The Twilight Zone!
By forexnews on Mar 3, 2011 01:45:18 GMT
North is south, right is wrong, up is down. Have you ever had the feeling that what you believe to be true really isn’t? That somehow you exist in an alternate reality and are starting to question your own sanity?Well that’s how I feel when I listen to Fed Head Bernanke give testimony to Congress. Well not exactly, but you get the idea. Yesterday’s Beige Book report told a different story than what many Americans are currently seeing regarding current economic conditions. While the economy may be improving, current monetary policy and the commitment to keep interest rates low could have dire consequences going forward.
As the world’s reserve currency, a depreciated US dollar contributes to higher commodity prices. This is an undisputable fact, yet Bernanke continues to dismiss it. Does anyone really think that oil would be at $100 if interest rates were at historical averages of 4%?
So Bernanke is guilty of willful blindness and is all but screaming at the top of his lungs that he wants to see inflation—without actually saying it.
Other regions around the globe are more sensitive to the inflation issue, such as the ECB who will be having their rate decision later this morning. Part of the problem that established nations such as the US and the Euro zone have is how to ward off inflation while maintaining and encouraging growth at the same time.
The politically expedient way is through the “extend and pretend” policies that we see here in the US; however the best way to tackle the problem is with intellectual honesty which we seem to lack.
So far this morning the market is enamored with the economic prospects and current policy, as stock futures are way higher to start the day, and oil is pulling back as Libyan turmoil is seen as improving.
In the forex market:
Aussie (AUD): The Aussie is mostly higher on risk themes despite the fact that building approvals came in much worse than expected, dropping nearly 16%. In addition, Australian exports were lower some 4%, perhaps a result of a stronger currency or Chinese slowdown.
Kiwi (NZD): The Kiwi has rebounded nicely after the MSCI Pac Rim index traded higher on the back of the US Beige Book report issued yesterday. While rate expectations for the Kiwi remain muted, the positive interest carry cannot be ignored.
Loonie (CAD): The Loonie is slightly higher on risk appetite though lower oil prices are holding it back some. The US employment reports both today and tomorrow will affect the Loonie as Canada’s economic prospects are closely tied to the US.
Euro (EUR): The Euro is mostly lower as the ECB keep rates unchanged at 1% but didn’t issue overly hawkish comments in the decision. Meanwhile, retail sales figures came in much better than expected posting a YoY gain of .7% vs. an expectation of no change. It seems likely today that the Euro will flip back to positive as risk themes continue.
Pound (GBP): The Pound is lower across the board as a home price survey showed that prices were lower for an eighth consecutive month and the PMI services index came in lower than expected, posting a reading of 52,6 vs. an expectation of 53.7. (Click chart to enlarge)
Dollar (USD): The Dollar is mixed this morning ahead of the initial jobless claims report which is expected to show some 400K of job losses. Individual weakness in the Euro and Pound are giving the Dollar some life, though it is lower against the rest. It will be interesting to see if stocks can hang on to their early gains this morning.
Yen (JPY): The Yen is mostly lower on risk-taking as stocks in Asia were higher overnight. The Dollar is putting in a near-term bottom vs. Yen. (Click chart to enlarge)
Part of what makes the currency market the most exciting market to trade is that different interpretations of events provide endless opportunities to make money.
While often I feel like I am in the “twilight zone”, being able to stand apart from the crowd will give me an opportunity to stay ahead of curve. While I don’t want to impose my own view of where I think things should be, it is much easier for me to change course should my overall view be proven correct.
I try not to listen to the media who simply regurgitate the talking points coming from the government and spin them into a positive. I don’t believe government reports that are lacking in merit (such as inflation data) and take them with a grain of salt.
But what I do is try to interpret how the market will react, and look for signs that a certain view may be supported through price action.
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