Tuesday, May 16, 2006


Markets Seesaw Amid 'Currency Tensions'

Some reports on what's moving the markets. "The dollar fell after government reports on inflation and housing starts boosted speculation the U.S. economy is slowing enough for the Federal Reserve to stop raising interest rates. 'Both give credence to the Fed taking a pause in June and having less of a need to tighten rates in the second half of the year,' said Tim Mazanec, senior currency strategist at Investors Bank & Trust. 'The dollar is going to weaken.'"

"The dollar fell to $1.2853 against the euro at 8:59 a.m. in New York, from 1.2796 yesterday. The U.S. currency dropped to 109.90 yen, compared with 110.49 yesterday."

"'The inflation data is the key arbiter of what the Fed is going to do,' Sophia Drossos, a currency analyst at Morgan Stanley, said before the producer price report. 'If pressures are just temporary, the Fed will probably take the opportunity to pause in June. It still points to the downside for the dollar.'"

"Gold futures headed higher Tuesday morning as weakness in the U.S. dollar helped the metal recoup some of the more than $36 an ounce it lost in the past two sessions. 'Buoyed by short covering and scattered physical buying, gold made an honest effort to recover from Monday's slump,' said Jon Nadler. 'It did not take much for the dollar to resume its downward spiral, as structural imbalances continue to put doubts into the minds of its would-be holders,' said Nadler."

"Peter Grandich said he believes 'the correction appears to have more work left to be done on the downside.'"

"Gold for June delivery rose $8.50 to $693.50 an ounce on the New York Mercantile Exchange after reaching a high of $690.90. July silver tacked on 6.5 cents to trade at $13.40 an ounce after losing more than 6% on Monday. July copper added 8.5 cents to $3.755 a pound. June palladium was up $2.25 at $377 an ounce and July platinum climbed $19.20 to $1,304 an ounce."

"The Canadian dollar rose against the U.S. dollar on Tuesday. At 9:01 a.m. (13:01 GMT), the currency was at C$1.1087 to the U.S. dollar, or 90.19 U.S. cents, up from C$1.1136 to the U.S. dollar, or 89.80 U.S. cents, at Monday's close."

"'The market is going to reinforce the view that the Fed's on pause, given the steep decline in housing starts and core producer prices,' said Beata Caranci, an economist at TD Securities. 'So it would widen the spread diversions between Canada and the U.S. with Canada still biased toward another 25 basis points, so that's a net positive for the (Canadian) dollar.'"

"China's official exchange rate weakened significantly on Tuesday, the central bank announced, defying a gain the day before that helped break through the psychologically important 8 yuan per U.S. dollar level. The dollar, measured by the central parity rate announced by the People's Bank of China (PBoC) before the market opens each business day,bounced back to 8.0150 yuan. The yuan depreciated by 168 basis points, the biggest day-on-day decline since a revaluation reform last July."

"At a time when international currency tensions are at their highest in two decades, Japan's Finance Minister Sadakazu Tanigaki has defied American warnings to stop jaw-boning the US dollar. Mr Tanigaki yesterday addressed the touchy issue of currency intervention when he told an Upper House finance affairs committee that Japan's $US860 billion ($1.13 trillion) foreign currency reserves were 'set aside for intervention in the future.'"

"'We can be ready for such an occasion to use them, but I would not comment how high such a possibility can be.'"

"Mr Tanigaki said the Bank of Japan's vast holdings of US Treasuries could be sold in future to fund intervention operations. However it's doubtful he was considering the current environment because a T-bond sell-off would further destabilise the US dollar, which is precisely what Mr Tanigaki does not want."

"Washington tried to engineer a currency easing in 2003, in spite of the overt commitment to the so-called 'strong dollar policy' that continues today, but was frustrated by a massive Japanese campaign to buy US dollars. During Mr Tanigaki's first seven months as Finance Minister, the BoJ bought more than $US200 billion. After intense pressure from the Americans and Europeans, the BoJ quit the market in March 2004 and has not returned."

"US Treasury officials have tried since the G7 finance ministers meeting on April 21 to persuade Mr Tanigaki to stop his 'verbal interventions' to prop the greenback. The G7 communique called for greater 'exchange rate flexibility' from Asian economies, though only China was named."

Looks like BB is going to pause next month. Will PM go up between now and then?
Just can't keep'em down!
John in VA (to continue),

Just to clarify my position, tj, I don't claim to know whether it's early or late in the cycle

We're clear; I said "believe", not "know". However, your belief is strong enough to steer you away from what I consider the opportunity of a lifetime. I'm just trying to convince you otherwise, or -- upon failing to do so -- possibly save myself. ;)

I don't think gold's any more in a bubble than oil. Has there been a "speculative premium" at work? Most certainly. Does that change the underlying trend? Not at all.
any bubble talk now is more a long the lines of a 1987-like bubble. a pause in a long-term trend.

I believe in 73 or 74 gold fell nearly 50%, from around $200 down to $100, before going to $850.

I don't hear anyone talking about leaving their job to propect for gold. I don't hear anyone retiring on their gold shares in 3 years. remember during the dotcom days one some of those guys were going to retire at 40?
I don't think gold's any more in a bubble than oil. Has there been a "speculative premium" at work? Most certainly. Does that change the underlying trend? Not at all.

Sounds like we're in not-so-violent agreement here, tj. Oil, I suspect, is in a bubble along with other non-PM commodities like copper, etc. Yes, I know, China..., but it seems overdone nonetheless. I think there's an interesting "conundrum" (as AG might have put it) with non-PM commodities: rapidly rising commodity prices are seen as a major driver behind inflation. Inflationary concerns are pressuring the dollar and driving investors into...commodities. In other words, I see a potential vicious cycle developing that could drive commodities much higher if the central banks don't get out in front of it. Conversely, the whole dynamic could unwind itself quickly if we start go slip into a global recession. In that scenario, demand for resources falls quickly, China tanks hard (despite our China-awe, their economy is still extremely dependent on U.S. consumption), inflationary concerns evaporate, and PMs correct sharply.

So, if I were paid big bucks to come up with wild-ass guesses about the future(like, say, a Fed governor), I would don my swami hat and predict:
- commodity prices (including PMs) continue to rise sharply for a period of time - probably less than a year.
- rising commodity prices finally begin to filter through to consumer price inflation -- combined with high gas prices, this really puts a damper on consumer spending
- the Fed has to act aggressively to get in front of inflation and whips out a can of fed-funds-rate whoop-ass, just like Paul Volcker did in the 80s
- sharp home price declines by late 06, along with rising interest rates, put the kibosh on consumer HELOC-fueled spending
- the commodities and PM boom cycle comes to an end

What do you think?

I just can't see the Volcker-style rate increases. The current Fed rate of 5% is already starting to crush some of the variable-rate debtors. Can't imagine what a string of increases to 8% or 9% would do.

I agree that such hikes would be the prudent thing to do, but I don't believe there's anyone in the Fed with big enough cajones to do it.
I don't believe there's anyone in the Fed with big enough cajones to do it.

You may be right, lv. However, it's hard to envision a situation in which consumer price inflation skyrockets and the Fed stands still. I agree with most here that the real rate of inflation is higher than the artificial metrics the government relies on. But sooner or later, even the core CPI will start to show dramatic increases.

My guess is that ol' BB is smarting from the "Helicopter Ben" monicker, and could very well go out of his way to prove that he's a no-BS inflation hawk.

As for the variable-rate borrowers - they're already dead, they just don't know it. If it comes down to an all-out inflation fight, my bet is that the Fed rolls its tanks right over the condo flippers and third-mortgage retirees. Someone's got to pay the tab for this party. If you were the Fed chairman and it came down to them or the bond market, who would you choose?
(May 17th) -- Mass confusion in the markets today. Dow plunges more than 150 points on higher than expected inflation, AND metals and miners are down.

The expectation is that the Fed will now get "really tough" on inflation. Where does this faith in the Fed's dedication to fighting inflation come from? They certainly haven't demonstrated anything of the sort so far.

My bet is Bernanke talks a big game, paying lip service to fighting inflation and raises rates another measly quarter point. Meanwhile the dollar slide will continue unabated and M3 will continue to swell.
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