.

Opening the Gates of Hell

2007-07-18T10:02:00.001+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3784 Hi 1.3834 Low 1.3779
USD/JPY 121.89 Hi 122.34 Low 121.57
AUD/USD 0.8761 Hi 0.8789 Low 0.8716
EUR/JPY 168.00 Hi 168.59 Low 168.00

While the PUNDITS are distracted by the non-vote which will take place in the U.S. Senate, bigger things are afoot. On the 11h of July Senator Joseph Lieberman, a man with no shame and no conscience, introduced an amendment to a Defense Spending Bill in the U.S. Senate which declared that Iran was committing acts of hostility against the United States. No evidence was presented, none was requested and the bill passed unanimously. Which proves just how Anti-War the Democrats are.

That Senate vote gives George W. Bush a clear casus belli for attacking Iran. This time around the U.S. Government is not even bothering with presenting cooked intelligence to the voting public. In fact no-one is talking about the plans which are afoot at all. The mainstream media is far more interested in the Glasgow bonfire and the made-for-television non-vote on a U.S. withdrawal from Iraq. The American Establishment plans on staying in Iraq. Just nobody is keen to mention that unfortunate fact to the gullible American public. For now we are going with the Iraqi War withdrawal charade to keep Mom and Pop happy.

Meanwhile back in the real world the U.S. aircraft carrier Enterprise was moved to the waters near Iran on July 10. This is the third U.S. aircraft carrier now in that area. But hey don't worry it's just a sort of coincidence.

In fact the U.S. Navy spokeswoman, Denise Garcia, has reportedly stated that "These operations are not specifically aimed at Iran." Well gee I guess we can all relax now. They wouldn't lie to us, would they?

The word on the street is that an "incident" involving Iran is likely to occur in August of this year, when Congress is conveniently out to pasture. This "incident" will then justify the next leg of the U.S. military adventure in the Middle East. Charm, charm, charm. So the U.S. killing machine moves on. What are we up to? 1 million dead Iraqis, 4 million Iraqi refugees and no-one is even counting the wounded, the impact of the depleted uranium or the damage to the Iraqi economy and infrastructure. Oh and the nation which launched this unprovoked and illegal attack has lost some foot soldiers. Tut. Tut. I thought wars of choice were meant to be clean and swift at least for the invading party. Well I guess you can't help a few broken eggs, now can you?

The Iranians, of course, think that there's a way to get around this with logic and tactics. So far they have announced that U.N. inspectors can come back into the country. And they have also announced that the Japanese will have to pay for the OIL they buy in YEN. Well they do seem to know the score. But have they figured in Special Ops and made-for-television events like the Bay of Tonkin "incident" or even 9/11? When you think that over all these Iranian attempts to circumvent an attack seem a bit naive.

But this new war is something to look forward to you if you are an arms dealer or run a private army. For everyone else it will just be one step closer to WWIII.

None of this is bothering financial markets where the big news, well sort of, is that Rupert Murdoch, media mogul and war monger extraordinaire, has finally maybe clinched his deal. Hey great. That should see the Dow Jones (the Index not the Company) hit yet another high and keep all those nervous nellies from panicking. We don't panic until we want panic and we don't want panic yet. Stocks are hanging in there. The USD is doing less well. A new record high in the EUR/USD was reached overnight in Asia. Not to worry Sarkozy is coming to the rescue of the USD. And over in Asia the Carry Trade is helping keep the USD/JPY afloat. The USD index still doesn't look healthy but under the circumstances with two wars to pay for and another on the way it's the best that can be hoped for. What we are seeing is people (well the PPT anyway) sticking their fingers in the hole to try and keep the dike from busting open. When it bursts then it will get interesting.

OIL 74.28
GOLD 670.30

GOLD is creeping higher which is no surprise given that some people are planning for Armageddon and even without Armageddon the USD still looks like a very bad bet. The PPT may be working to fight the rising trend in GOLD but that just looks like sticking more fingers in another dike ready to be swept away. Not really much of a strategy there from the PPT, just desperation.

And OIL, of course, has been given a shot in the arm by the very big mess in the Middle East. Which is good because it means even more money for the Saudis who are reportedly the real source of funds for the insurgents killing U.S. troops. What a tangled web we weave.

Well I guess if the powers-that-be are looking to extend this violence, and odds on they are, then they have yet another casus belli just waiting to be dusted off and presented to the public. More war, more arms, more money to some very dodgey war profiteers. The Devil and his minions are sure having a lot of fun.

Islamophobia

2007-07-03T10:32:00.001+02:00

Craig Murray is the the former UK ambassador to Uzbekistan.

Thirty Pieces of Silver For Tony

2007-06-28T12:48:00.002+02:00

EUR/USD 1.3465 Hi 1.3482 Low 1.3440
USD/JPY 123.08 Hi 123.76 Low 123.40
AUD/USD 0.8463 Hi 0.8471 Low 0.8375
EUR/JPY 165.73 Hi 165.94 Low 165.17

How's that for clever timing? Tony Blair steps down at pretty much the same time that the EU manages to ram through the new EU Constitution Mark II, otherwise known as the EU Treaty. And most of the British Press is, of course, going with the main story: Tony Blair stepping down. Because that's what really counts and who cares that the U.K. just signed away a large chunk of its sovereignty??

The French Press, of course, doesn't seem to find anything amiss in the new French President forging ahead with this new Treaty despite the fact that the Treaty is fundamentally the SAME as the EU Constitution which the French Public previously and overwhelmingly voted AGAINST. How inconvenient. The less said about that the better. So nothing is being said. Not for the French the nasty tactics of a feral press.

So soon Europe will have a President and a Foreign Office and all of the people in them will be "appointed". Appointments are big these days. After all it has worked well for the World Bank, the IMF and Central Banks everywhere. Well, maybe not. But at least it's quick and efficient. It does away with the pesky necessity of consulting "the people", not to mention the cumbersome and expensive "voting" process. No need to massage the message. SPIN will be history. All that will be required is edicts. The more imperial the better.

And Tony has been rewarded for his clever sleight of hand. Thirty pieces of silver have been arranged in the form of an appointment!! Yes, he, Mr. Tony Blair, one of the principal mouthpieces for George W.'s insane plan to take over the Middle East by military means, has been appointed Middle East Peace Envoy. Of course, the appointment is not all that it seems. Tony is contrite. More than that really. Tony is contrite and in addition he is almost Catholic. And since his Catholic wife has already suggested that wrong-doers should be personally confronted with the consequences of their crimes, Tony is heading off to the Middle East where he will be chief Meet and Greeter for the 4 million or so Iraqi refugees who are currently looking for a home. Being refugees, of course, means that they are ipso-facto to blame for their own sorry plight, so it is unlikely that they will have less than kind words for the likes of Tony Blair.

Almost everywhere around the world confidence in our Dear Leaders is sky high. Well not really. But no-one is worried. We have democracy and everyone out there seems to be happy with the charade. At least there are no riots, except at G8 Meetings. Let's move on. Moving on is good. It used to be called changing the subject. Either that or you can invent some suitably distracting alternative news story. Whatever works.

Meanwhile over in Japan it seems that hundreds of thousands of Japanese housewives, the ones who were supposedly responsible for selling bucket loads of JPY, appear to have changed their minds. Perhaps they are taking profits. Perhaps they've given up: defeated by the sheer size of the JPY buying generated by the enormous Japanese Trade Surplus. Whatever. JPY selling seems to have waned. My guess is that these Japanese housewives, after pouring over the recent economic statistics out of the States, have decided to cash in some chips. After all the numbers look ugly. Durable Goods numbers were terrible. The GDP numbers, revised or otherwise, don't look great. The U.S. Housing Sector is still in big trouble and the Sub-Prime Market? Nobody wants to talk about the Sub-Prime Markets. Can we please move on?

So maybe the Carry Trade has been taken to its logical conclusion. Maybe not. We will see. The USD is still in trouble, Carry Trade or no Carry Trade. And the U.S. Economy doesn't exactly look chipper. So USD bullishness might not be the happiest bet in the market. Not, that we are worried or anything. Worry would be bad. Worry doesn't play well. So we aren't worried. It doesn't matter what happens to the USD, or to International Capital Flows, the U.S.A. is still the most productive economy in the world, Trade Deficit or no Trade Deficit. So there is nothing to worry about. And we won't.

OIL 69.11
GOLD 648.10

GOLD falling as OIL rises?? Now let's see, why would that be? Oh yes I forgot: the current U.S. Administration has ties to the OIL industry and a higher price of OIL is not unwelcome in those quarters.

At the same time the U.S. doesn't want to see anything (especially not GOLD) replace the USD as an International Reserve Currency. Of course so many events have already undermined the status of the USD as the International Reserve Currency that this rearguard action to keep the price of GOLD down may not really achieve very much in the long term but for the short term it is capping rallies. So 10 points for the PPT.

Feel the Gush

2007-06-22T11:28:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3458 Hi 1.3470 Low 1.3380
USD/JPY 123.95 Hi 124.17 Low 123.67
AUD/USD 0.8484 Hi 0.8496 Low 0.8460
EUR/JPY 166.78 Hi 166.82 Low 165.63

You would never know from the headlines that Nicholas Sarkozy actually LOST seats at the recent legislative elections in France. No. Everywhere there is talk of triumph. The media is having a GUSH FEST about his mandate for reform. Indeed, the man did win the Presidency but he wasn't exactly running against genius. Far from it. And when it came to the more recent Legislative Elections the UMP actually lost seats. Alain Juppé got tossed out altogether. That was the guy appointed SUPER-MINISTER for everything. Now he gets the super ministry for nothing. Not that he is likely to be out of job. Friends in high places mean quite a lot in France.

But hey no-one in the mainstream media is worrying about Sarkozy's spectacular failure to win a legislative landslide and his inability to EVEN HOLD on to ALL the seats the UMP already HAD. It's full steam ahead and let's go for reform because the man has the votes. Votes. Right. The way democracy works NOW is: as long as you have enough votes at the relevant elections you can do whatever you want subsequently. You may even talk "Political Capital" just to rub it in.

Looking on the bright side at least no-one is talking about outright electoral fraud.

So we have a worldwide trend. No-one is getting governments these days that even vaguely resemble what "the people" want. In France "the people" want less immigration and more security. Particularly job security. What they will get is the exact opposite. Not that the PUNDITS are fussed. The narrative in the press is that Sarkozy won a mandate for widespread reform. End of story.

And now somewhere in Europe there is all sorts of tweaking going on with the European Constitution Mark II. This tweaking, which is largely cosmetic, will allow our Dear Leaders to plausibly deny that they introduced something which "the people" have actually already voted against. Oh my. It's so kind of them to bother. After all they could just barrel ahead and introduce the darn thing without making even cosmetic changes. But hey they do understand their role as our representatives. Maintaining appearances is so crucial.

Meantime back at the ranch the people working behind the scenes to ensure that ARMAGEDDON happens right on time haven't given up. Accusations are flying. The Americans are accusing the Iranians of kidnapping people. No mention, of course, of the Iranian DIPLOMATS which the U.S.A. kidnapped in Iraq earlier this year. Or of the covert U.S. operations inside Iran aimed at destabilising the Government. And, of course, no-one is really talking about that great U.S. fiasco: the illegal Iraqi Invasion.

And right at this pleasant juncture Tony Blair has decided to bestow a knighthood on Salman Rushdie, who is, you might recall, not the most popular person in Iran. Nothing like pouring a little fuel on the fire Tony. Such timing. Such panache.

Tony reportedly plans to convert to Catholicism soon. Can it be the rite of CONFESSION that he's interested in? They no longer do indulgences. But place your hand on your heart and say you're truly sorry. A couple of Hail Marys and, voilà, all is forgiven, your soul is wiped clean and you get to move on. Accountability is so last century.

Back on financial markets the game plan looks a little strained. Interest rates are rising everywhere. Sweden went. New Zealand went. The U.K. looks set to hike in the short term. Japan is reportedly planning to hike soon. And BOND MARKETS are getting slammed.

This is not the greatest scenario possible for debtor nations. And debtor currencies. And the U.S. is the NUMBER ONE debtor nation.

U.S. Treasuries yields look set to test their recent highs. And U.S. Stock Markets are less nonchalant about that than they used to be.

USD/JPY is doing fine. That's about it. And that particular trend is supposed to be something to do with Japanese Housewives opening deposit accounts in foreign currencies. These housewives are supposedly offsetting those huge on-going Japanese TRADE and CURRENT ACCOUNT SURPLUSES with that little piece of sophisticated financial engineering. Does that sound plausible to you? Me neither.

Everything else looks sick. The USD is performing badly against pretty much any currency you would care to name. No-one wants to buy more U.S. Treasuries and the Stock Market has got as much zing as it's going to get out of Mr. Murdoch's timely little take-over bid. Stay tuned this could get worse.

OIL 69.28
GOLD 656.70

In the midst of the mess that is the Middle East OIL climbs. GOLD is being held in check by shady forces and COMMODITIES are struggling as global economic growth slows. Led, of course, by the economic train wreck taking place in the U.S.A. and helped along by the rising cost of finance, well, everywhere.

Liquidity glut? I mean please.

Tony's Second Life

2007-06-21T13:38:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3384 Hi 1.3410 Low 1.3371
USD/JPY 123.66 Hi 123.78 Low 123.41
AUD/USD 0.8463 Hi 0.8468 Low 0.8428
EUR/JPY 165.43 Hi 165.47 Low 165.36

Tony Blair is casting around for job openings now that his political career is coming to an inglorious end. The feral British Public, like the feral British Press, doesn't seem to know just what a treasure they are losing and some career suggestions for Tony have been extremely ungracious. While there was once talk of Blair being offered a post on the Board of News Corp by his old mate and mentor, Rupert Murdoch, there have been no recent noises in that regard. But George W. seems to have stepped into the breach. After all what are old (war-mongering) friends for?

Ooooh the delicious irony of it. Tony Blair, apologist for the unprovoked attack and invasion of Iraq is to be "appointed" PEACE ENVOY. Well I guess if you are going to have one it may as well be someone who faces the possibility at some point of being tried at the Hague for War Crimes.

But back to the markets. U.S. Treasuries are not doing well. Pundits everywhere are falling all over themselves, as expected, trying to explain why this is really good news. Or at least not bad news. Or anyway nothing to worry about.

The break above 5.0% in 30 Year Treasury Yields led to a spectacular sell off last week which saw 30 Year Yields rise as high as 5.40%. It was mayhem on the markets. Expect news on just how much damage has been done in Hedge Fund Land shortly.

NOW, after a little short covering rally in Treasuries, the sellers are back. Oh the joy, the joy. The prospects for the U.S. economy are obviously so much better than we first imagined!! Ah yes.

Only maybe not. Maybe this is just the result of the absence of some very annoyed foreign buyers who are, after all, the guys with the dough. China, Russia and potentially a lot of Oil-Producing Arab nations don't seem to see the current GEOPOLITICAL situation in quite the same light that George W. does. And they certainly don't see why they should be providing the funding for his attempt to take over the world with bigger and better guns. So they don't appear to be rocking up to buy more Treasuries.

What happens when they start actually dumping the Treasuries they already hold? You don't want to know. And George W. doesn't know and doesn't care. Eventually these divergent points of view (between George W. and everybody else) about how the world should be run and by whom will lead to a confrontation. If we are lucky the confrontation will take place on financial markets. If we are unlucky quite a lot more people could end up dead.

For now the pain is being contained. Treasuries have taken a hit but the U.S. Stock Market hasn't seen much damage and the USD looks steady. With ECB rates now on hold while Trichet examines the tea leaves (that is M-3 data) and Japan not expected to HIKE until August, the immediate risks to the BUCK look limited. That doesn't mean we are going to see a huge USD rally. But the market needs new news. And the news recently has been that the European economy is taking some hits. Despite the bragging from Trichet, the recent data hasn't been quite as exciting as most would hope. Good news for the BUCK? Not likely. More like a temporary reprieve.

As for the U.S. Stock Market that seems nothing more like a very big accident waiting to happen. And when it does the echo will be heard around the world.

OIL 68.90
GOLD 658.00

Well the GOLD rally has fizzled which is weird considering the fraught GEOPOLITICAL scenario (Lebanon, Gaza, Syria, Putin, Iraq, Iran, George W.), the very sad performance of the U.S. Treasury market (could it be it's inflation they're worried about?) and the idea making the rounds that it might be a good idea to reduce risk right now.

But the fizzle in the GOLD market, it seems, is not entirely spontaneous. Forces are at work. Those big guns standing by to help George W. dig himself out of a hole are indeed lurking. Not that they are advertising their actions. And they haven't engineered a collapse in the price of GOLD either. The market has so far failed to break above USD 700 but it hasn't exactly fallen into a black hole. So here we are waiting and wondering. Just how much money, or leverage, or chutzpah do these guys have anyway? And does it really matter? For the long term player this attempt to stop the price of GOLD breaking to the upside may just provide another, and cheaper, buying opportunity. Provided, of course, that the somewhat unappreciated IMF doesn't decide to offload its GOLD holdings. Market manipulation? Why never. It's just necessary and intelligent way to manage reserves.

I wonder what happened to the geniuses at the Reserve Bank of Australia who started the ball rolling in 1996 by offloading a substantial proportion of Australia's Central Bank GOLD reserves when the price was around USD 400?

Well nothing beats Gordon Brown's move to sell massive amounts of GOLD at the bottom of the market. And he's up to be the U.K.'s next Prime Minister. So in some rarefied circles, it seems, there is simply no accountability. Which is why Tony Blair just might be able to find himself a second career.

Meanwhile the price of OIL is reacting to the unfortunate situation in the Middle East.

OIL bulls beware Tony Blair may well be "appointed" (the man is unlikely to ever get himself legitimately "elected" to anything anywhere in the world ever again so an "appointment" is his only hope) the new Middle East Peace Envoy. All these entrenched Middle East problems may well be swiftly solved. On second thoughts, perhaps not. No, there is nothing much beyond the possibility of a U.S. economic collapse keeping the price of OIL from rising.

Punching Above Your Weight

2007-06-05T18:52:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3530 Hi 1.3555 Low 1.3486
USD/JPY 121.30 Hi 121.95 Low 121.12
AUD/USD 0.8357 Hi 0.8410 Low 0.8336
EUR/JPY 164.06 Hi 164.10 Low 163.92

One of the disadvantages of coming from a rich family and having your path in life paved out for you by Daddy's connections, problems solved with a phone call and trouble quietly covered up, is that you don't understand a real crisis when you see it and you really don't understand your own limitations. And so it is with George W. and by extension the United States. George W.'s presidency may be in real trouble but he doesn't seem to understand that there is a problem. So he goes blithely on, assuming that if it comes to a show-down he can just call in the big guns and everything will be fixed. Pronto. And anyway he doesn't really care.

And so after having led the United States and the "Coalition of the Willing" into a hopeless military adventure in Iraq, George W. seems intent on laying the grounds if not for an outright military confrontation with Russia and potentially China, then at least he is opening the way for a new COLD WAR. Oh goody. Everyone knows that the United States has more bombs than anyone else. So there is nothing to worry about. I mean look at how far all that military equipment got the Americans in Iraq: heavily armed and sinking in the quicksand. Well at least they can boast that they have bombed half the country, destroyed most of the infrastructure and have been directly or indirectly responsible for killing nearly 1 million Iraqis and rendering another 4 million homeless. So they might not be winning but they sure have demonstrated how destructive they can be. So everybody better watch it.

And watch it they are. Putin called George W.'s bluff this week. And now George W. had better hope that democracy in the Czech Republic is NOT working. After all THREE QUARTERS of the Czech population are reportedly opposed to the U.S. military bases being planned there. Though it shouldn't really be a problem. Most people in Europe are opposed to the introduction of the European Constitution and the new French President has been talking about getting one up and running in the next two weeks.

George W. knows that democracy is mostly a charade so he's not worried about popular opinion. And he's right. There's nothing much the people can do about politics. Even getting him impeached seems to be beyond the ability of the American public. But that doesn't mean he isn't playing a very dangerous game. After landing in the Czech Republic today George W. went on the offensive. He criticised Russia and China. Good move George. Oh and Egypt and Saudi Arabia. Even better. Obviously George W. doesn't understand just how reliant the United States is on foreign capital inflows.

Without foreign capital inflows the U.S. economy will tank so fast there won't be time for any planning. And a great deal of the money needed to keep the economy ticking over in the United States, to fund the Federal Government, to fund all this exciting new military expansionism comes from, er, well places like Russia, China and Saudi Arabia. And we are talking capital inflows from Foreign Central Banks mostly. And Central Banks report to the Governments in those countries. So it wasn't a great move. But then George W. doesn't really understand what a potential crisis really looks like. Nor does he understand when he's punching above his weight. Which is what he's doing right now. But financial markets have figured it out pretty quickly.

And not surprisingly the reaction has begun. With the USD already under pressure versus the EURO, given the divergent interest and economic outlooks in the two blocs, NOW the USD is also sinking against the JPY. Which is significant. Because it was mostly the carry trade which was keeping the USD afloat. And the carry trade's core is the USD/JPY. If, as appears likely, we start to see CARRY POSITIONS closed then the USD could be in very, very serious trouble.

And if the USD is in trouble then U.S. Financial Markets are in trouble. The U.S. Treasury market knows that already. It keeps getting slammed. Doesn't matter what economic news is released, good inflation, bad inflation, growth, no growth, jobs, no jobs, U.S. Treasuries just keep taking hits. Yields on 30 Year Paper have broken through 5.0% and keep rising.

The only part of the financial market which has really held up over the past year or so in the States has been the U.S. Stock Market. But it can't last. It doesn't matter how many mergers or buy outs get announced at the last minute. All the cheerleading in the world won't be enough. As Corporate Profits start taking hits, as they are, we are going to see selling pressure emerge on the U.S. Stock Market. And that will only encourage more USD selling. Because the U.S. has only managed to attract capital inflows on the assumption that everything is pretty fine and dandy in the United States. When it becomes clear that that is not the case then capital flight will become a problem. And in that situation provoking the people providing the finance is insanity.

But George W. is cool. He knows there are big guns behind him somewhere. He has back up, connections, he can make phone calls and then all the problems will be solved. Pronto. Only maybe not. He obviously thinks that the PPT and Hank Paulson can just magic away any financial market instability.

More downside for the USD is on its way. There is no good news in sight for U.S. Treasuries if they can't find buyers and U.S. Stocks are unlikely to survive the type of economic slow down which is inevitable if foreign funding for the economy slows. Oh and by the way foreign funding has slowed.

OIL 65.51
GOLD 675.80

With the USD under pressure and GEOPOLITICS looking ugly everywhere from Eastern Europe to Turkey, the bid is back in the GOLD market. Given the current U.S. Administration's crisis management skills expect GOLD to remain bid.

Misreading the FED Minutes

2007-05-31T11:33:00.001+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3466 Hi 1.3424 Low 1.3466
USD/JPY 121.58 Hi 121.46 Low 121.69
AUD/USD 0.8274 Hi 0.8277 Low 0.8218
EUR/JPY 163.71 Hi 163.77 Low 163.04

Funny how things work these days. All it takes is the release of FED MINUTES which suggest that NO RATE CUT is likely in the short term and, hey-ho, everyone goes with the idea that the U.S. economy must have bottomed. The fact that no RATE CUT is in the offing, that wages growth is non-existent and that the U.S. Consumer may be optimistic but his credit limit is maxed out and that REAL CONSUMER SPENDING is not happening, were swept away yesterday in a burst of optimism. Or so we are told.

There was nothing particularly cheerful about relatively hawkish monetary policy guidance in the face of weaker economic activity. But that guidance was supposedly the foundation for the U.S. Stock Markets' rally yesterday. Stocks in the States ignored the sharp sell-off in Asia, ignored the fact that the FED acknowledged that the "slowing" in the Housing Market had impacted growth more than they had originally expected and swept on to make new records. Gee that was easy.

Meanwhile in Europe, with inflation relatively contained, the ECB is making noises about growth. Over here in OLD EUROPE growth is a big of no-no. We don't like it, don't trust it and have given powers to an INDEPENDENT Central Bank to deal with it. Well not exactly. The ECB's brief is to deal with inflation, of which there doesn't seem to be much, and the ECB appears to have extended that brief to include CURBING ECONOMIC GROWTH. We wouldn't want anyone to get too happy or too rich. Especially not the plebs. Keep those wages down guys or we'll come running after you with higher interest rates and then you'll be sorry. And maybe we'll hike anyway, just because we can. That old saying about absolute power never looked more relevant.

The ECB has already signalled that a rate hike has been pencilled in for next week's ECB meeting. This will take the Official Cash Rate up to 4.0% in the EuroZone, which is a very comfortable margin above an annual headline inflation rate of 1.9%. But the hawks at the ECB have been squawking recently and more rate hikes look likely before this cycle is over. An independent Central Bank, independent of the people, the economic data and totally divorced from reality, can be a terrible thing to behold.

Still for now economic activity in the EuroZone remains robust, which is more than you can say for the U.S. economy. Indeed, given the divergent economic and interest rate outlooks for the two areas, it looks like the recent EUR/USD correction is over. Or close to. The FED may not be easing but it's not hiking either and the ECB is.

The external accounts of the EuroZone are unremarkable, there is no major surplus and no major deficit, and the U.S. economy is still leaking cash all over the place. That is: the U.S. is still spending more money that it earns. And there has been no relief despite a fairly substantial USD depreciation. Indeed, there has been no improvement in the U.S. Trade Deficit for, oh, the last three decades or so. Something must be done. So now it seems the U.S. has decided that they may as well bring back direct currency market intervention.

According to an article in today's Financial Times: The Senate bill is to be introduced in the next month and will mandate the US Treasury to intervene in global markets if currencies become fundamentally "misaligned".

So the U.S. Treasury will be able to "operate" directly in Foreign Exchange markets. Hmm. When they do they won't be buying USDs, that's for sure. At least if, as it seems, the powers-that-be have decided that the reason the U.S. can't sell anything to anyone is all currency related. In the U.S. they like nice easy solutions to complex problems. Sell a few USDs against the Chinese Renminbi and, hey presto, problem solved.

This has to be one of the most naive and ill-thought out policy responses ever. But then the U.S. has neglected education for decades and the results show. After all President George W. actually managed to graduate from a prestigious university. So it's quick-fix, sound-bite policy and if anything goes wrong bring in the troops.

In the months ahead we could see the U.S. Treasury join the long list of potential USD sellers. I don't see this as a bullish USD signal. And it's not a great signal for U.S. inflation either. If the USD takes a hit imported inflation will spike. And, given that the U.S. still imports just about everything, having moved most production offshore, imported inflation is not something to be sneezed at. Yes, Ben Bernanke and his boys are right to underline the inflationary risks which are lurking out there. Because they are considerable.

Meanwhile the U.S. Stock Market is going with misplaced optimism and the only rational explanation seems to be: everyone is already short. As an explanation it's not that exciting. Oh, and U.S. economic growth is benefiting Corporate Profits exclusively. The only trouble with that last argument being that growth, such as it is, is nothing to get excited about. They may have clocked up an annualised rate of 0.6% in the first quarter of 2007 but that translates into a very, very meagre 0.15% growth over the quarter itself.

OIL 63.24
GOLD 662.30

Although it seems that the U.S. is still planning military ARMAGEDDON in the Middle East they have done a very good job of not talking about it recently. And, because the markets react only to what is talked about, both GOLD and OIL are listing.

What we do know, finally, is that Bush is committed to keeping U.S. Troops in Iraq for the next 50 years or so. For the stability of the region, you understand. I'm glad we finally got that out of the way. This "Bring the Troops Home" was getting tedious.

At some point revenue from the Iraqi OIL will start to kick in and everything will be OK. The only trouble with that little plans seems to be Iraqi hostility. Still, so far out of an Iraqi population of around 20 million 5 million Iraqis have ALREADY been either killed or displaced. So, given the efficiency of the U.S. War Machine, eventually that Iraqi hostility will either be dead or living in refugee camps. Problem solved. In a unique American way.

Everything is going to plan.

Cheerleaders and the Delusional

2007-05-24T18:09:00.001+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3431 Hi 1.3465 Low 1.3415
USD/JPY 121.49 Hi 121.70 Low 121.23
AUD/USD 0.8208 Hi 0.8242 Low 0.8198
EUR/JPY 163.15 Hi 162.94 Low 163.74

There must be some peculiar alignment of the stars set for June 30th 2007. June 27th is the day on which Tony Blair will FINALLY step down. To jeering crowds. The head of the World Bank, Paul Wolfowitz, has resigned. Effective 30th of June. Why wait? Didn't want to disappoint his fans? There are none. But in the land inhabited by Grandiose Delusionals reality rarely gets a look in.

And in Europe we have politicians rushing, yes rushing, to cobble together some kind of compromise to resuscitate the European Constitution. The deadline is June 30th, when Germany hands over the Presidency of the EEC. The Germans, or at least their politicians, are pro this type of thing apparently. No-one on the street in Europe really cares. And those who do care don't want to breathe life back into this monster. The French people and the Dutch actually voted AGAINST it. Most everyone else didn't even get to vote on the issue. Now the politicians are making sure that no-one else will be able to vote. Because our Dear Leaders know it would not pass. Anywhere.

The European Juggernaut just keeps getting bigger and LESS accountable to the people. The people are not happy but it doesn't matter. We have DEMOCRACY in Europe which means "the people" only get to vote once in a while. And only on national issues. On questions regarding Europe they almost never get to vote. More Europe means less voting. Which is great news for the politicians. But the June 30th deadline is looming and so the politicians are at work. Rushing in fact.

June 30th 2007. Write it in your diary it could turn out to be an important date. We just don't know what for exactly. And the people that know are not telling. What can they have planned?

Well GEOPOLITICS is suddenly back. All sorts of new and exciting developments are taking place in the Middle East. The Israelis are bombing Gaza, arresting Ministers (haven't we done this already?), there is some kind of Civil War re-erupting in Lebanon and the U.S. is staging military GAMES (is that the word?) off the coast of Iran. Not that anyone is noticing. No, there is so much excitement about the U.S. Presidential Campaign (yawn) and the French Election (yawn) and Blair doing his little star-studded tax payer funded round the world trip, that there just doesn't seem to be much room in the press to report on the next Anglo-American attack. Which is, of course, focused on Iran. And this time France will be shoulder to shoulder.

Last year was just a rehearsal. The plans for World War III appear to have been taken off the shelf and dusted down. Israeli politicians have been making all sorts of ugly noises about how they can fire their 200 (undeclared) nuclear war heads in any direction they choose. Yeah guys we know. Thanks for reminding us. Iraq is still a mess. Iran is being blamed for that. But of course. And the U.N. is making noises about the Iranian nuclear programme. AGAIN.

So it's all going to plan. Sort of. The USD has recovered some ground. This is good news because it means that the USD is still a reserve currency. We think. We hope. Maybe it simply means that positions have been closed. It's not like the U.S. is seeing this flood of new foreign money. Only no-one is really talking about that inconvenient fact. The yield on the 30 year bond just broke through 5.00% and the it doesn't look like there is any new money ready and willing to soak up new paper. So yields keep rising. But hey this is good news because it means that the economy must be getting stronger. Not that the YIELD CURVE is positive yet. But it's getting there.

What happens when a nation which bases its entire economy on SPENDING (OK Consumption) and relies on foreigners to supply the CASH for that spending when the foreigners get antsy about handing over more of their hard earned dough? Well we may be about to find out.

Not that the cheerleaders in the States are likely to take any notice. Right now the cheerleaders are beyond shrill. Stocks can only go up from here. Indeed, records have been broken. But the whole rally thing is starting to look a little suspect.

Rupert Murdoch handily helped the Dow Jones Index push higher into record territory with his well timed bid for Dow Jones. Some insider traders reportedly also did very well. Surprisingly, the Rupert Murdoch owned New York Post published an article on how News Corp is run right in the middle of the bid. It painted an ugly picture, just in case the Bancroft family felt inclined to accept Rupert's very generous offer. (Well how about that?) I wonder if there are any insiders going short now. Particularly given the whispers that the kindly Mr. Murdoch, war monger extraordinaire, may in fact withdraw his offer? Well I guess we will never find out.

What we will find out right about now is just how much money which has been hitting the U.S. Stock Market is, in fact, purely speculative. Call it hot money. You buy because everyone else is buying and this will make you rich. The grandest delusion of them all.

OIL 65.11
GOLD 656.40

While the cheerleaders are going for ongoing global economic growth and the 'containment' of the U.S. economic slowdown, commodity markets appear less cheerful. Despite all the bullish calls out there, and we had near unanimity on this one, commodity prices are under pressure. So I guess in addition to inventing new ways to make money out of thin air (they call it liquidity) it seems someone has also found a new way to make commodities out of thin air TOO. In the face of really strong GLOBAL DEMAND the price of commodities is FALLING. There is a new paradigm in there somewhere. Just wait.

And the price of GOLD remains under pressure. This is good news because it means that everyone will have to stock up on USDs again and that will keep the U.S. economy afloat till the end of time. Which is planned, supposedly, for December 21 2012. So not that long. In the land of the permanently delusional this is a plausible scenario.

Trust Us, Everything is Under Control. Maybe

2007-05-14T13:40:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3554 Hi 1.3561 Low 1.3523
USD/JPY 120.32 Hi 120.41 Low 120.02
AUD/USD 0.8334 Hi 0.8354 Low 0.8311
EUR/JPY 163.05 Hi 163.17 Low 162.55

Economic news out in the States has been consistently bad recently. That's no surprise. The U.S. economy had been powering along since 2000 on a wave of Debt Financed Consumer Spending and Rising Residential Housing Prices. That bubble has popped. Now we get the fall out. Regardless, Ben Bernanke has been telling everyone that, bad economic news or no bad economic news, no rate cut is in the pipeline. That message hasn't been bothering the cheerleaders though. Every time we have some really terrible economic news the message goes out: don't worry the FED will cut soon.

Only no-one seems to have told the FED. Don't worry everything is under control just the same. The Bush Administration might not know what a Plan B looks like but the FED sure does. They just haven't told us what it is yet.

Not that the U.S. Treasury market is trading on trust right now. While Stocks bounced Friday, supposedly because the FED will cut because the economy is in trouble and inflation is under control, the U.S. Treasury market is obviously not buying into that idea. Even when inflationary risks appear diminished and the U.S. Consumer Driven Economy looks sick, out there in Treasury Land the buyers are staying away. Actually it's worse than that: as the economy weakens U.S. Treasuries are seeing selling pressure. Though you wouldn't know it from the newswires.

Headlines on the failure of the U.S. to attract new (foreign) capital into the U.S. Treasury market have been few and far between. It's a bit of a no-no issue. Like Karl Rove's 5 million missing e-mails. If you don't talk about it (the "issue") gradually goes away. Let's just hope the Japanese or the Saudis or someone with cash turns up for the next Quarterly Refunding. In the meantime let's not make too much of an issue about this. OK? Let's talk Stocks instead. Stocks look good. New records. Take overs. Mergers and Acquisitions. Stuff like that. Obviously everything is under control.

And the weaker USD is great news too. It makes the U.S. more competitive. Not that being competitive is a problem or anything. Everyone knows that the U.S. is more productive than everyone else anyway. It's just that the U.S. Trade Account doesn't fully express that productivity gap which is so obviously in favour of the United States. The U.S. Trade Deficit INCREASED in March. But that really was all about the price of OIL. Otherwise everything was just fine. Eventually this productivity will combine with the weaker USD and see the U.S. Trade Deficit shoot back into surplus. Though no-one is actually holding their breath and everyone knows that the U.S. can continue to run a Trade Deficit with the rest of the world indefinitely. We think.

Last week the USD seemed to be buying into the Ben Bernanke message: NO RATE CUT. But with a string of bad economic numbers and signs that the U.S. Consumer has just about thrown in the towel, the USD is under pressure again. Sentiment is overwhelmingly USD negative. Oh and JPY negative.

And this could be a problem. For a long time no-one in the U.S. was making rude noises about the Japanese Trade Surplus and the weak JPY. That is no longer the case. Over at Morgan Stanley, Stephen Roach suggests that the pressure which had been largely directed at China and the Chinese currency, is now also being directed at Japan. The U.S. now wants the USD/JPY to weaken along with the Chinese Yuan. So I guess they also want the Japanese to keep their money at home. How they think they will fund the U.S. Government Deficit is beyond me. But then joining the dots is not a U.S. strong point. For now the Carry Trade Crowd continues undaunted. This could get interesting.

But it gets worse. It would seem that productivity, which roughly translates to negative real wages growth, is not enough. Free trade is not enough and a weak USD is not enough. U.S. policy makers have decided that the game is stacked against them and the answer, apart from forcing currency appreciation on Japan and China, is to increase protectionist measures. This will be good for world economic growth. Not. Someone should tell the Stock Market bulls.

OIL 62.96
GOLD 675.40

Commodity markets are struggling with conflicting trends. Do we have growth or a growth recession? Do we have a strong USD or a weak USD? Is the Middle East about to blow up or is the new U.S. strategy to TALK to Iran? And if so why on earth are they sending in Dick Cheney? I mean Cheney?

Welcome to Plan B: making it up as you go along. Well I guess it's better than rigidly holding onto a failed plan. But only just.

Timing is Everything

2007-05-09T07:34:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3540 Hi 1.3554 Low 1.3534
USD/JPY 119.81 Hi 120.07 Low 119.66
AUD/USD 0.8288 Hi 0.8298 Low 0.8263
EUR/JPY 162.25 Hi 163.61 Low 162.06

Thursday the Bank of England is expected to raise rates. AGAIN. Obviously the move will be unpopular. Though the pundits and the apologists for Central Bank Independence will cheer. Inflation you see is the enemy and it can only be fought with Central Bank Independence. Yada, yada, yada. Still people with debts (that is everyone in the U.K.) won't be happy. Something must be done. No, they're not going to keep rates steady. What they need is a DISTRACTION. Right. So what can be done? Well how about this? How about Tony Blair announcing his exit plans Thursday? That should work. Tony the arch media manipulator is on the job.

The idea is simple: when unpleasant things happen get the coach potatoes out in Voter Land to focus on something else entirely. And that idea is based on the belief that the electorate is stupid. And it does seem to have worked as a strategy. Up to a point.

Tony Blair's track record is a series of failures: the reform of the National Health System, Railtrack, the reform of public education and, of course, Iraq, shoulder to shoulder and all that. And despite this string of failures, a revolving door of cabinet ministers, despite the draconian restrictions on civil liberties which have been introduced in Britain but which nevertheless failed to prevent terrorist attacks and despite widespread voter dissatisfaction, there is only one message out there: Tony Blair is the most successful Labour leader since WWII.

In the sense that he has managed to hang on to power for a long time. And in Politics these days that is all that matters. Success is not about achievement it is about to hanging on to power. First you say whatever you need to get elected and once elected you do exactly as you please provided you can hang on. And the key to hanging on is the media. So the only thing that matters post-election is controlling the message in the media. And Tony has proved an expert at staying "on message", SPIN and media timing. And HANGING ON. Mostly Tony has been very, very good at HANGING ON. But it's all starting to look a little tired. And Tony now has become a political liability for the Labour Party. New Labour is over. SPIN, unfortunately, is still with us.

Today we get to see how good Bernanke is at SPINNING the message. Rates are expected to remain unchanged in the States. So with nothing actually happening to RATES, the market will parse the FED statement for clues instead. Everyone now knows that U.S. economic growth is under strain and the market will be looking for some relief in the form of lower interest rates. Or at least the hint that rates will fall some time this year. The idea being that if rates go down the Consumer can go deeper into debt and start the party up again. But that party is over. There is a limit to how many times you can play this game. The 'game' has changed and the market doesn't seem to have worked that out yet. Eventually the new reality will have to be factored in. Weaker economic activity in the States is not necessarily going to lead to lower rates. As a debtor nation the United States must set monetary policy with one eye on the USD and another eye on international capital flows. Neither leave room for rate cuts. For now, the idea seems to be: let's pretend that nothing has changed. It can't last.

Weak U.S. economic activity has already started to hit home with Asian exporters. Toyota just announced the slowest profit growth forecast in 10 years as a result of weak U.S. demand. Expect more headlines like this going forward. The export-orientated model for economic growth has been adopted by the entire Asian region. And the model worked successfully provided that foreign markets for Asian products remained strong. Asia is no engine for growth. It is simply the "beneficiary" of excess U.S. demand. Demand which ironically it was also largely responsible for financing. Ultimately that is an unhealthy and unsustainable relationship.

Just as it will be near impossible to quarantine the impact of the slow down in the U.S. Housing Market on overall U.S. growth it will be near impossible to contain the impact of the U.S. economic slow down on world growth. Weaker economic times lie ahead. Thank increased international economic integration and trade for that.

The EURO correction is not over but the USD/JPY correction may just be starting. Everywhere there is a rush for the exits. Call it profit taking. No-one wants to be the last to leave the party. Especially when it's a speculative free-for-all.

OIL 62.25
GOLD 687.80

Everything is in limbo as the market waits for new news. We need to see what happens with rates this week and how the USD reacts before any break out can be expected on commodity markets.

Is it Shadenfreude?

2007-05-08T17:01:00.001+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3533 Hi 1.3622 Low 1.3514
USD/JPY 119.92 Hi 120.16 Low 119.52
AUD/USD 0.8273 Hi 0.8312 Low 0.8242
EUR/JPY 162.30 Hi 163.42 Low 161.89

Well France has replaced the Paternalistic Tall Guy with the Confrontational Short Guy. The Anglo-Saxon press is cheering. Could this be Schadenfreude? Finally the snobby and complacent French get to deal with a political reincarnation of Mrs. Thatcher. Stand by for Winter of Discontent Mark II. It's all been done before. All you need is bolshie Unions and a confrontational politician at the head of a right-wing Government. First the bolshie Unions strike and ensure the maximum discomfort out there in the general populace. Then the right-wing Government takes on the Unions with support from the très annoyed general populace. Then the Unions lose. A that point Corporates get to set the agenda which does not include better working conditions or better public services. But it takes a while. For now France is set for CONFRONTATION. Strikes are already under way.

Of course there is the added bonus that President Sarkozy will a) fall into line with the Foreign Policy of George W. and b) endorse the resuscitation of the European Constitution which the French voted down in 2005. So we are on track for a French Republic which ignores the wishes of the people. This could get interesting. As in violent. After all this is France.

Meanwhile across the Atlantic the Queen of England is visiting, which is a blessed relief for George. Now he gets to go to some garden parties and the only speeches he flubs are ones about history. And no-one expects him to get his history right anyway. So the heat is off. Mixed in with headlines about Iraq, Wolfowitz, Gonzales, the impeachment of Cheney etc. are lots of cheery sound bites about Her Majesty.

And the Stock Market is riding high. That old warmonger, Rupert Murdoch, helped spur the Dow Jones Index to yet another record close last week with his well-timed bid for, er, Dow Jones. So the situation is under control. Although there are challenges ahead.

Central Banks will be reporting in this week. In the U.S. there is a good chance that Bernanke will hold to his recent "anti-inflation" stance tomorrow. That won't be well received. Especially now that it has been confirmed that U.S. growth is slowing and that job growth is suffering. The "market" is still holding out for some relief from good old Bernanke in the way of rate cuts. There could be some disappointment. In the U.K. another rate hike is expected Thursday. Inflation, Central Bank independence and all that. At some point joining the Euro will start to look like the easy way out for the Brits. So expect the interest rate squeeze in Britain to continue. And we get to hear from our old friend, Trichet. No rate hike is expected in the EuroZone this week but we will all get a chance to interpret Mr. Trichet's "codes". "Extreme Vigilance" and a rate hike is a done deal for June.

Despite the rate hike outlook in the EuroZone, the Euro continues to struggle. All the good news is already "in" the market and slightly less exciting news has emerged. And that's without even taking into consideration the potential for social unrest in France. The nice safe trends: buying EURO against JPY and USD both look like they are in trouble with more to come.

But where it could get really interesting is in the USD/JPY. Which is holding valiantly but looking increasingly dented. No sign of panic. But USD/JPY has been the trend of trends for more than a year. When it turns, and it looks like that is happening now, it could do real damage.

OIL 61.50
GOLD 685.50

Commodity prices continue to struggle. All the good news is long gone and despite all the positive "analysis" the outlook for the global economy remains clouded. More downside is on it's way.

GOLD has been bouncing around a lot lately. But it hasn't broken to the upside. Neither has it broken to the downside. With the USD in recovery mode against the EURO and given the weakness in commodities generally, unless we have a break out in GEOPOLITICAL mayhem (always possible) or a significant fall in the USD index, the risks for GOLD for now remain to the downside. This is not a longer term trend, but it's a trend nevertheless.

Exhaustion Sets In

2007-05-02T12:05:00.000+02:00

For contact details and article archive by title see: fxtalks

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.

Digging In

2007-04-24T14:58:00.000+02:00

For contact details and article archive by title see: fxtalks

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.

USD Trouble Not Troubling Stock Market Bulls - For Now

2007-04-17T09:26:00.000+02:00

For contact details and article archive by title see: fxtalks

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.

Our Dear Leaders

2007-04-12T11:23:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3450 Hi 1.3480 Low 1.3427
USD/JPY 119.39 Hi 119.54 Low 119.21
AUD/USD 0.8251 Hi 0.8275 Low 0.8232
EUR/JPY 160.60 Hi 160.88 Low 160.26

There is an election campaign under way in France. There are three main candidates: an airhead, a proto-fascist and a guy who knows how to drive a tractor. Not surprisingly the guy who knows how to drive a tractor seems to have ambushed mainstream commentators by emerging as the "third" and unexpected candidate for the Presidency. Not that anyone is getting excited. Like everywhere else in the world, DEMOCRACY in France has been reduced to choosing the candidate who can reasonably expected to do the LEAST damage. No-one expects anything to actually improve. Particularly as political candidature seems to favour cynical, self-promoting individuals with no identifiable agenda EXCEPT self-glorification. The soulless cult of the LEGACY seeker is everywhere. And the electorate knows it, in a resigned kind of way.

Although being able to drive a tractor is seen as a hopeful sign that the man actually knows how to "do" something, voter enthusiasm is cautious. The Tractor Driver also supports "Europe". Europe as a "intellectual concept" that is. "Concepts" are big with politicians. These self-aggrandising fools seem to believe that their job is not to simply ADMINISTER the country but to get elected by selling an "IDEA". IDEAS are cheap. Everyone has one. The Tractor Driver seems to think that the "European Idea" is big with voters. He is wrong. The "European Idea" is only big with politicians who see bigger expensive accounts, less well defined constituencies and, of course, a larger stage on which to promote themselves. Voters see more taxes, a less accountable political body and trouble.

Regardless the politicians are trying to forge ahead with the "European Project". Soon even the European Constitution is likely to rise from the dead. Another unstoppable monster.

Voters simply want COMPETENT ADMINISTRATION and none is on offer. So in France as elsewhere everyone is mildly depressed.

Not that this particular mood is likely to diminish the certainties of one Monsieur Trichet, who is scheduled to "talk" today. Trichet is is expected to explain why more rate hikes in the EuroZone are necessary. It will be the same old blather about M-3 and how he knows why rates must rise and doesn't have to explain himself.

So what if the U.S. economy is slowing? Even the IMF has worked that one out. Though, of course, they are not worried. (What us worry? Never.) So what if the EURO just hit a record against the USD? So what if an economic slow down in the U.S. together with a further fall in the USD will feed directly into an economic slow down in Asia via reduced demand for Asian Exports? So what if that all adds up to a rather substantial global slow down. Nope, we have our M-3 data and this means rates must rise. And if that puts at risk economic growth in the EuroZone, then so be it. Economic growth is not part of the ECB's mandate.

What Trichet is really looking to do is secure his LEGACY. Perhaps he has a future in politics? Yes, the Central Banker with the mostest wants to have the strongest currency. What a LEGACY. Quelle Grandeur. When did simple competency go out of fashion?

Meanwhile back on the farm the FEDERAL RESERVE scared everyone by suggesting that more rate hikes may be necessary. Even as economic conditions are worsening. And, even the IMF concedes that economic conditions in the States are worsening. This is bad news for Stock Market bulls and doesn't seem to have done much for Treasuries either. Oh, and did I mention that there has been no real reprieve for the USD? The USD/JPY is holding, thanks to positive interest rate differentials and lots and lots of speculators, but real capital inflows into the United States are not expected to start rising any time soon. Further USD downside is on its way.

Don't watch Baghdad watch the States. The mood is explosive. Except on Fox News, which everyone knows is fair and balanced and therefore completely irrelevant. George W. is sinking, Cheney is a hate magnet, Rudolph Giuliani is starting to look like a chump and no-one seems to be thrilled by what the Democrats have "achieved" thus far. The politicians are counting on voter complacency. That complacency seems to be turning to anger.

As economic conditions deteriorate in the States and rates continue to rise across the yield curve the mood of the U.S. electorate is unlikely to improve. A rate hike by the FED would be the icing on the cake. None of this can be good news for U.S. financial markets. And that's without considering that the U.S. is engaged in a WAR OF CHOICE with Iraq and Afghanistan and seems poised on the brink of a confrontation with Iran. Oh and there seems to be this little problem about starting a new COLD WAR with Russia. A trade war with China looks possible. Ah, the joys of incompetent leadership. While no-one in Europe is particularly happy with "Our Dear Leaders", the incompetence on offer in Washington is just breathtaking.

How long before this extraordinary level of incompetence leads to an all-out debacle on U.S. financial markets? No idea. But not that long.

OIL 62.34
GOLD 683.50

No new news.

Competitive Devalutation Anyone?

2007-04-10T15:06:00.000+02:00

For contact details and article archive by title see: fxtalks

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.

Spin and Lies

2007-04-06T12:08:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3417 Hi 1.3435 Low 1.3410
USD/JPY 117.75 Hi 118.93 Low 118.65
AUD/USD 0.8185 Hi 0.8205 Low 0.8181
EUR/JPY 159.33 Hi 159.55 Low 159.24

One of Tony Blair's great talents for which, no doubt, he will be remembered is: lying. Tony lies with passionate conviction. And he's at it again. Today the line is:

"our forces are there specifically at the request of the Iraqi government and with the full authority of the United Nations"

Notice he does not mention the "Iraqi people", who are merely incidental. And only Lancet is counting the Iraqi casualties anyway: current estimate of Iraqi WAR DEAD: 650,000. How many maimed? No-one knows.

No, Tony Blair prefers to suggest that the puppet regime installed by the Anglo-Americans has given its authority for the Anglo-American invasion and occupation of IRAQ. Which is an interesting way to put it. Of course this puppet regime wasn't even "in Government" (if you wish to call it that) prior to the invasion. Makes sense really. How could they have been? I mean FIRST you invade THEN you install the puppet regime and then you retroactively LEGITIMIZE the whole charade by telling everyone that THE Government, your Government, gives you the authority to be there. INDEFINITELY. See. It's easy. It's called SPIN. But it's a misrepresentation of the truth just the same. So let's call it what it really is: lying.

He's been a bit "clever" with the"specifically at the request" rubbish. But the next bit, the bit about the "full authority of the United Nations" is a bald-faced lie. An open bald-faced lie. The United Nations NEVER authorised the attack on Iraq by the laughably named "Coalition of the Willing", also sometimes referred to as the Coalition of the Billing, which was comprised mostly of Failed States, Hangers-On, Political Opportunists and those hoping to GAIN something. This sorry Coalition keeps losing members as country after country heads for the exits. George W. though has NO intention of withdrawing troops. EVER. Not that his children or JEB's children or any of the Bush children will ever see active duty, of course. So what's the risk for these guys? Their legacy. Which means they have NOTHING at stake.

Of course if the Anglo-American invasion was illegal , which is was, that makes Tony Blair, George Bush and Dick Cheney WAR CRIMINALS.

Tony Blair is a lawyer. He knows all this. So Tony doesn't want to go there. And he certainly doesn't want the British media or anyone else to go there. So he's sticking with the lies and SPIN. Which, as noted, he is rather good at.

And today he's suggesting that the current mayhem in IRAQ is really the work of (guess who?) the Iranians. But of course. Yes those untrustworthy, lying Iranians have been creeping across the Iraqi-Iranian border and killing, oh, 650,000 IRAQIS with their BOMBS. They like to call it: "Shock and Awe". I mean please.

Yesterday FOUR British soldiers were killed in Iraq. No-one knows how many IRAQIS were killed. We know only that it was more than FOUR. No matter. Lying Tony has this to say about the recent British deaths:

"Now it is far too early to say the particular terrorist act that killed our forces was an act committed by terrorists who were backed by any elements of the Iranian regime, so I make no allegation in respect of that particular incident.

But the general picture, as I said before, is that there are elements, at least, of the Iranian regime that are backing, financing, arming, supporting terrorism in Iraq"

Those sneaky IRANIANS. First they bombed IRAQ, causing catastrophic damage to the infrastructure, power lines, water supply. Then they invaded, dismissed the Iraqi Army and Police Force, allowed and perhaps encouraged chaos and civil war and are now occupying the country with 150,000 or so Troops and another 150,000 MERCENARIES. 650,000 Iraqis have died and millions are now refugees. And so devious are they that they are passing all this off as the work of the Anglo-American forces. Clever. Too clever. And now they have released British sailors so we can't go ahead with the bombing campaign which we had planned. Or maybe we can. Isn't there some semi-plausible excuse we can use? Well I mean if you sift around and are prepared to lie and exaggerate and SPIN it can't be that hard. Can it?

Tony, of course, is looking for a new excuse to attack Iran before the British Public gets truly fed up and attacks him. He has a timeline to work with. He's supposed to be stepping down some time in the next two months. An attack on Iran was supposedly pencilled in for April. And if his rhetoric is anything to go by then the attack on Iran has merely been postponed by the recent release of the British sailors.

No sign of concerns on financial markets. In fact, global Stock Markets continue to rise despite tighter monetary policy conditions and concerns about slowing growth. The assumption seems to be that Mergers and Acquisitions will keep stocks risings in the face of some fairly fearsome headwinds. GEOPOLITICS is not even on the radar.

OIL 64.11
GOLD 679.40

The only market which seems to have factored in GEOPOLITICAL risk is GOLD. And if the war mongering rhetoric of Tony Blair is anything to go by then something is afoot.

Tony Says Thanks

2007-04-05T14:08:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3374 Hi 1.3387 Low 1.3353
USD/JPY 118.88 Hi 118.93 Low 118.48
AUD/USD 0.8183 Hi 0.8214 Low 0.8163
EUR/JPY 158.98 Hi 159.04 Low 158.38

"Fascism should more properly be called corporatism because it is the merger of state and corporate power": Benito Mussolini. And, in case you're wondering, he would know because Mussolini was the father of modern Fascism.
---
When Kermit Roosevelt published his book "Countercoup" in 1979, which detailed the role of the CIA in the 1953 Iranian Coup, British Petroleum went out and bought every copy. The guys at British Petroleum were concerned that their role in the 1953 overthrow of the legitimately elected and sovereign Government of Iran would make them look bad. Well yes this sort of thing does tend to leave a stench. Kermit's little CIA coup helped install a brutal regime in Iran, allowed the Western Oil Corporations a free hand in the country and ultimately lay the ground for the Iranian Revolution of 1979 which removed the Shah and saw foreign OIL corporations ejected from the country. In 1979 Iran was returned to the Iranians. Western Corporate Oil executives were not happy.

Not that the British and the Americans have ever really given up hope of running the country for their own profit. The Americans and the British sponsored Saddam Hussein and his war on Iran. The Iran-Iraq War lasted years and cost millions of lives and still the British and the Americans got no closer to taking over the country, with or without a convenient Fascist Dictator in situ. Nope.

The U.S.A. has had an embargo against Iran since 1979 and that embargo became total in 1995. Now, with a little help from the Iranian nuclear programme, that embargo has been extended and strengthened. These guys, our guys, just don't give up. And their ultimate aim is clear: the British and the Americans want to get their CORPORATIONS back in charge of Iranian Oil production. And if WAR is the price to pay, then so be it.

Reportedly at the behest of "Western Governments", Iranians officials have recently been kidnapped and/or killed both abroad and in Iran itself. There are whispers of U.S. covert operations within Iran aimed at undermining the Government. The details are tediously similar to all the other CIA run covert operations and the aim is the same: to install a puppet regime favourable to the "West" or at least to Western Corporations. After all if they can do that in Nicaragua to protect the interests of an American Banana Plantation owner they can do it in Iran to promote the interests of Western Oil Corporations.

But enough of history. Yesterday the Iranian Prime Minister released 15 British sailors who may or may not have violated Iranian waters. Of course no one questions the right of the British Navy to be in those waters. After all when you attack a sovereign nation in order to disarm it, remove a dictator who you previously armed and funded, and bring freedom to the people, then obviously you need to make sure that your achievements are protected. The British are in Iranian/Iraqi waters to make sure that nobody steals that newly conferred Iraqi democracy. Ha. Ha.

And so we have the British a long way from home and very close to Iranian territorial waters checking for terrorists. Of course. And then they get taken into custody by the Iranians. Iran asks for an apology. None is given. The Saudis reportedly warn the Iranians that the Anglo-Americans really are as crazy as everyone suspects, the Russians warn that the Anglo-Americans are planning an attack on Iran for Friday the 6th of April. And the Iranians only need to look across their border to Iraq to know that all the Anglo-Americans need is a tiny little pretext.

So they release the sailors.

Everyone, except Tony Blair and George Bush, is happy.

But there are still problems. Right now the world is not happy with George and Tony's foreign policy. And, increasingly, neither are the U.S. and British public. Questions about the Iraqi War won't go away. Questions about who was really behind 9/11 won't go away. And, despite a concerted attempt by the Democrats to STALL, the grass-roots movement to IMPEACH President Bush is not going away. In fact the voices get louder. Yesterday Karl Rove got stoned. As in: attacked by people throwing stones. How bad can this get? Well George W. and Cheney aren't going to start winning any popularity contests any time soon. McCain might be able to walk around Baghdad but George W. and Dick Cheney should never go out anywhere in the U.S. without their huge security contingent. Of course, they don't.

Tony and George need help. They need another big conflict, another war, or even just another really big terror attack on either U.S. or British soil. They need to prove that FORCE is necessary. They need to prove that the THREAT is real and that it is FOREIGN. Right now no-one believes any of that. Except maybe at Fox News. Without another "event" there is a chance that Tony and George will end up at "The Hague". Which makes both of them pretty desperate right now. It also makes them pretty dangerous. And they weren't exactly "safe" before.

So the much publicised arrest of the British sailors was a bonus. For Tony and George's WAR PLANS. But then the Iranian released the British. Tony is not happy. Hence no gracious thank-yous to the Iranian Government. Back to the drawing board Tony.

But back to the markets. U.S. Stocks rallied a little after the release of the British sailors. The idea that another WAR could kick off was depressing market sentiment. But the rally wasn't much to get excited about. Tomorrow we have Non-Farm Payroll data and now Bloomberg is touting the idea that the U.S. economic expansion is being "sustained" by U.S. Jobs Growth. Well it certainly isn't WAGES growth. And there is no room for an expansion in Household Debt. So I guess Jobs Growth will have to do. The market is expecting a rise of 135,000 in Payrolls and an unemployment rate steady at 4.6%. The number is statistically insignificant, it tells us very little about the state of the U.S. economy and should properly be ignored. It won't be.

U.S. Treasuries are still in the dog box. And yields are expected to rise further. Foreign buying of U.S. debt is likely to be limited as long as the "crazies" run policy. And the USD/JPY has gained a little. Some pundits suggest that the CARRY TRADE is back. Well it might be. But I wouldn't bet on it. The AUD/USD is going through the roof, with or without an RBA rate hike. And the AUSSIE is always a good leading indicator for the USD: when the AUD rallies the USD comes under pressure.

OIL 64.07
GOLD 678.50

The end of the Iranian stand-off has seen OIL soften a little but GOLD bulls are roaring. Which is bizarre unless the Russians are right and a U.S. attack on Iran will be launched on schedule on April 6th 2007.

Spoiling for a Fight: Pick Your Weapons

2007-03-28T12:24:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3332 Hi 1.3372 Low 1.3324
USD/JPY 117.26 Hi 118.02 Low 117.08
AUD/USD 0.8092 Hi 0.8111 Low 0.8038
EUR/JPY 156.37 Hi 157.60 Low 156.33

The Anglo-Americans are bristling with guns and weapons of every type. They have spent decades and trillions of dollars developing all kinds of new and exciting ways to kill people and/or render large parts of the globe uninhabitable. Their arsenals are full and the propaganda machine is cranking up the rhetoric. Weapons are their strong point and it's all systems go. All they need is an EXCUSE.

Blair and his buddy Bush may have to be slightly more careful with their EXCUSES this time 'round, seen as how no weapons of mass destruction were actually found in Iraq. Not that George W. is dwelling on that inconvenient fact. And since the invasion Iraq country is now very obviously not a Democracy. More a dystopian nightmare of epic proportions. A nightmare which the American propaganda machine is now blaming on who? Why the Iraqis themselves. Of course. But the psychotic "neo-cons" have another country in their sights now: IRAN. They always did. No-one can really remember why Iran has been subject to an embargo by the United States for more than a quarter of a century. Except that the CIA doesn't take well to countries who opt for self-determination over CIA stooges. After all not even the Americans really have self-determination.

Now it doesn't really matter. Now we have the NUCLEAR issue. And the guy in the Trainspotter outfit in Tehran is playing along. After all his mandate back home is about as popular as George W.'s mandate is in the States. That is: it's not. A war would be just the trick. Take the heat off his terrible economic management and focus everyone's attention on fighting the FOREIGN enemy. So, unfortunately, these two pitiful "leaders" have common cause. Which makes a military conflict probable.

And who better to help get it started than Phoney Tony?? Right on time.

So let's get the battle going. We have the guns. We have the grunts. We have the media in our back pocket.

The only problem being that this war is unlikely to be settled on the battlefield. The world sits and waits and watches in disbelief as the Anglo-American forces systematically lay waste to Iraq and Afghanistan. And everyone except the Anglo-Americans know what happens next. While the U.S. Congress panders to U.S. public opinion and debates meaningless dates for withdrawing (combat) troops from Iraq and perhaps, maybe, in very small print suggests that funds for more war may be withdrawn. The rest of the world is waiting to pull the pin on the whole shebang. Washington can shift around its resources as much as it wants. The real money is not in Washington.

More than 60 years ago Mao-Tse Tung called the U.S. a Paper Tiger. Mao, incidentally was the guy who finally kicked the Foreign Devils out of China, after near on three centuries of Western mayhem inside the Middle Kingdom. Mayhem which included fighting wars to force the Chinese to buy Opium. So same old, same old. And now the Chinese are sitting on USD 1 trillion of Foreign Reserves, the Japanese, who the Americans kindly used to experiment their nuclear technology in the closing days of WWII, reportedly hold USD 800 billion worth of U.S. Treasuries. I forget how large the Russian Foreign Reserves are. Needless to say they are large. And now even the Saudis are cancelling State visits. Not like the Saudis really.

And Russia has been issuing very public warnings about unilateral action by the U.S., in the Financial Times and elsewhere, all apparently ignored.

Obviously the Anglo-Americans expect the confrontation to come to some kind of military climax. Putin would have to be retarded to try that. And I don't think retarded is a good description. Although it certainly fits the American "neo-cons" like a glove.

So when the opening shot is fired don't expect any USD safe-haven buying. There won't be any. Expect large and concerted USD selling. Only a fool would go to battle with the weapons of choice of "the enemy". This won't be about who has the biggest arsenal this will be about who has the MOST MONEY. And we all know that the U.S. is broke. Well everyone outside of the United States does anyhow. Welcome to Paper Tiger: round two. For some people it could be quite an education.

So far USD selling has been gentlemanly in its restraint. That is unlikely to last. And when the gloves come off and the USD selling accelerates, like it will, the U.S. Treasury market and the U.S. Stock Market won't be safe either. So as the rhetoric from the Anglo-Americans becomes increasingly aggressive watch the USD take a hit. Think big. Because the stakes are high and this time it seems the Americans need to a learn a lesson. I wonder if Putin plays chess? I would guess so.

And as the real FUNDING is withdrawn economic conditions in the U.S. are likely to get considerably worse. How long before we have rioting in the streets? You might think that worsening economic conditions are driving the USD lower. You might be very much mistaken on that account. It's the other way 'round.

OIL 64.11
GOLD 672.00

The Anglo-Iranian stand-off is getting the OIL bulls excited. A little. More upside is possible, particularly in USD terms. But the real action, of course, will be in the GOLD market. It's going higher. A lot higher. The scramble to exit the USD has only just begun.

Don't Worry Be Happy

2007-03-27T15:20:00.000+02:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3333 Hi 1.3356 Low 1.3320
USD/JPY 118.21 Hi 118.42 Low 117.85
AUD/USD 0.8085 Hi 0.8111 Low 0.8064
EUR/JPY 157.63 Hi 158.04 Low 157.17

Right now the Happy-Clappy crowd is happy because the YIELD CURVE in the U.S. has (maybe) turned POSITIVE. That is short term rates are now lower than longer term rates, depending on which bit of the curve you look at. Because no-one really knows what is going on with monetary policy in the States, the YIELD CURVE is all over the place. Still the 10 year yield (4.61%)is now lower than the 30 year yield (4.82%)and the 2 year yield (4.59%) is lower than the 10 year yield. Regardless of all that, the FED FUNDS rate at 5.25 is higher than the entire curve. So while bits of the yield curve are positive, the short end is still NEGATIVE. The idea that the Happy-Clappy crowd is running with is that the FED is behind THE CURVE. That is: the FED will eventually be forced to cut interest rates as economic conditions worsen. And IF the YIELD CURVE is a good leading indicator of the economic activity then the now partially Positive Yield Curve must mean things are looking up. That is the kind of reasoning you would expect from the Happy-Clappy crowd.

Except U.S. Statistics suggest that "things" aren't looking up at all. The Housing Market, that huge PONZI SCHEME which is in the process of collapsing, still looks ugly. Housing numbers released yesterday were bad and today saw the release of the Home Price Index which confirmed what we already know: there is no reason to be optimistic about the Residential Housing Market in the U.S. for, oh, let's say the next five years or so. For the Happy-Clappy crowd that is not a problem. The FED will ride in to the rescue, CUT RATES, and everything will be fine again.

Only the FED doesn't seem to see it that way. Nobody at the FED is talking RATE CUTS, everyone is talking INFLATIONARY RISKS, and the pundits aren't listening.

And while we are at it the rise in YIELDS, which has led to the change in the shape of the YIELD CURVE, is not necessarily something to be gleeful about. What you have is worsening domestic economic conditions and yields which continue to rise. Support for the U.S. Treasury market seems to have diminished. Which is not surprising given the Fiscal Record of the George W. Administration. Why this is anything but unmitigated bad news is beyond me. However, those looking for good news and comfortable with straight-line correlations and very simple ideas are going with what they have. And the (sort-of) POSITIVE YIELD CURVE is the best they can come up with right now.

Meanwhile back at the farm the USD is struggling. It is (just) managing to hold it's head above 118.00 versus the YEN but seems to be sinking against the EURO. Although the Happy-Clappy crowd are sure that the sell-off in U.S. Treasuries will see international capital come pouring back into the U.S., such optimism is PREMATURE. Wise investors avoid a market on the slide. And it's way too early to say that U.S. Treasuries have bottomed out. The FED is not riding to the rescue of the domestic economy and foreign investors are not lined up ready to rush into the U.S. Treasury market as it slowly but steadily crumbles.

The outlook for the USD is grim. Eventually the Happy-Clappy crowd will seize on this phenomenon as good news because it means that the U.S. is becoming more internationally competitive. In the way that Mexico became more internationally competitive. It's the way you become internationally competitive by FIRST becoming really poor. Painful, but the IMF and the World Bank are keen on it. So maybe that is the game plan. It's what you do when you have run out of options.

OIL 62.67
GOLD 663.30

The posturing surrounding the Iranian seizure of 15 British Marines has given the price of OIL a little fillip. The OIL corporations and the SAUDIS must be happy. But fears of recession in the U.S. are keeping a lid on things. Not that the war mongers have given up. There is still a chance for a serious new conflict in the Middle East. Wasn't the plan for a break out in hostilities (ie. an attack on Iran) for April?? In this surreal atmosphere we sit and wait. And so do the markets.

The USD: Not Waving, Drowning

2007-03-22T11:03:00.001+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3358 Hi 1.3414 Low 1.3343
USD/JPY 117.79 Hi 117.95 Low 117.22
AUD/USD 0.8074 Hi 0.8092 Low 0.8055
EUR/JPY 157.39 Hi 157.55 Low 156.82

In these circumstances, the Committee's PREDOMINANT policy concern remains the risk that inflation will fail to moderate as expected.

And that, Ladies and Gentlemen, is an admission that monetary policy settings in the U.S. are no longer going to be dictated by DOMESTIC economic conditions. The PREDOMINANT concern is placating offshore investors in an attempt to keep the USD stable (a rally is out of the question given current circumstances). Such is the way of debtor nations everywhere. Of course, that doesn't fit will the idea that most Americans have of themselves and their economy. No, they still think of themselves as free and independent. A beacon for democracy even. But in the real world of Dollars and Cents, the U.S. is up to its neck in debt and can't afford to see foreign investors stampede for the exits.

Of course, George W.'s expert economic management and incredibly popular foreign policy, not to mention the U.S.'s unmet ambitions for yet more military conquest, has caused a certain amount of disquiet overseas. Where, sadly, most of the people who provide the cash to keep the show on the road reside. The risk to the USD is real, it's growing and the FED knows that.

So when the FED talks of inflation read IMPORTED INFLATION, because that's what they mean. With the Household Sector sinking under a mountain of debt, falling residential property prices, rising domestic interest rates and wages which are going exactly NOWHERE, there is little or no domestically generated inflation in the U.S. right now. I mean where would DOMESTIC inflation come from in that environment?

Inflation in the U.S., such as there is, is being generated as a result of the rising cost of IMPORTS. And the price of imports is rising because the USD is performing badly. And the outlook for the USD is worse still. IMPORTED INFLATION is the big CONCERN. If the USD sinks further, which it will, then rates will have to rise and the Residential Housing Market and the U.S. Consumer will have to fend for themselves. In a dog eat dog world, such as the U.S., that can hardly be a surprise.

It would appear that Helicopter Ben has suddenly discovered the EXTERNAL SECTOR. Bravo Ben. Not before time either, given that the U.S. now relies on foreign finance for near on 7% of its current GDP growth. Without that FOREIGN finance you have a RECESSION. And if you know how to subtract it's easy to work out it would be a biggie.

The U.S. Stock Market is still running with the idea that if economic conditions get any worse then the FED will ease monetary policy. That is, since EVERYONE expects economic conditions to worsen the Stock Market thinks a RATE CUT is coming. And, what's more they think a RATE CUT will fix everything. So they are buying STOCKS. These guys are still living in an era where the U.S. ran the world and what they didn't run they bombed. So even while the FED is telling everyone that, gee whizz, yes we have noticed that the Housing Market is in trouble, that the Household Sector is in trouble and that it's all likely to get considerably worse in coming months, they are also telling anyone who will listen that that's just TOO BAD. Sorry, but we have to try and keep (IMPORTED) Inflation under control. That is our PREDOMINANT concern. The economy, well hey, we're sorry about that.

While the Stock Market lives in the 1950s, foreign investors don't seem convinced. Just look what happened to Treasuries following the FED statement. No rally and today we have a sell off. So it seems that U.S. economic slowdown or no economic slowdown, no-one is rushing to buy Treasuries. With Foreign Investors holding more than half of the U.S. Treasuries already on issue there doesn't seem to be a queue forming to buy more. Why is that I wonder? Oh yeah, the USD. Ooops. That pesky little detail that those darn foreigners don't use USDs back home where they come from. Can't we do something about that? Invade or something? Oh yeah, I forgot, we don't have the money for more invasions. We don't even have the money for current invasions. Darn.

So how long before the USD/JPY breaks below 117.00? Oh, I'd give it a week or so. At the most. The EUR/USD is also back on the upward trajectory. And European Industry is not happy. The Banque of France is not happy. Chirac is not happy. No-one is happy. Regardless, Trichet keeps blattering on about M-3 and how rates HAVE to rise. More. On his say so. The ECB may as well kiss independence goodbye right now. It's called arrogant overreach and when you get there, eventually, they get you. Wheels have been set in motion. Suddenly people in the EuroZone are not so keen on Central Bank Independence. Sub 2% inflation seems like an arbitrary number of no consequence and certainly not something to AIM for to the exclusion of all else. Knives are being sharpened.

But in the short term all this ECB Hawkishness, inspired by Trichet's bizarre imitation of that failed institution, the Bundesbank, is not helping the USD. What do we have? Oh yeah: rate rises in Japan, rate rises in China, rate rise in the EuroZone, monetary tightening in the U.K., in Australia, New Zealand. Anywhere easing right now? All that excess liquidity. Poof. Gone. Bad news for economies which are built on debt. Bad news for the BUCK.

OIL 60.50
GOLD 664.70

As the USD takes another kick in the head, GOLD is rallying again. It's not over yet. This has only really just begun. Want to know how far how fast? Watch the DOLLAR.

Getting the Hell out of Dodge

2007-03-20T08:55:00.001+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3300 Hi 1.3316 Low 1.3272
USD/JPY 117.19 Hi 118.06 Low 117.04
AUD/USD 0.8000 Hi 0.8035 Low 0.7962
EUR/JPY 155.87 Hi 156.99 Low 155.59

All you really need to do is follow the money. George W. and all his buddies are lining up telling everyone that the U.S. is never leaving Baghdad. And maybe they aren't. And maybe they will start another conflict with Iran. This time with bigger and better missiles. But that doesn't mean they don't know they are in trouble. All you have to do is follow the money.

Halliburton, Dick Cheney's old hunting ground, is getting out of Dodge. And fast. Suddenly one of the principal beneficiaries of the Iraqi Invasion is leaving the United States and setting up in Dubai. You can listen to Bush all you want. The truth is: they are in big trouble. When the only thing that counts is money and plunder, and for these guys that is all that counts, then following the money is the only game in town.

And what exactly is the problem? Has Middle America suddenly discovered that the Iraqi Invasion was illegal and immoral? I wouldn't count on it. The American media bleats on about the 3,000 or so U.S. Troops who have died during the American WAR OF CHOICE but there is almost no coverage about the 650,000 Iraqi casualties, about the devastation of Iraqi towns and Iraqi infrastructure and the U.S. is certainly not welcoming the 2 million Iraqis made homeless by George W.'s destructive little foray into GEOPOLITICS. Middle America still can't find Iraq on a map and they certainly haven't discovered that Iraqis have rights.

Nope the problem lies elsewhere. George H.W. Bush (the man is an endless source of inspiration) once reportedly remarked that: "The American People" are "The BUD People, The Broke Useless and Depressed. We are the MPBs, Money, Power and Brains. As long as we keep food on the BUDSTERS tables, a roof over their heads, a car in their driveway and gas in their gas tanks to go to and from work. We can keep the BUDSTERS at bay." So much for the "vision thing".

And that is the real problem. The Average Joe in the USA doesn't think there is anything even slightly wrong with using America's big guns, and all the other fun toys they spend endless time and resources developing, to go steal other people's resources. Or to invade sovereign nations. That's just what the U.S. does. So long as the U.S. wins, gets the plunder and manages to shout down the United Nations, the European Union and anyone else who dares get in their way. The assumption, of course, is that the use of FORCE is not only a feasible policy option it is the U.S. preferred foreign policy option. Just so long as the lifestyle of the Mr. Joe Average is not adversely impacted. And that's where the real problem is right now. And it's a biggie.

The lifestyle of Mr. Joe Average is not being just adversely impacted but economic prospects for Middle America look grim. It's all very well if the Sub-Prime Mortgage Market should disappear down a black hole, after all the Sub-Prime Market only really involves minorities, but should CONTAGION start to be a problem, and it's hard to see how it won't, then Mr. Joe Average is going to get mad and he's going to start looking for someone to blame. And the billions of dollars wasted on the Invasion of Iraq and the Invasion of Afghanistan, which have provided NO DISCERNIBLE benefit to Mr. and Mrs. Average, are likely to be a good starting point for the BLAME GAME. A lot of those billions went right into the pockets of Halliburton and other war profiteers. So they're leaving town while the going is good. Or at least before the impact of the economic plunder which has taken place under George W. becomes obvious.

The good news is that the BoJ didn't hike today. On the back of that fairly unimpressive piece of good news (well that the best there is at the moment) the USD/JPY managed to rally all the way back up to 118.00 in European trading. But it didn't stay there very long. And even if the FED indicates that NO RATE CUT is coming (none is) that still won't do all that much for the USD/JPY. What happened when Cheney went to Japan is significant. The Japanese met him with due courtesy and then dismissed his visit as a big non-issue in their press. The USD/JPY has been under pressure ever since.

USD/JPY is going lower. The Carry Trade is being closed all over town. Hedge Funds are in trouble. We just don't know which ones yet. The USD/JPY is headed back to the recent 2007 low and there is no real reason for it to stop there.

Other U.S. Financial Markets will struggle as the USD comes under further pressure. But the main game, for now, remains the USD/JPY and the unwinding of one of the bigger speculative bubbles of the past few years. Easy come, easy go. No point picking bottoms quite yet.

OIL 56.62
GOLD 660.20

GOLD is seeing more strength as everyone scrambles for an alternative to the USD. Onwards and upwards while the price of OIL languishes as the entire world reassesses global economic outlook. That is as the markets try and figure out what a U.S. Recession is likely to do for the price of OIL. All up, no news on either market.

Attack of the Pinheads

2007-03-15T10:33:00.000+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.32O7 Hi 1.3237 Low 1.3192
USD/JPY 117.20 Hi 117.61 Low 116.99
AUD/USD 0.7883 Hi 0.7889 Low 0.7847
EUR/JPY 154.80 Hi 155.55 Low 154.69

Well there the word has gone out: there is no problem. And the pinheads are on the attack and the message is: there is no problem. The Sub-Prime Market meltdown is not a problem. The collapse of the Residential Housing Market in the United States is not a problem. The unwinding of the Carry Trade is not a problem. And in any case where is the proof that the Carry Trade is even being unwound? I mean apart from the fact that the USD/JPY just fell off a cliff. And there are still consumers out there. Of course. And everything is just fine and dandy. George W. is in the White House. Now there is a trustworthy, honest, COMPETENT individual with a fine track record of achievement. Well actually no, but he stonewalls so well, doesn't he? That skill has to come in useful at some point. Surely.

Two of my favourite little stories during this past week of sorry financial market performance come from two impeccable institutions with no track record for publishing misleading information: Bloomberg, the Republican newswire, and the Financial Times. Now I don't know what's up with the Financial Times but the political agenda is unmistakeable.

The talking pinhead on Bloomberg this week opined that because people lined up for a shop opening where free sunglasses were on offer this proves DEMAND is still strong. Ipso facto the economy is not a problem. I like it. In the first place these people in Hong Kong were lining up for "free" sunglasses and in the second place in a consumer culture, such as the one we live in today, "spending" is never a problem. The problem is having the money or credit to finance the "spending". As every economist knows DEMAND is potentially infinite. But that doesn't make the wheels of commerce turn. There have been millions of people in India and China for decades, nay centuries, and no-one ever got excited about it.

Without the means to finance consumption all that Indian and Chinese DEMAND doesn't add up to a hill of beans. Still this particular pinhead was pushing the line that, of course, there is no problem. We still have people willing to spend. Yeah right.

But my particular favourite was the large article which appeared on Page 3 of the Financial Times on March 8. The point of the article was to convince everyone that the Japanese were destined to send their savings abroad for higher returns. This as a kind of inevitable truth, dependent of course on the fact that interest rates in Japan are so miserably low. To illustrate this questionable point Pilling and Turner came up with the example of Mr. Tomio Nakayama who "About three years ago... put about Y2m into an Australian dollar bank account. Yen accounts at the time were offering a pitiful 0.01 per cent interest rate, making the rate for Australia dollars, then 12 percent, spectacularly attractive." I think the world needs to find out who this Mr. Nakayama person is. Not because of his financial market expertise. No, it's much bigger than that. Mr. Nakayama seems to have found the key to time travel. Bank rates in Australia haven't been 12% since, oh, somewhere in the early 1990s. Simple fact checking would be good. Still the bottom line for the article: the unwinding of the YEN Carry Trade is not a problem.

What are these guys hoping to achieve? It's not like pensioners in Japan are going to suddenly send even more money abroad to support the creaking edifice of Anglo-Saxon capitalism. And even if these guys could convince every speculator on the planet to buy USDs that would only be a short-term palliative solution.

The real trouble is that there is not a single Anglo-Saxon country on the planet which is not dependent on large, ongoing injections of foreign capital. Without those capital inflows their economies are at risk. They have no domestic savings to speak off, their households are in debt and none of them even remember the last time they saw a Trade Surplus. Starting with New Zealand, which has a current account deficit of epic proportions, through the U.K. to, the biggie, the United States, every single Anglo-Saxon economy is dependent on foreign capital inflows.

And the REALLY BIG PROBLEM is that, now that it has become clear that the United States is led by people who appear to be completely unhinged from reality, the enthusiasm of foreign investors for yet more USD denominated debt has whithered a little. No a lot actually. The Japanese were the largest sellers of U.S. Treasuries last year. China just announced that in addition to diversification of its Foreign Exchange Reserves (read its intention to sell USD) it also intends to hold hard assets: read strategic assets. They won't need USDs for that.

So the USD is still in trouble. We have had our little NFP bounce. And now we can get back to basics. And the basics are bad. In addition, it now appears that the plans for an attack on Iran have moved along a little. Oh the joy, the joy.

This week Rep. Pelosi and the democratic leadership decided to pull language from the Supplemental Appropriations bill which stated that no funds may be authorized for military operations in or related to Iran unless specifically authorized by the Congress. So if you thought voting DEMOCRAT was the answer, it's time to think again. The U.S. might not have the money but they're not giving up their war plans.

OIL 58.58
GOLD 647.50

The prospect of global economic recession, led of course by the United States, has taken the zing out of the OIL price. What these corporate OIL guys really need is another war in the Middle East. That would get the price of OIL out of the doldrums. Don't worry they are working on it.

And GOLD is in a holding pattern. Ultimately GOLD will outperform, largely as a measure of the total lack of confidence in Central Banks and Governments. This is an entirely rational, explainable lack of confidence and it's not going to go away any time soon.

Trichet's Bizarre Bundesbank Fixation

2007-03-06T14:51:00.002+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.31O3 Hi 1.3133 Low 1.3080
USD/JPY 116.32 Hi 116.69 Low 115.20
AUD/USD 0.7729 Hi 0.7759 Low 0.7678
EUR/JPY 152.44 Hi 153.02 Low 150.72

Well it's gonna be another big week. Thursday the ECB will wheel out Trichet, who is widely expected to raise short term rates by 0.25 points. Now last conference Trichet talked about "STRONG VIGILANCE" and not "EXTREME VIGILANCE", so he may have some wriggle room there. All the code breakers will be back to work by the end of the week. Certainly raising rates in Europe when all the data points to falling inflationary pressures, a German Consumer who has stopped spending (and the Consumer side of the economy in Germany wasn't breaking any records before this news) and Global Financial Markets which look poised, well, poised on the brink of what could be a very nasty correction, could take more chutzpa than poor old Trichet has hidden up his double oxford cuffs. Although his bizarre fixation with the fat boys at the Bundesbank might be enough to see him through. He may hike anyway and damn the consequences. I hope he's got his retirement plans worked out because if he stuffs this up, and let's face it if history is any guide stuffing things up is what Central Bankers do, then a quiet retirement is the best he can hope for.

The Bundesbank, with its post-unification incompetence, essentially rang the death-knell for the European Monetary System (the EMS). Post-Bundesbank, Post-EMS, we have the Euro and the ECB. So if Foreign Exchange Markets really start seeing damaging volatility see it only as a stepping stone to something larger than the ECB. Maybe things are working out. It just depends on which game plan you are working with.

And then Friday we have Non-Farm Payrolls in the States. Now Non-Farm Payrolls is really a non-number. It's not relevant, it's not a leading indicator of economic activity, it's badly reported, it gets endlessly and massively revised but IT IS important. Why? Because Friday, and Non-Farm Payroll days in particular, are the moment of choice for hefty financial market intervention by the powers-that-be. This Friday is likely to set a lot of hearts racing. The number is not that important. Expectations are not that important. For the record the market is expecting a measly 100,000 increase in Non-Farm Payrolls in February. The Unemployment Rate is expected to remain broadly steady at 4.6%. These are mere details. Obviously job creation in the States is not healthy. The entire U.S. economy, apart from the Military Procurement Sector, is not healthy. We know that.

The important stuff is what the BIG GUNS are likely to try on Friday. And it's not hard to figure it out. They don't want financial market panic in the U.S., they don't want the USD to fall through the floor and they want offshore investors to continue financing the massive U.S. external financing requirement. Now, in the long run, it is unlikely that these guys will be able to pull off anything more than window dressing. The economic fundamentals and the political and corporate leadership in the United States are so bad that ultimately the piper will have to be paid in the form of a very bad recession, a huge cut back in domestic spending, higher interest rates and a lower USD.

But in the short term a little skull-duggery is always possible and should be factored in to any trading equations. And after the volatility of the past week or so, more volatility is a sure bet for Friday.

When the shady people from the PPT and the sovereign buyers move on Friday other players would do well to step back and let them do their stuff. If they manage to get a bounce in U.S. Stocks or the USD then that should be seen as a medium term selling opportunity. So say a little thank you, particularly if by some unfortunate coincidence you happen to be long USDs. The opportunities for dumping USDs are not going to increase over time. Take what you can get when you can get it. Same for stocks.

George W. and his little band seem to think they are very smart. Maybe they are. Maybe they can pull it all off. But once, not all that long ago, there was a guy called Cosimo de' Medici. He thought he was pretty smart too. He financed wars, both sides of long, entrenched foreign wars. A bit like Bush and Co. arming the Iranians secretly, as discovered during the Iran-Contra scandal, and financing and arming Saddam Hussein AT THE SAME TIME in the same war. The Medicis had this kind of deal going all over Europe. It was one of those great times in history. Torture was practised as a hobby. Like now.

Then one day these creditors told the Medici they weren't going to get their money back. Ever. At that point Florence, where the Medici's hung out, was pretty much Centre of the Universe. Cosimo de' Medici employed Artists and Alchemists and Scientists in an attempt to discover the secrets of the Universe. Then the money stopped coming in and the Medicis went bankrupt. Florence now is just this medium-sized town which lives off fat American tourists. Or did. They are hoping the Japanese will pick up the slack. And Centre of the Universe it is not.

Things happen faster these days. So we know where we are going, it's just a question of speed. George H.W. Bush once famously remarked that: "If the people knew what we had done, they would chase us down the street and lynch us." George, old boy, there is still time. Maybe he knows that. Maybe that's why he sobbed so publicly recently.

OIL 60.65
GOLD 646.00

Well the USD is in trouble. U.S. Stock Markets look ready to crack, U.S. Treasuries have barely rallied despite the weakness of the U.S. Stock Market but the one, the only, bright spot is that the price of GOLD has fallen. Hey, this is good news. See there really is no alternative to the USD. All you doubting Thomases out there will come back cap in hand and start buying the USD any day now. Or maybe not.

Still as the Yen Carry Trade suddenly looks like a very expensive way to finance speculation, all markets which have benefited by the increase in fictitious liquidity which this particularly dim financial manoeuvre has generated will see selling pressure. And GOLD is one of those markets. It was never the major beneficiary of the Carry Trade, but GOLD bulls should bear that in mind.

The Fall of Babylon

2007-02-28T10:33:00.003+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3193 Hi 1.3244 Low 1.3186
USD/JPY 118.36 Hi 118.76 Low 117.92
AUD/USD 0.7880 Hi 0.7889 Low 0.7853
EUR/JPY 156.18 Hi 156.94 Low 155.87

Funny what a difference a 25 point rate hike in Japan can make. Not that the pundits and the pinheads are worried. Oh no. These are the same guys they wheeled out at the beginning of the Asian Crisis. They are saying the same things: the underlying economic fundamentals are fine, there is no longer-term problem. It was a lie then, it's a lie now. The fundamental underlying problems of emerging Asian economies were many and manifest. And the Asian Crisis was much longer and much harder than all the pinheads forecast. Of course, this time 'round for the most part we have a new generation of pinheads but the message is the same: the current correction in world stock markets is nothing to worry about. The EXIT from the CARRY TRADE is nothing to worry about. Hedge Funds are nothing to worry about.

Well we'll see about that.

We may get a bounce. Big deal. Even if the FED starts doing a BOJ by simply spewing out DOLLAR bills, that won't work. The Nikkei hit a record high of 38,915.81 on the 29th December 1989. Yesterday the Nikkei closed at 17,604.12. And that brilliant result comes after decades of easy money and after a number of years when the BoJ simply printed as much money as the system could absorb. The FED, of course, has already prepared for this possibility. Hence M-3 numbers are no longer published. But when money turns into wallpaper you don't necessarily want to hold it. Unless you particularly admire the design.

Of course the fundamental economic picture in the U.S. is healthy. You can tell by the numbers. Yesterday saw the release of the Durable Goods numbers. They were great!! No actually they were dismal. But for now the Consumer, reportedly, doesn't seem to be concerned. If you believe the surveys. When the U.S. Consumer finally becomes concerned about the economy it will be ALL OVER, bar the shouting. And Cheney will be in his bunker.

Well I guess we could have a repeat of the Weimer Republic debacle and we all know what followed that. What I like about these guys is how deterministic they are. They follow the same tired old script and hope nobody is watching. Like a bunch of morons playing chess with the same game plan. One thing they got right though is that mostly nobody is watching. Much more pertinent is the Anna-Nicole Smith saga. Or the Britney Spears saga. Or the fat kid story in Britain.

So they are going with a repeat of history. But it's not that easy. And these guys are neither smart nor charming. Which makes things a little difficult. Determination and a devious game plan may not be enough, even with their passionate intensity. And George W. doesn't even have that.

The USD is still in trouble. Weak economic activity will help support the U.S. Bond market in the short term, at least in USD terms, but that is unlikely to be enough to encourage ongoing offshore buying of USD bonds, which is crucial to the long term health of that market. Ultimately the scarcity of savings in the U.S., together with the insane spending plans of the Bush Administration, will keep a floor under bond yields in the United States. The upshot is that there will be no relief for the credit-dependent U.S. Consumer in the medium to long term. Bad news for an economy which relies so completely on consumption to fuel growth and it will also eventually be very bad news for those export-orientated economies around the globe which rely on the U.S. Consumer Market. So much for world growth and the feel-good economy.

OIL 60.84
GOLD 675.30

They took another whack at GOLD yesterday. They keep trying. Which is what you would expect. Should the story out on financial markets change from growth to DEFLATION, which is likely, GOLD is likely to see something of a correction, particularly in non-USD denominated terms. In USD terms the downside for GOLD appears limited.

Bursting ECONOMIC bubbles are not going to help commodities in the short to medium term. Although there is still plenty of potential for further conflict in the Middle East, unless another major flare up ACTUALLY takes place (and we all know that there are PLANS for that), the likelihood of another major surge in the price of OIL appears limited. Weak world growth is not good news for commodities.

It's Starting to Fall Apart

2007-02-22T15:49:00.000+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3103 Hi 1.3146 Low 1.3081
USD/JPY 121.35 Hi 121.43 Low 120.81
AUD/USD 0.7893 Hi 0.7920 Low 0.7874
EUR/JPY 159.04 Hi 159.14 Low 158.54

So how are we doing? Well let's see. Dick Cheney made a trip to Japan. What was the official reason for that visit? No idea. Now he's in Australia, where the Australian public are cheering and waving flags. Well no, not exactly. But the Australian Prime Minister, John Howard, does a good grovel. And Dick Cheney loves being grovelled to, so that's all going well. Unfortunately, in the meantime, the BoJ hiked rates. (Bad news for the Carry Trade and U.S. Treasuries but for now the PPT is holding the fort.)

Oh and Tony Blair just announced that because the Anglo-American WAR on Iraq was in such great shape (see Cheney was right) and so obviously POPULAR that the British are withdrawing troops. The Danish are also withdrawing troops. The U.S. is still going with the SURGE because, well, what else would they do with all their billion dollar bases which they purpose built in the middle of the GREEN ZONE in Baghdad and in strategic points all over the country? Seems a shame to waste them.

In Italy the Italian Prime Minister was forced to stand down because he lost a crucial vote in Parliament. On what? Oh nothing really, just foreign relations. Specifically though on keeping Italian troops in Afghanistan and increasing American Military Bases in Northern Italy. The Italian public was not impressed. It seems a pity to lose a guy who knows how to use a Ouija Board in a pinch and who helpfully released a whole lot of dangerous prisoners as one of his first acts of Government, resulting in a Crime Wave. Didn't Saddam Hussein do something similar just before the U.S. invasion? What is going on? Anyway now Italy has lost two sterling public figures: Berlusconi, the well-known member of the P-2 Masonic Lodge, and Prodi, the guy who knows how to work a Ouija Board. If you ever wondered why Italians feel justified in NOT paying taxes EVER, unless it is completely unavoidable, wonder no more. Perhaps they could persuade Cicciolina to run for Parliament again? You never know it just might improve the tone of the place.

So there in a nutshell is why Italians are religiously devoted to withholding their hard earned cash from their Government. Tax Avoidance is a nationally accepted sport which Italians play at a professional level. And that is why the Italian Government has accumulated such a massive level of debt. Otherwise the country is doing just fine. In fact Italy seems to work better when there is no discernible Government. Perhaps Britain should try that. After all Tony Blair hasn't exactly covered himself in glory these past 10 years.

Otherwise everything is going to plan. Well, apart from the U.S. economy which keeps producing bad headlines and worse statistics. But that doesn't matter. Every time some bad data comes out, some bad company report (and they have been pretty bad lately), we get our boys to step in. Which accounts for the bizarre way the market is trading. First the bad number then the sharp sell off and then the rally on the back of nothing at all. How long can they keep this up??? Well the FED prints the money, derivatives are unregulated and Hedge Funds can do whatever they want. The answer then is: probably not much longer.

But then they got a lot on their plate: the USD, Treasuries, Stocks, Gold (which is the only one they really want to see fall). So far the USD is holding. Could be tricky going forward because, unfortunately, the FX MARKET is not a DOMESTIC market. Stocks they are doing better with. (Hedge Funds buying). Treasuries, well, they haven't recovered from the slump but there is no panic selling. YET. And GOLD, well never mind.

OIL 60.06
GOLD 682.00

The PPT gave GOLD its best shot this week. The huge slide in GOLD didn't last long though. And that's even with the timely press and the judicious use of the derivatives market. So here we are and GOLD appears to have broken through its recent high. It's still a long way from making a multi-year high but GOLD bugs can count on a number of favourable factors: Helicopter Ben is in charge at the FED, the U.S. Government is currently planning an attack on Iran and no-one is really comfortable holding the USD any more.

Cheney in Japan. Serendipitous Coincidence?

2007-02-19T10:22:00.001+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3131 Hi 1.3165 Low 1.3127
USD/JPY 119.55 Hi 119.75 Low 119.21
AUD/USD 0.7855 Hi 0.7889 Low 0.7855
EUR/JPY 157.02 Hi 157.38 Low 156.85

Well how about that? The BoJ has to make a decision about monetary policy this week and Dick Cheney is in Japan!! There have been all sorts of noises made about the Japanese economic recovery (which technically suggests that a rate hike is possible), the Carry Trade (which depends on favourable interest rate differentials) and the risks to Japan of a precipitous decline in the USD/JPY (exporting may become more difficult). Remember this is the country which continued to run a favourable trade account with the U.S.A. BEFORE, DURING and AFTER the Plaza Accord, which saw the USD/JPY depreciate by 50%. So the potential risks may lie elsewhere. Japanese exporters can obviously handle a stronger currency.

So what are the risks for the U.S.A.? Well, as it happens, there are quite a few. The U.S. is in the middle of number of wars of conquest at the moment. And, it appears, an attack on Iran is currently being planned. Deviants at the Pentagon just can't wait to try out their new weapons arsenal. There is only one small problem: the U.S. doesn't really have the money for all these exciting new plans for world domination and the USD isn't exactly performing well on international markets, the one exception being the USD/JPY, which is holding up largely because of the Carry Trade.

And the Carry Trade depends on favourable interest rate differentials. Now the interest rate differential between the U.S. and Japan is currently 5.00%, which is quite a lot. But it seems that the powers-that-be are concerned that should that differential shrink by a mere 25 basis points then the game will be lost. What does this say about the DOLLAR? Well pretty basic really: the USD is in big trouble.

The Saudis might be helping to support the currency but, despite the little fillip in the price of the OIL which the Iraqi invasion and the Israeli attack on Lebanon provided, the price of OIL has languished since. The Saudis have cash but the Japanese and the Chinese and the Russians have more. Hence Cheney's little trip to Japan. Which is quite unusual. Cheney doesn't make foreign trips often. Not surprising really. He might smile at someone and scare them half to death. Best he's kept in his bunker to plot in private. The last trip he made was to Saudi Arabia where he was summoned on Thanksgiving 2006. But here he is suddenly turning up in Japan trying to drum up support for his Wars and for the USD. Obviously the situation for the U.S. is quite dicey, otherwise he wouldn't bother.

With a WAR in Afghanistan, a WAR in Iraq and a WAR planned for Iran, the U.S. needs to keep those foreign capital inflows coming. That task might be just a little difficult if the USD really starts to show signs of wear and tear on international foreign exchange markets. No-one likes to lose money. U.S. Treasuries might look like a great bargain, given the trouble the U.S. economy is in, but factor in Foreign Exchange risk and even the most naive foreign investor is likely to get the shakes. The U.S. Government's funding requirement isn't going to get any smaller any time soon and even if they concentrate all the Government Spending in the military sector that still won't be enough for the insane Military Plans of George W. and Company. Foreign investor support for the U.S. Government is therefore crucial to the success of their mission.

So who better to send off to "convince" people than that "people-person": Dick Cheney? Yes they may have the plan, but the execution isn't all that great. Arrogance, incompetence, years of inter-breeding? Who's to know? That's the trouble with being a deviant: the people on your side tend to be slightly repellent. How desperate do you have to be to send Cheney as your front man?

Asia is a place where saying NO is considered impolite. So they don't. Say it that is. But that doesn't mean they mean YES. If we all cross our fingers the Japanese won't say NO but they will withdraw funding for the obscene military adventurism of the current U.S. Administration regardless. What the BoJ does won't really impact anyone but the speculators. And speculative support for the USD is merely phantom. It is not real money. So the writing is on the wall. The USD decline continues.

We may see the USD/JPY appreciate mildly during the Cheney visit. That would be nothing more than a bit of forelock tugging for a tyrant. The longer term trend for the USD/JPY is down. And once Cheney leaves Asia that is likely to accelerate. Selling USDs on rallies is still the recommended strategy.

Stock Markets of the world continue on their upward trajectory, oblivious of existing conflicts and the potential for new and more disastrous Middle East wars. Well I suppose some people are making money out of these wars so perhaps Stock Markets are celebrating that. It could get interesting if the destruction spreads. Some people would have us believe that WAR is good for the economy but you don't have to live in Sudan to know that's a lie.

OIL 59.00
GOLD 674.40

GOLD remains bid. And with more war on our doorstep and no solution in sight, that is expected to continue.

Drums of War

2007-02-17T10:06:00.001+01:00

"Attacking Iran will be a crime against peace, a war crime. Those conducting military operations will be violating the Nuremberg Principles, the Geneva Conventions and the Laws of Land Warfare. Prosecution for commission of war crimes is possible.

I appeal to the conscience of US Air Force and US Navy pilots and military personnel who command cruise missiles and pilot bombers and those who plan the missions for the pilots and missile commanders. I ask that they refuse what I believe will be unlawful orders to attack Iran."

Colonel Ann Wright

---

At a farewell reception at Blair House for the retiring chief of protocol, Don Ensenat, who was President Bush's Yale roommate, the president shook hands with Washington Life Magazine's Soroush Shehabi. A grandson of one of the late Shah's ministers, Soroush said, "Mr. President, I simply want to say one U.S. bomb on Iran and the regime will remain in power for another 20 or 30 years and 70 million Iranians will become radicalized."

"I know," President Bush answered.

"But does Vice President Cheney know?" asked Soroush.

The president chuckled and walked away.

Let's Talk Capital Flight

2007-02-15T11:25:00.000+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3127 Hi 1.3155 Low 1.3118
USD/JPY 120.19 Hi 120.80 Low 119.78
AUD/USD 0.7782 Hi 0.7841 Low 0.7824
EUR/JPY 157.83 Hi 158.63 Low 157.33

Ben Bernanke testified yesterday and suddenly nothing else matters. It doesn't matter that HSBC was forced to admit that the U.S. Housing Market, particularly the sub-prime market which it unwisely bought into, is struggling. It doesn't matter that U.S. economic statistics continue to surprise on the downside and it doesn't matter that George W. is gearing up to open ANOTHER front in the ENDLESS war on terror. All that matters is that RATES in the States are on hold. Oh and it matters that Ben Bernanke has noticed inflationary pressure may have moderated. Well, well done Ben!!

Trichet, the man with the patrician manners and the face of a HAG, has also noticed inflationary pressures have moderated but it appears that the Headline Rate of Inflation is no longer his primary concern. Or rather it is his concern but he has ways and means of knowing how the "Inflationary Threat" will evolve over time. He doesn't need tea leaves and he doesn't study the entrails of slaughtered bulls. Oh no, what he does focus on is Credit Growth and Money Supply. Credit Growth has been rising rapidly in the EuroZone recently. And this is not good. Do we have a number, Mr. Trichet, which would be GOOD?? Which particular single digit would you prefer?

Now Credit Growth is a fairly lumpy piece of data. It can hide all kinds of sins and all kinds of virtues. People in the EuroZone might all be borrowing like mad to buy the latest plasma screen on offer. But then again this is not the United States where conspicuous consumption is a national sport. Perhaps they are borrowing so that they can invest in more productive equipment.

The consequences of the TYPE of borrowing taking place is very important. Productive investment reduces inflationary pressure by allowing us to produce more with the same input. Borrowing which merely finances DEMAND obviously creates DEMAND-LED inflationary pressure.

Trichet doesn't seem to be interested in finer distinctions. He is looking at the number as a whole and seems to have already decided where inflation is heading. UP, that's where. And with inflation, interest rates are also heading up in the EuroZone. We wouldn't want to get too excited here and allow a sustainable economic recovery or anything subversive like that. No. And keep your wages growth low or we will hit you over the head with a sharp rise in interest rates and then you will be sorry. In his next life Trichet will be working at Wal-Mart and living in a trailer. Unfortunately for now he is head of the European Central Bank.

Not surprisingly the EUR/USD is bid as the markets react to the divergent interest rate outlooks. The EUR/USD is also reacting to the divergent economic story. And now the divergent economic story is spreading to the USD/JPY. This is not good. Well not for the USD anyway.

The outlook for the USD remains clouded AT BEST. Today saw the release of Net Foreign Purchases in the States. These numbers measure foreign capital inflows. Now the U.S. needs foreign capital like never before and the numbers weren't good. JUST to keep the USD steady the U.S. needs to attract upwards of USD 70 billion every month. In December the purchase of long term assets came to just USD 15 billion. But when short term assets were also considered there was a net Capital FLIGHT. Which means that not only is the U.S. NOT attracting sufficient capital to keep the USD afloat, money already invested in the country is leaving. The PPT will really need to get to work to keep everything ticking over as required.

Last year Japanese investors were the largest sellers of U.S. Treasuries. That means while a lot of people were selling U.S. Treasuries the Japanese were selling the most. So it seems that Japanese investors did take advantage of the favourable exchange rate to EXIT the country. Of course the Republican newswire known as Bloomberg attempted to put a positive spin on the data. But if you add things up we have Japanese investors leaving, OPEC selling USDs and China looking to DIVERSIFY (read sell USDs). And the U.S. still has this unbelievably LARGE external funding requirement known as the Current Account Deficit. Which incidentally reached a RECORD last year.

So the USD is in trouble. And the Carry Trade crowd hasn't even really started to PANIC. Yet. Not to worry. Cheney is due to make a trip to Japan soon. Pressure will be brought to bear. The U.S. doesn't want Japan to raise rates quite yet. That would only increase the selling pressure on the USD. Which, of course, would be ultimately negative for the U.S. Financial Markets. Which would mean that George W. and his devious friends would have a) involved the U.S. in costly and illegal wars, b) overseen the sharpest deterioration in the U.S. Federal Budget EVER and c) screwed up the domestic economy. That's quite a hat trick. Though when you consider who is involved I guess it's not all that surprising. What do these guys do for an encore? Better not ask.

OIL 58.26
GOLD 674.00

The scary global economic scenario is keeping a lid on the price of OIL. But the price of GOLD keeps rising. The PPT, which we know really doesn't exist (if you don't exist you can't go to jail), seems to be struggling here. They are losing the battle to keep the floor under the USD. Treasuries are at risk. And GOLD looks set to continue its UP, UP and AWAY trajectory. What happens to people who don't exist and nevertheless don't manage to fulfill their brief? I guess we will never know.

Dancing with the Devil

2007-02-12T14:39:00.001+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.2961 Hi 1.3039 Low 1.2940
USD/JPY 121.72 Hi 122.12 Low 121.58
AUD/USD 0.7724 Hi 0.7780 Low 0.7719
EUR/JPY 157.79 Hi 159.03 Low 157.56

The current international GEOPOLITICAL situation defies explanation. It is hard to find a plausible explanation for why George W. launched an all-out attack on Iraq. Provided, of course, that you discount the argument that he is simply insane. This is the explanation of choice for many, but then how do you move forward if that is your premise? The USA is currently controlled by a bunch of crazies, run for your life? Financial markets, thus far, have certainly not bought into that scenario.

So let us put aside that explanation and try to understand how we got where we are now and what is likely to happen in the months ahead. Given the risks we can not afford to simply ignore GEOPOLITICS and concentrate, say, on economic statistics.

The Anglo-American invasion has not brought democracy to Iraq, only chaos and civil war. Once Saddam Hussein's regime had been removed in the early days of the invasion it seems inconceivable that there was no attempt to establish order in what is notoriously a fractured nation. Troops were not sent, those that were stood idly by as mobs rampaged. Indeed there have even been whispers of covert Anglo-American attempts to inflame the violence.

There are two plausible explanations for what happened immediately after the invasion of Iraq: colossal incompetence or malevolent intent.

Then there is the war in Afghanistan. The Anglo-American alliance led an invasion of Afghanistan in 2001. This was "officially" justified as a response to 911. And the great and the good would have us believe that Afghanistan is the just war. Not that George W. and his buddies have actually captured Osama Bin-Laden the man we are led to believe, on flimsy evidence, was responsible for 911.

Indeed the only politician who has publicly suggested that the "official" explanation of what happened on September 11 is a lie is the Former German Defense Minister, Andreas Von Buelow. Elsewhere only silence.

So let's assume that Bin-Laden is responsible for 911. The "official" version of events still remains difficult to comprehend. London did not bomb and invade Ireland, at least not this century, in an attempt to find the terrorists who were blowing up bits of Britain. So why did the U.S. attack Afghanistan?

Since the official explanations for these conflicts are constructed on such poor fundamentals we must conclude the "official" justifications for the current Anglo-American Imperial adventures are not the real reasons for these hostilities.

But we still need to know why these WARS were waged. Without that knowledge we are no closer to understanding what is likely to happen next. If we don't know why Afghanistan and Iraq were attacked then we can't understand what might provoke an Anglo-American attack on Iran.

We must consider other scenarios, other justifications. To do so we must be prepared to put our automatic loyalties aside.

If the possibility of malevolent intent is considered then these conflicts become somewhat less mysterious. Once you make the leap, then the logic of the whole sordid episode becomes, if not acceptable, then understandable. Tony Blair's lying speeches become necessary. The doctored, misleading "intelligence" can be seen to build a case for war were there was no case. And the dismissal of popular opposition to the Iraqi invasion is understandable.

When the intent is WAR from the get-go everything else is just details.

Regardless of the Conspiracy Theory you prefer, all the signs are there that suggest some kind of military action against Iran is likely in the reasonably near future. We are talking weeks. Certainly many current commentators suggest that an attack on Iran, on whatever the pretext, is imminent. Unless of course George W. is removed from office with considerable haste. That seems unlikely. Congress is divided and focused more on the 2008 Presidential elections. The next 2 years belong to George W. and to be optimistic about what he might achieve in that period seems hopelessly naive.

Iran has responded to the obvious signs that an attack is being planned by saying there will be aggressive retaliation to any U.S. attack. All things considered, the plan for WWIII seems to be going smoothly.

Currently Global Financial Markets seem more concerned about the direction of monetary policy in the U.S. and Japan than the possibility of an attack on Iran. They shouldn't be. Given the evidence it would appear that an attack on Iran is likely and there is a chance that the longer term goal is to create the conditions for a major global conflict. Financial markets meanwhile are pricing for NO VOLATILITY and no risks. Pricing for perfection at a time like this is a leap too far.

Stocks are at risk. The USD/JPY may have been granted a temporary reprieve by the anemic G-7 statement released on the weekend, but TEMPORARY is the operative word here. The United States can't afford the WARS it is waging now. More conflict is not going to help the U.S. economy, the USD or U.S. Stocks. U.S. Bonds could get blown out of the water. And ignoring the risks does not make them go away.

OIL 58.71
GOLD 668.70

The slow motion disaster of the GEOPOLITICAL mess in the Middle East has seen GOLD outperform, PPT or no PPT. That is unlikely to change.

Financing the Never Ending War on Terror

2007-02-06T12:59:00.000+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.3016 Hi 1.3025 Low 1.2971
USD/JPY 120.65 Hi 120.80 Low 119.99
AUD/USD 0.7782 Hi 0.7791 Low 0.7759
EUR/JPY 157.06 Hi 157.16 Low 155.80

As George W. continues with his plans to militarize the U.S. economy entirely, and hence make WAR a way of life, if not simply one of the few ways open for an American citizen to access education and health care, it appears that the rest of the world is somewhat less than enthusiastic about financing this escalation. So the USD is under pressure. AGAIN. The pressure is not huge thus far. But so far the USD downtrend has resisted all the concerted attempts to arrest the slide. There are whispers that Central Banks were in again in EUR/USD above 1.3000. Certainly following the release of the NFP numbers Friday there was "intervention" of some kind. The NFP seems to be a favourite with these guys. It's not like it's this hugely significant number. It fluctuates, it's revised to the point that it is meaningless and it is a LAGGING indicator of economic activity. Which means that by the time the data gets released the game has moved on. And still the market gets excited. Or at least whip-sawed.

At any rate George W. plans to shift more and more resources toward the American military machine and he and his buddies are assuming that the American people can be frightened into believing that more militarisation is not only necessary but patriotic. They may need another TERROR type incident for that. But where there is a will there is a way. And there is no doubt that George W. and his buddies have the will. So an incident can be created if necessary. After all it's happened before.

It's fair to assume that the American public will go with the plan. After all Mr. Joe Average is either ill-informed or drowning under a barrage of FOX NEWS propaganda. The U.S. Congress is unlikely to make too much trouble. U.S. politicians are too busy trying to work out how to explain why they voted for the Iraqi invasion in the first place while they keep their wages coming in. Hypocrisy and double dealing is everywhere. But the offshore investor, with perhaps the exception of the Saudis, may not come to the party. So that makes financing "escalation" something of a problem.

The PPT can't be everywhere. They are trying to stop the USD from falling down a black hole, trying to keep GOLD from emerging as THE global world reserve, trying to support the U.S. Treasury market (and that could be a real problem going forward) while all the while remaining very low-key about the whole deal. To the point where they even try and deny their very existence. This is so in tune with the zeitgeist.

OIL 58.83
GOLD 659.80

The attempt to strike fear into the heart of the GOLD market appears to have been less than successful. These people (the powers-that-be, the PPT, the market manipulators) are not going to go away. They will though continue to have trouble with the ongoing GLOBAL search for an alternative to the USD as a global reserve currency. And that trend is NOT going to go away anytime soon.

So buying GOLD on dips is still the recommended medium to long term strategy. The market manipulators have derivative markets to play with and the possibility of unleashing selling by the IMF and other proto-Government organisations but they have to contend with a wall of money looking for an alternative to the USD. So on the one hand we have the Tricky-Dickies and on the other we have the world. The world, ultimately, will win.

Rigging the Market

2007-02-02T15:05:00.000+01:00

For contact details and article archive by title see: fxtalks

EUR/USD 1.2924 Hi 1.2968 Low 1.2912
USD/JPY 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.

Cheering as The Fed Weighs "Additional Firming"

2007-02-01T10:35:00.001+01:00

For contact details and article archive see: fxtalks

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.

The Great Unravelling

2007-01-26T14:22:00.000+01:00

For contact details see: fxtalks

EUR/USD 1.2902 Hi 1.2947 Low 1.2889
USD/JPY 121.44 Hi 121.66 Low 121.20
AUD/USD 0.7727 Hi 0.7752 Low 0.7723
EUR/JPY 156.71 Hi 157.45 Low 156.59

Weak economic data released in the States yesterday did nothing to stop the slide in U.S. Treasuries. The U.S. Treasury market, largely unremarked by U.S. newswires, has been under considerable pressure lately and the poor outcome of this week's Treasury Auctions have done nothing to dispel the gloom in the market. Even with a modest rebound in the USD yesterday and signs that the economic "cooling" in the U.S. could turn into a hard landing, there was no bounce in Treasuries. It has been a very, very bad week for the U.S. Fixed Interest Market.

The best explanation for this bizarre turn of events from people in PUNDITLAND was that the weak data might be a sign that economic activity is bottoming out. Well yes it might, it might also be a sign that economic activity is weak and unlikely to improve significantly in the medium term, particularly with short term rates on hold and longer term rates RISING. Economic growth in the U.S. is after all almost entirely debt driven.

Markets are still working on the assumption that economic data determine direction. So if weak data doesn't produce a rally in Treasuries it must mean that the data wasn't all that weak. It's as if everyone was assuming that all economies are closed and isolated from international capital flows when, in fact, international capital flows together with speculative position taking (otherwise known as hot money) basically determine what happens on markets these days. And right now we don't have international investors queuing up to purchase more U.S. Treasuries.

Yields on 30 year bonds look set to break through 5% in the very short term. 10 year yields won't be far behind. Before long the U.S. Yield Curve will be flat and could very easily turn positive. And it all comes back to DIVERSIFICATION of assets by Foreign Central Banks. Which is another name for capital flight. No doubt someone out there in PUNDITLAND will start making the case that a Positive Yield Curve (that is a situation where short term rates are lower than long term rates) is a sign that the U.S. economic outlook is positive too. It would be a very weak case.

George W.'s State of the Union this week did nothing to restore faith in the direction of U.S. Foreign Policy and, let's face it, economic policy isn't even on George W.'s Agenda. Hell, even New Orleans isn't on his agenda so why would he worry about the economy? The policy focus of the current U.S. Administration is centred entirely on Foreign Policy and the results are there for all to see: one ruined country, 650.000 dead Iraqis, a lot of money spent and more conflict planned. The Senate might have voted against the SURGE but, as Cheney said this week: That won't stop us. In fact it is quite clear that NOTHING will stop these guys. Not economic ruin, not military failure, not the U.N. and not the U.S. electorate. Although it has been suggested that bankruptcy might be the least worst outcome. The alternative, of course, is Armageddon and a lot of people in the U.S. seem to be hoping for that outcome so that they can all go around saying: "I told you so". I'm not sure if this is something to do with Christian Fundamentalism or the idea that if the U.S. can't run the world then they may as well blow it up. That way no-one else will be able to run it either.

There is some kind of a theory going around at the moment that higher yields on U.S. Treasuries will help support the USD. It's a nice idea. The assumption behind it is that all the people who don't want to buy U.S. Treasuries at current levels will be queuing up to buy them as the yield moves higher. Only the reason that the yield on U.S. Treasuries is rising right now is because buyers are NOT enthusiastic. And what's more as the Treasury market falls any potential buyer, unless by some miracle he manages to get in when the market is at its nadir, will face a capital loss on his investment. So the idea that a falling Treasury market will lure back International Investors to U.S. Financial Markets is nothing more than a nice idea. You wouldn't want to throw any real money at it. And you certainly wouldn't want to start loading up on USDs on the back of trouble in Treasury Land.

Oh and by the way we may have just seen the peak in Stock Markets this week. As in THE PEAK. Now we get to see how leverage works in reverse. The Great Unravelling has begun.

OIL 54.41
GOLD 647.00

GOLD has enjoyed a good run, bolstered by increased volatility on financial markets and the increasingly unstable GEOPOLITICAL scenario. That might be the last of its bull run for the next little while as the bigger trend of collapsing Commodity Markets takes over. GOLD remains a good longer term bet but leverage and skullduggery must not be overlooked as market moving forces. After all it does appear that part of the PPT's brief is to ensure that no credible alternative to the USD as a Global Reserve Currency emerges. When you have an External Funding Requirement as large as the U.S. External Funding Requirement you need to hold on to your Reserve Currency status for as long as possible. So part of the PPT's brief is to ensure that confidence in GOLD and the EURO are systematically undermined. They haven't done all that well but they haven't slunk off the stage quite yet.

OIL briefly rallied after George W. committed the U.S. to doubling its reserves. That and cold weather have kept the price of OIL above the USD 50 level. For now we have range trading as the market tries to figure out just how bad the situation in the Middle East is likely to get in the short term and just how weak Global Demand really is.

Weak global economic activity and weak global international commodity prices could turn out to be the story of 2007. Not that the cheerleaders are giving up yet.

It's Geopolitics, Stupid !!

2007-01-22T14:55:00.000+01:00

fxtalks

EUR/USD 1.2934 Hi 1.2979 Low 1.2923
USD/JPY 121.72 Hi 121.81 Low 121.20
AUD/USD 0.7887 Hi 0.7908 Low 0.7880
EUR/JPY 157.47 Hi 157.65 Low 157.04

While there is a whole army of guys sifting through the economic data looking for clues to the health of the U.S. Economy, aka the U.S. Consumer, the real action is on the GEOPOLITICAL front. And there sure is a lot of action right now. Although the U.S. would like to believe that it makes all the rules in the International Arena it appears that there are more and more players who don't hold quite the same view. And the belligerence of the U.S. Administration is starting to have real consequences. Unsurprisingly none are positive.

In the three months to November OPEC members sold 9.4 percent, or $10.1 billion, of their U.S. government debt securities according to Treasury Department data. This is a pity because the U.S. has a big savings hole and OIL producers have surpassed Asian central banks as the largest pool of global savings, accumulating an estimated $500 billion in 2006 alone.

Somehow I don't think it was concern over the U.S. Inflation rate which caused OPEC members to dump U.S. Treasuries. So stop watching the economic data and start following GEOPOLITICS because that's what's important right now. OPEC dumped Treasuries last year and the trigger was GEOPOLITICS not inflation.

The Republican newswire, better known as Bloomberg, tried to make the best of the news by suggesting that OPEC selling of U.S. Treasuries was all about falling OIL prices. That makes no sense at all. If falling OIL revenues left OPEC with less money to invest in the three months to November 2006, and remember during that time OIL prices were still close to historical highs, then a case could be made for OPEC buying fewer U.S. Treasuries during that period. But that's not what happened. OPEC was a NET SELLER of Treasuries. Which means that one of the biggest supply of funding for the bankrupt U.S. Treasury may just have dried up.

And this is happening when the cost of the IRAQI conflict is going through the roof. Oh and just when the Bush Administration is talking about its plans for a bigger and better conflict in the Middle East.

It's starting to look like some people might have a problem with those plans.

The Chinese and Russians may have voted with the U.S. on sanctions directed at Iran but it doesn't look like the Chinese are keen to give the U.S. a blank cheque internationally. On January 19 China launched a missile designed to bring down satellites. They succeeded and just two days later the Chinese announced their intention to review their Foreign Exchange Holdings. Coincidental timing? I doubt it. In the Financial Times Richard McGregor blithely notes that Chinese FX Reserves are "now mostly locked up in US Treasury bonds". Er yes. So that's another source of funding potentially down the toilet.

Meanwhile Senator Ted Kennedy is trying to arrange a boycott of the latest Bush Plan for the Middle East, aka the SURGE. He doesn't really have to bother. The real source of funding for the U.S. right now is external and it looks like the principal funders, with perhaps the exception of the Japanese, have plenty of reasons to withhold funding. That external boycott will be considerably more effective than any rearrangement of finance which Senator Kennedy can arrange.

So while all the tea leaf readers study the data they should perhaps pay more attention to International Cash Flows. Unless the Bush Administration radically changes course there seems to be early indications that AT LEAST SOME of the international capital available to fund the U.S. 900 billion external funding requirement might not be so readily available in the future. Indeed, it seems that that funding has already started to be withdrawn.

It could be that the Bush Administration is clever enough to find a way through the labyrinth. Perhaps they can succeed in Iraq, whatever the current definition of success, perhaps they can reduce the spectacular U.S. external funding requirement without triggering a domestic economic recession, perhaps they can arrange for the Japanese to provide even more funding in order to compensate for the likely funding shortfall from China and the already apparent shortfall from OPEC. But given the performance of the Bush Administration thus far, it is far more likely that they make a complete mess right across the board. Bad news of course for U.S. Financial Markets, for U.S. Stocks, Bonds and the USD. So same old, same old.

OIL 52.15
GOLD 633.90

There are mutterings in the market that Saudi Arabia is acting to keep the OIL price down in order to pressure their Iranian friends. Perhaps it's true. It makes a nice story. But if global demand for commodities was as strong as it is supposed to be the Saudi refusal to agree an emergency meeting wouldn't be enough to keep OIL prices falling.

If this is recovery why did the BoJ stand pat?

2007-01-18T16:04:00.000+01:00

fxtalks

EUR/USD 1.2934 Hi 1.2980 Low 1.2895
USD/JPY 121.36 Hi 121.61 Low 120.46
AUD/USD 0.7879 Hi 0.7895 Low 0.7853
EUR/JPY 156.95 Hi 157.39 Low 155.94

Suddenly everybody is standing pat. Well except for the Bank of England which is hiking. The BoJ is standing pat, the European Central Bank is standing pat and Commodities are tumbling. What's the problem? I thought economic recovery was a slam dunk. I mean how strong can the Japanese economy be if it can't take a 0.5% cash rate? Somewhere, someone is not telling it like it is.

And if the Global Economy is in trouble, which is what the BoJ, the ECB and the Global Commodities Market is telling us, then now is not the time to load up on USDs. Because of all the major economies the U.S. economy is the most at risk right now. It is an economy built on debt and military expansionism. If you want a manufacturing job in the U.S. right now the only real industry in expansion is the military machine. Everything else has or is being outsourced. The U.S. doesn't have a balanced, well-managed economy. Which is why they have a Trade Deficit, a Current Account Deficit and a Government Deficit. Oh and a Household Sector which is up to its eyeballs in debt. And you just have to take a look at the leadership over there to know that effective economic management is just not what they do. So don't hold your breath waiting for the cavalry to arrive. There is no cavalry.

And they don't do crisis management either. Which is why no-one is dealing with the Iraqi debacle. They haven't a clue. What the U.S. leadership does do is work out how they can use their positions to gain more power and money, but that really won't do the U.S. economy much good in its entirety. It's called stealing. Or if you prefer War Profiteering. But it comes pretty much to the same thing in the end. And that's bad news for Mr and Mrs Joe Average; only out in Couch Potato Land they haven't really worked that out yet. I don't know where Cheney's bunker is but when Mr and Mrs Joe Average work out what's happening he may need to use it.

Today we saw the release of some fairly positive (well better than expected anyway) data related to the Housing Sector in the States. This hasn't done much to console the Stock Market, which is the only market still holding. Fixed Interest Markets have taken a hit, the Commodity Bubble has deflated but Stocks are holding. For now. What everyone is talking about on financial markets, while the Pundits Hype the Economic Recovery Story, is the rate of Housing Foreclosures in the States and what will happen when ARM Floating Rate Mortgages start to reset in 2007. And with CPI and PPI coming out higher than market expectations the chance of relief in the form of RATE CUT has evaporated. So things don't look so good for Mr and Mrs Joe Average.

The USD/JPY got a mild boost overnight by the failure of the BoJ to hike rates. The USD hasn't performed quite so well against the Euro. And the outlook for the USD is still clouded. Since year end the USD has climbed on short covering and interest rate differentials. There is also a weird theory making the rounds that slower global economic growth will be beneficial to the USD. Why I don't know. That theory doesn't seem to be based on anything more than conjecture. With the BoJ non-event now out of the way it is probably time to buy the rumour and sell the fact. And a USD/JPY correction would certainly add weight to overall USD weakness.

OIL 53.36
GOLD 635.20

The OIL price is following the Commodity Bubble down. A break below USD 50 could be ugly. Or at least we could see some stops triggered. Despite the recent turn for the worst in U.S. weather the OIL market has no legs. When you consider the potential for further trouble in the Middle East and the Bush Administration's psychotic (though not yet official) plan for an attack on Iran, the failure of the OIL market to make any gains AT ALL starts to look like a worrying indication that global industrial growth may be in more trouble than is presently being forecast by Global Equity Markets.

One of these two markets is wrong. Either Commodities start to see strength or Global Stock Markets start to reflect the economic weakness that Commodity Markets are currently predicting.

Iraq, Iran, Oil, Gold and Bizarre Tilting Points

2007-01-15T15:32:00.000+01:00

EUR/USD 1.2940 Hi 1.2960 Low 1.2914
USD/JPY 120.40 Hi 120.62 Low 120.06
AUD/USD 0.7842 Hi 0.7863 Low 0.7835
EUR/JPY 155.83 Hi 156.11 Low 155.07

fxtalks

Well Trichet took a giant step back last week. No more rate hikes are to be expected in Europe till after the French Presidential Election. Stocks cheered and the EURO rallied. But the FX market has no conviction. The market is confused and looking for direction. The pundits are telling us that the U.S. economy is RESILIANT, that the Japanese economy is in recovery and that the strongest European economy is Germany with France now falling behind. Only the last two statements appear to be true.

The way things are going the U.S.A. could see the yield curve flatten out altogether and then even turn positive. But that doesn't mean that the economy has turned the corner. All it means is that the Bush Administration is having trouble finding investors reckless enough to fund George W.'s bizarre Imperial Game Plan. The U.S. Consumer may well have whipped out the credit cards over the Christmas Holidays and the U.S. Consumer is 70% of the U.S. economy but economic growth is built on more than an ability and willingness to borrow and spend money. Any fool can spend money.

While every pundit out there is talking about the resiliency of the U.S Consumer and what great news that is, no-one is talking about where the money is coming from. Because that's the scary part. And the facile explanation that U.S. Treasuries are selling off because the economy and INFLATION may be stronger than previously forecast is simply rubbish. Currently 55% of the U.S. Treasury market is held by Foreign Central Banks. These Banks don't care where domestic U.S. inflation is heading. It's not like they shop at Wal Mart. The only INFLATION, in the sense of loss of purchasing power, that they care about is entirely currency related. A fall in the value of the USD and the value of their holdings falls. So the trick to keep Foreign Investors lining up at every Treasury Refunding is to keep the USD supported, despite a massive external funding requirements. This is not easy.

If the confidence of Foreign Investors is not maintained then the whole charade falls over.

So the USD is crucial. And confidence in the Bush Administration's commitment to a STRONG DOLLAR POLICY is crucial. Everything else is expendable. And that means the U.S. Consumer is expendable. So don't bank on a Consumer Driven economic recovery happening in the U.S. any time soon.

OIL 53.20
GOLD 627.90

Over the quiet trading days of year end and New Year the GOLD bears got to work. They didn't get all that far, but they did try. GOLD didn't break below USD 600 but GOLD bearishness hasn't disappeared entirely. What the world is waiting for now is to see how the Bush Administration's New Plan for the Middle East pans out. The expectation is that the SURGE in Iraq is just a distraction. The real escalation will happen when the U.S., or one of its allies, attacks Iran.

And the time table is becoming clearer. We are talking APRIL. China and Russia were persuaded just before Christmas to vote for sanctions against Iran at the United Nations. No-one knows what kind of horse trading went on to persuade China and Russia to drop their U.N. veto. But they did and now they are sidelined. The Saudis, for reasons to do with some obscure rivalry with "The Persians" aka Iran, are on board and so are the Israelis. After all they are the mostly heavily armed nation in the Middle East and hence believe that any military conflict will go their way. So we have clocks ticking.

Before April the French will be too involved with their Presidential election to make trouble. Tony Blair will still be in office, advocating the use of force and playing poodle to George W.'s cowboy. Oh and there is an off-chance that France will elect the Pro-American Sarkozy. So that's France out of the game. And if it's not Sarkozy it will be the ineffectual Royal. Both French Presidential candidates are great admirers of Tony Blair. Why? Well not for his achievements, obviously, but because he showed everyone how to use the media to gain and hold power. Photo opportunities anyone? What the world doesn't need is more of these kinds of politicians. So France really is out of the game.

Now I'm guessing that an American attack on Iran is going to be bad news for pretty much everybody. First, for the Iranians and then for the rest of us. But hey after you've slaughtered 650,000 Iraqi civilians where are the moral guidelines? The point is winning. Though, strangely in a Nation where "IS" needs to be defined, no-one has been asked to define "WINNING". Nor has anyone explained how you "WIN" an "ENDLESS WAR" on Terror. Doesn't endless mean there is no end point? Well exactly. Orwell had the blueprint but no-one reads books anymore so Cheney and his buddies have everything wrapped up.

Either way ugly GEOPOLITICS will help keep GOLD bid and, unless someone changes George W.'s medication, that seems unlikely to change. Or at least that's the conventional wisdom.

But there are other views out there. And if you take the view that war is profitable but unpredictable, unless relatively contained, then you could take the view that there will be no escalation, just lots of veiled threats. So we could, right now, be right on the brink of some bizarre equilibrium where there is no resolution and no escalation. Or at least an attempt by the powers-that-be to hold on to a bizarre equilibrium.

The trouble with that point of view is that a) it overestimates the intelligence of the people involved by a large margin and b) it underestimates the imponderables and the unpredictable. This is Karl Rove's November election strategy to the power of 100 and we all know that the Karl Rove strategy failed. These people may be devious but they are not really smart, they just think they are.

So we don't really know how things will fall but we do know that it would be unwise to take any serious bets on direction until the GEOPOLITICAL situation becomes clearer. There is a lot of deviousness around right now and not a whole lot of smarts. The U.S. Administration overestimates its own economic smarts. Ultimately that is bad news for the USD, U.S. Financial Markets and the U.S. economy. And bad news travels fast.

The Sound of Bubbles Popping

2007-01-10T11:56:00.000+01:00

EUR/USD 1.2994 Hi 1.3007 Low 1.2952
USD/JPY 119.17 Hi 119.51 Low 119.14
AUD/USD 0.7797 Hi 0.7816 Low 0.7786
EUR/JPY 154.85 Hi 155.28 Low 154.59

fxtalks

That noise you hear is the noise of a 1,000 Hedge Funds sucking in air through gritted teeth. Given that following the crowd has proved such a disastrous strategy, the market is now looking for contrarian ideas. And guess what? These contrarian ideas are ALL THE SAME. Here are three of the most common:

Idea No. 1: The USD might look weak, and the market is/was looking for it to crumble, but clever contrarians know that a global recession will see the USD outperform other major currencies.

Idea No. 2: As a result of Idea No. 1, and because we are faced with a recession and potentially DEFLATION, USD denominated Treasuries are a good long term bet.

Idea No. 3: GOLD will underperform other assets. The market is bullish, long and DEFLATION is looming. Plus the USD will rally (see Idea No. 1) taking the shine off GOLD.

Well good luck trying to figure out how it's supposed to work in the medium to long term. In the short term the USD is gaining support from short covering. We have not seen a resurgence in USD bullishness. There is still no reason to want to hold USDs or USD denominated assets in the long term unless you use USDs to pay your grocery bills.

The Treasury Market story looks like it is having slightly more trouble buying the Contrarian Story. U.S. Treasuries continue to see selling pressure. The U.S. Deficit is a BIG PROBLEM. What's more the U.S. Government wants to attract more offshore money so that it can finance more international conflict. Potentially this conflict will be nuclear and will be carried out by the U.S. Patsy in the Middle East: Israel. So far, so good. Cheney is practically beside himself with anticipation.

The one MAJOR problem with this little game plan is that the people who are supplying the cash are also the people who have already seen what Nuclear Bombs look like: the Japanese. They might not be so excited about the use to which the U.S. wishes to put their savings. So keep a very close eye on the USD/JPY. In terms of the U.S. Funding Requirement, the USD/JPY really is more important than Europe and the EUR/USD. The USD/JPY has been appreciating over the past year, mostly because of the CARRY TRADE, but should Hedge Funds be forced to square, should the BoJ go ahead and HIKE in January and should the Japanese take advantage of the current exchange rate to REPATRIATE FUNDS, then the USD/JPY could see a sharp reversal.

Meantime we do know what's on the agenda on U.S. Financial Markets for this year thanks to the recent release of the FEDERAL RESERVE "Minutes": NO EASING. The FED looked to one side and saw the high levels of Consumer Debt, Falling Housing Prices and struggling American Citizens and then looked to the other side and saw the Massive Government Funding Requirement and, guess what, the FED went with the Government Funding Requirement. The FED has decided that the Federal Government needs to keep USD denominated assets attractive to offshore investors. So sorry about all those guys we encouraged to take out floating rate mortgages at the bottom of the market and sorry about the fact that we didn't tighten up lending requirements or increase Reserve Requirements, like the Chinese just did (which means a decrease in lending but not necessarily an increase in interest rates) but we gotta try and protect the value of the USD for our Foreign Investors. Not that Foreign Investors are necessarily buying into this, but hey, we can't take any risks here. We'd like to help, we really would, but we got a Trade Deficit, a Current Account Deficit and a soaring Government Deficit to deal with. Our hands are tied. There's nothing we can do. You're on your own guys.

So it's good news all 'round. And if Global Stock Markets don't seem to see it that way, well too bad. And Global Stock Markets certainly seem to have started the year with a bit of a bang. The sort of bang you get when a very BIG BUBBLE POPS.

OIL 55.11
GOLD 611.50

Although the economic outlook hasn't dramatically worsened, (the economy has been bad for a while, just everyone was pretending) all the commodity bulls are suddenly getting slammed into the wall. And now the data out of Europe is starting to look clouded. That makes: the U.S.A., China and now Europe. How long before we officially declare a global economic "cooling"? Not long.

Accommodation is being removed everywhere. So the Commodity Correction could have a while to run before we're done. The creation of the Hedge Fund bubble (that is the Hudge Fund Industry) means that you could see selling pressure at absurd levels on the downside as stops are triggered, just like we saw buying pressure at crazy levels on the upside as short sellers were squeezed. I wonder what did happen to that Chinese trader who was caught massively short copper and squeezed as the market spiked? Expect more stories like that, only in reverse.

The GOLD price has fallen back as Commodity Markets got hit and the firmer tone of the USD has helped. But we haven't seen anything like the scale of panic driven selling we have seen in other Commodity Markets. The longer term outlook for GOLD depends on two things: confidence in the stability of Global Financial Markets and investor confidence in the USD in particular. Neither is guaranteed.

Strange goings on in the GEOPOLITICAL world together with the impact of warmer weather has taken the zing out of the OIL price. What Bush needs to do to get that price back up is start another war. So, together with his buddies in Saudi Arabia, using Israeli Air Power it appears that ANOTHER WAR is being planned. It involves an attack on Iran, by Israel, with nuclear bombs and U.S. and Saudi support. Just in time for Armageddon. Which reportedly is going to happen on December 21, 2012. It's nice to get these things lined up neatly. They'll tell you about the next war when they're good and ready. Oh and when there is no way to back out.

At any rate this new little plan for attacking Iran, and the strange alliance between Israel and Saudi Arabia that this involves, has shown how quickly the Palestine issue could be solved with the right incentives. Israel is releasing Palestinian funds, prisoners and calling for: "bygones to be bygones". So this intractable problem is suddenly over? Oh yes. Funny what can be achieved when you really put your mind to it. And so quickly too. Not that the International Press is pondering the issue or the bizarre swiftness with which that particular conflict was resolved. Things move on.

But don't worry we have another bigger and better conflict coming your way soon. The attack on Iran could really get things going. You know how it is? War is so profitable. Cheney really is beside himself with joy. Or whatever passes for joy at his house.

Sometimes it seems that the Conspiracy Theorists really are onto something.

Bush's New Iraqi Plan. Two Words or Less?

2007-01-02T14:15:00.000+01:00

EUR/USD 1.3267 Hi 1.3290 Low 1.3226
USD/JPY 118.87 Hi 118.95 Low 118.49
AUD/USD 0.7956 Hi 0.7962 Low 0.7913
EUR/JPY 157.75 Hi 157.89 Low 156.88

fxtalks

Well it's New Year and we are all waiting breathlessly for George W.'s new Iraq policy. This is the same extremely talented team which came up with the puerile: "Punish France, Ignore Germany, Forgive Russia". The point of which escapes me but it was the considered response of the Bush Administration to the opposition by France, Germany and Russia to "Operation Iraqi Freedom", the code name for the U.S. war on Iraq. From memory I think China also opposed the war but obviously thinking up a slogan which encompassed more than three nations wouldn't have had the same snappy ring to it. So they went with "Punish, Ignore and Forgive". Marketing in America is everything. Do whatever you want so long as you sell it right. No-one out there in Voter Land is really paying attention anyway.

The Bush Administration's "Punish, Ignore, Forgive" response was built on the premise that: a) they were right b) the U.S.A. is the most heavily armed nation on earth and can do whatever it wants and c) force is not only necessary but sufficient to settle any dispute and divergent views are not appreciated. The upshot being that the U.S.A. can and will and has done whatever it wants where ever it likes and no-one can or will do anything about it. And that's true. At least in military terms.

So the New Iraqi plan will be more of the same: puerile and redundant. Only possibly worse. And the stakes just keep getting higher. On December 23, when the western world was distracted by the Christmas Holidays, under U.S. pressure the U.N. quietly voted for sanctions against Iran. So, despite the complete failure of the Iraqi incursion, the Bush Administration has decided to continue pursuing its Foreign Policy Objectives, sans Rumsfeld, and without any significant modification of its strategy. First we have U.N. sanctions aimed at further weakening a nation damaged by existing economic sanctions. Then, at some point, there will be a military strike. The point of which will be unclear, though the unstated aim seems to be to wrest physical control of Iranian Oil Reserves. The champions of Free Trade only believe in Free Markets when applied to other people. Not for them the mere purchase of Oil on the Open Market.

The question that needs to be asked though is this: if the world's most heavily armed nation hasn't been able to win a war against a nation which was effectively disarmed prior to the U.S. invasion, why would they expect to win against anyone else?

Oh I know that continuing the brutal tradition which so far has not been emulated by any other nation, barbaric or otherwise, the U.S. may decide that an Aerial Atomic Bombardment will silence critics and ensure their global economic and military pre-eminence. And this slightly psychotic aim seems to lie at the very heart of all of the Bush Administration's Foreign Policy Strategy. And the American public has no problem with that. In fact the American Public seem to believe that American pre-eminence is something akin to a divine right, like the Divine Right of Kings. It's a slightly archaic idea but they're hanging on to it.

The greatest risk to the current U.S. policy strategy is not on the military field. First, because the rest of the world does not necessarily buy into the idea that wars are good economics and/or good politics. The U.S. pretty much has the use of force to itself as a game plan. No challenges and no real interest.

No, the real risk for the U.S. is finding the funds to carry out their paranoid plans. And that Achille's heel is somewhat more tricky to deal with. The U.S. needs to keep foreign funds rolling in. They need to inspire confidence in foreign investors. This is somewhat difficult when you are going with a plan of global domination via military means but with a little ducking and weaving and lots of obfuscation you might just get there. Unfortunately having George W. as your Publicist-in-Chief makes the job just that much harder. Still you go to war with the team you have. Or, at least, the likes of Rumsfeld do.

So in the interests of shoring up offshore confidence in the USD and U.S. Financial Markets you produce headlines such as these:

Treasuries Have Best Half-Year Since 2002

What next? U.S. Treasuries have best Trimester? Best 10 days? Best 30 seconds?

U.S. Treasuries, in fact, had a bad year last year and the outlook for Treasuries this year is clouded. But you wouldn't want to spook foreign investors at a time when the Funding Requirement of the Bush Administration just keeps expanding and the U.S. has no domestic savings to speak of. The USD is still in trouble. The U.S. economy is in trouble and U.S. Financial Markets look fragile at best. 2007 could be a very interesting year.

OIL 61.21
GOLD 641.60

GOLD bulls are back in the driving seat, which isn't much of a surprise considering the recent USD performance and the possibility of more violence in the Middle East in the near term. The same forces are holding the price of OIL steady in the face of a potential U.S. economic "cooling".

So I guess the Bush Administration hasn't been a complete disaster, at least for the OIL industry. And in Afghanistan a record poppy crop is predicted. War mongers, arms dealers, drug dealers and the OIL industry have all done well. Conspiracy or bad management? Does it really make any difference?