Date: Fri Jan 07 2005 11:56
trotsky (goose@dollar) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
"cannot see any fundamental reason for the dollar to rise from here"
that doesn't mean it won't rise. even if the above were true ( it isn't ) , markets often move contrary to fundamentals for long periods of time.
the fundamentals for the dollar have however improved as well.
for one thing, the interest rate differential that has favored other currencies has shrunk or even disappeared in some cases ( ECB ST rates are now below the FF rate for instance ) .
US money supply growth is turning negative - contrary to money supply growth elsewhere.
and lastly, the yield curve has flattened, indicating a tighter monetary policy stance - which also favors the dollar.
the above fundamentals are more important for the short to medium term trend than the longer term fundamental issues of the current account and budget deficits.
note also that the trade deficit will probably see some short term improvement on account of recently lower oil prices.
all that said, i still think that the 80 level on the DXY is not as safe a perch to begin a rally from as everybody believes apparently. if it breaks on the next down move ( it should at least be tested, even if the recent rally's for real ) that break could precipitate a panic - regardless of fundamentals
Date: Fri Jan 07 2005 11:37
trotsky (frustrated) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
i've also been wondering about this recent 'let's ignore the jobs data from now on' propaganda campaign. it doesn't sound credible, now does it? after all, the Fed's mandate includes ( foolishly ) a passus that requires them to worry about trends in employment.
but i'm not so convinced that there's reason to worry about the demand for the USG's debt paper. as i've mentioned before, people tend to underestimate domestic demand for bonds and notes. it is obviously far stronger than previously thought - consider that Japan has stopped intervening in the currency markets 9 months ago. that has brought us a period of yen strength, but where was the much touted weakness in bonds? didn't everybody say that unless Japan kept buying, bonds would collapse?
Date: Fri Jan 07 2005 11:18
trotsky (@pm stocks) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
well, that sure was a quick end to the bounce. i had thought it might actually stick for one day at least, but apparently traders can't get out fast enough.
that said, the downturn has improved the money flow picture a bit. one has the feeling that the sector is trying to find a short term bottom, but is sabotaged by the persistent PoG weakness.
note that w.r.t. the medium to longer term, the picture isn't as bleak as the recent succession of failing rallies suggests. e.g. the sentiment data ( positioning data ) show that the correction has ravaged bullish sentiment - see the recent Hulbert missive ( gold advisor long exposure is very low ) as well as the fact that the Rydex pm fund has lost over 50% of its assets from the late '03 high - mostly due to outflows.
also, it's reasonable to assume that after flattening consistently and sharply since mid '04, the yield curve's next major move will be a steepening. the problem is we don't know when just yet. according to the FOMC's December minutes, they're more committed to the rate hike exercise than i thought they would be.
they've mentioned everything in those minutes, except the fact that yields on the long end have been declining ever since the rate hike campaign began.
martincapital.com
in essence, the market is trying to tell them that every little hike may turn out to be a bridge too far , but they're firmly set on ignoring this piece of evidence in favor of focusing on the speculative frenzy they've managed to unleash ( in concert, it must be said, with the Asian CBs ) . not per se a bad thing, but they're ignoring the lag phenomenon. note that quarterly broad money supply growth in the US is threatening to go negative for the second time over the past year, while year-on-year money supply growth keeps declining toward 10 year lows as well:
martincapital.com
martincapital.com
this shows that contrary to popular misconceptions, the Fed can't be accused to be 'behind the curve' - rather the opposite.
and that is a good reason to believe that support for further rate hikes will decrease in coming months, simply because the economic background noise ( i.e., the government's statistics ) are bound to deteriorate more and more in response to the decline in money growth. after all, the 'recovery' rests entirely on the bubbles produced by the reflation campaign - unless these bubbles continue to expand ( first and foremost, real estate ) there won't be much left of the much touted recovery.
so the question is, how do you continue to incentivize the consumite baboonery to increase its mortgage debt by more than $600 billion p.a. and drive the 0.2% savings rate down further in the face of declining real incomes and an annual interest rate bill exceeding $500 bn.?
the only possible answer from the Fed's PoV is to reverse the rate hike campaign. not that i think it will help, but what else can they do?
anyway, it gives us reason to expect a steepening of the long-short yield spread to begin at some point this year.
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