Wednesday, October 11, 2006


Fed Turning Hawkish

A Fed report shook up the currency markets this afternoon. "The Canadian dollar slid to a 2-1/2 month low versus the greenback on Wednesday, as commodity prices continued to decline, while a key report from the U.S. Federal Reserve suggested officials are still concerned about U.S. inflation."

"The somewhat hawkish Fed minutes report, which boosted the U.S. dollar broadly, although those gains were pared somewhat after news reports that a small aircraft had crashed into a building in New York. 'I think that the market was leaning a little bit on a hawkish stance from the Fed, and they got it,' said Steven Butler, director of foreign exchange at Scotia Capital."

"'We're slowly grinding to the next (technical) level, which is probably C$1.1425, which still seems like it's a little bit away, but it feels definitely like the market's... now going to continue to look to buy U.S. dollars on dips,' Butler said."

"While the market is debating the U.S. rate outlook, Bank of Canada rates have not budged since May and are not expected to move next week, when the Bank of Canada announces its next rate decision. The central bank's overnight rate is 4.25 percent, while the comparable fed funds rate is 5.25 percent."

"The economic fashions for the United States are changing. Out of style: the need for aggressive Federal Reserve rate cuts starting early in the new year. Back in style: a possible 'soft landing' for the U.S. economy."

"That change is tripping up the finance world's fashion followers who had bet recently on a sharp economic slowdown by positioning for lower interest rates and a weaker U.S. dollar. Lower market interest rates that have helped stabilize the housing market, as suggested this week by St. Louis Fed President William Poole, calls for drastic rate cuts to head off a recession are fading."

"Subsequent Fed speakers sang a similar song, culminating in Wednesday's hawkish minutes from the Sept. 20 Federal Open Market Committee meeting."

"The soft-landing scenario has hit interest rate futures, where dealers recently bet heavily on a slowing economy. The fed funds yield implied by Eurodollar futures has risen by almost 25 basis points since Oct. 4, erasing the equivalent of a quarter-point Fed rate cut."

"After the FOMC minutes, futures briefly implied, for the first time in three weeks, a small chance the Fed could raise rates in December from the current 5.25 percent. The U.S. dollar, meanwhile, is at multi-month highs against major currencies on assessments that the economy is in better shape than many had thought."

"Gold futures climbed Wednesday, but closed under $580 an ounce for a second session as traders weighed the precious metal's value as a defensive investment against a backdrop of weaker oil prices and threats of more nuclear tests from North Korea."

"With international tensions rising, gold for December delivery climbed by 30 cents to close at $576.50 an ounce on the New York Mercantile Exchange. The contract traded as high as $583.40 earlier, after losing $6.60 in the previous session."

"Other metals followed gold's lead higher on Nymex, with the exception of platinum, which saw its January contract fall by $2.90 to close at $1,072.80 an ounce. December silver futures closed up 11 cents at $11.33 an ounce and December palladium added $7.35 to end at $308.95 an ounce."

"On Wednesday, Edmund Daukoru, president of the Organization of the Petroleum Exporting Countries who also serves as Nigeria's oil minister, said OPEC has agreed to cut its global production by 1 million barrels per day in a move to boost prices, but were still discussing how to share the cut, Dow Jones Newswires reported."

"'If gold does indeed deserve to close out the year on a high(er) note, it will do so only after having proven to its faithful that it does retain its security blanket attributes after all,' said Jon Nadler, at bullion dealers 'It is not that gold's fundamentals are shaky; it just needs to re-align itself with one or more traditional drivers of demand and exhibit better correlation,' he said."

Funny that the Fed is playing down the housing troubles, which I don't buy. More likely, they are putting themselves in a position to try to put out inflation. Here are a couple of international reports:

'Argentina and Brazil plan to do away with the US dollar in bilateral trade from 2007, Argentine media reported on Wednesday. Brazilian President Luiz Inacio Lula da Silva and his Argentine counterpart Nestor Kirchner are expected to establish before the end of the year the details of an agreement whereby the peso and the real will substitute the US currency.'

'The Government of Zimbabwe has closed down 16 money transfer agencies in the country. The agencies were accused of abusing their licenses by trading on the black market.'

'A BBC report quotes Reserve Bank governor Gideon Gono as saying the firms were banned because of, 'non-performance and deviant behavior.' Some major banks such as the Standard Chartered Bank and Stanbic were affected by the ban. Western Union and Fedex were among the sixteen agencies that were shut down.'
I think that Argentina and Brazil relying on their own currencies, rather than ours or the Yen or a European currency, is a nutty approach. They have too long a history of slipping into the type of hyper-inflation seen only once, to my recollection, in the more-developed world, that being post-WWI Germany.

I am very familiar with Zimbabwe and have been there often. They are a basket case and a bellwether for nothing at all. Under Mugabe, they represent only black racism at its worst and any accurate history book of the future, should such exist, will show that the Western media chose -- heartily chose -- to turn a blind eye to the outright murder of whites in revenge of who knows what, to the ultimate starvation-level deprivation of its own people. Basically like turning on the cyanide gas in a room in which you and your enemy are trapped -- you'd better hate him "real bad."
Dang Chip, you're quite the worldly guy, aren't you? Keep the stories coming (and don't mind Fred).

p.s.: Everybody catch Prechter's interview on FSO?
Yea. I did.
What struck me is his last comment when he said that neither his deflationary nor Jim's hyperinflationary sceerio haven't happened yet.
I would argue that 8.5% yoy growth of M3 is prove that inflationary scerio is happening now. So he lost the contest already.
8.5% isn't hyperinflation.
OK, John.
I know that.
But Hyperinflation is not going to start from 2-3 % level overnight to 30 or 50%. It will rather accelarate over time.Sometime on the way must hit 8,10,15%.
8.5% looks like accelaration process, IMHO.
Will you agree?
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