Thursday, June 29, 2006

 

'Decision Day' For The US$

The Daily FX has this early update. "The FX markets remained motionless overnight, all but ignoring all of the economic data from Asia andEurope as dealing desks around the world prepared for the FOMC decision at 18:15 GMT today."

"The FX market the focus remains squarely on the Fed with the market keen to know if the Fed intends to move rates to 5.50% or even possibly 5.75% level as early as August. Despite dollar bears’ predictions of imminent doom once rates crossed the 5% threshold, the US economy has remained remarkably resilient in the face of higher rates and persistently higher oil prices. However, greenback shorts may not have been wrong, just early."

"The US housing bubble, like all bubbles before it refuses to pop quickly as buying momentum persists beyond all reason. However, the weekly MBA data clearly shows that this key sector of the economy is experiencing serious problems. Yesterday’s data revealed that both the Market Index and Purchase Index are at new lows for the last 3 years. Another 50 basis points rate increase in the Fed funds rate is likely to drive up the cost of adjustable rate mortgages even higher, making housing less and less affordable for the majority of the US population."

"For now the Fed has been able to tighten monetary policy without any detrimental effects to the US economy, but as it continues to ratchet rates higher, it raises the probability of a sharp contraction in housing, which in turn would lead to a significant slowdown in the overall economy."

"Traders like the ever increasing yield on USD assets but worry that these increases could trigger a US recession. This conflicting sentiment explains the lack of dollar strength versus the euro, given the unit’s substantial interest rate advantage."

"Nevertheless, should the Fed statement strike a hawkish note today, it may well push the EUR/USD below the 1.2500 level and possibly even towards the 1.2400 figure as momentum traders test the resolve of euro bulls. Any hint of hesitation, however, and the euro could see a rally on a classic 'sell the news' dynamic."

Comments:
Fascinating. The Fed raises, plus signals more possible raises, and yet everything is up. Go figure.
 
Bernanke turns out to be a wobbler. He puts out 4 Fed governors to peddle a hawkish message and in the end puts up a wimpish hike with a wimpish statement.

He provides neither direction nor credibility, becuase he has no clue neither courage.

Bernanke is as good as dead and the economy will pay with a slow-mo death with an implosion in the end.

Good for those that buy/hold gold in the last few weeks.
 
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