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Daily Forex
Commentary
By Jack Crooks
Key News
Foreign direct
investment in South Korea last year surged 97% to
a four-year high of $12.77 billion. (WSJ)
China's central bank cut its target for growth
for money supply and signaled it may raise
borrowing costs to curb inflation. (Bloomberg)
Guangdong's Customs Department says a host of
factors, including a shortage of migrant workers
and possible interest rate hikes, may combine to
slow the province's exports growth this year. (The
Standard)
Growth in the service industries of
the dozen nations using the euro held at the
slowest pace since August 2003. (Bloomberg)
Key reports
due Wednesday
(WSJ)
10am December Challenger Job
Cuts. Previous: +2.6%.
10am December ISM
Non-Mfg Business Index. Previous: 61.3.
Quotable
"It was a bright cold day in April, and the clocks were striking thirteen."
- George Orwell
FX Trading
Interest rates are heading higher. I’m shocked I tell you. Just
shocked!
"With the economic
expansion more firmly entrenched, cost and price pressures were likely to
become a clearer intermediate-term risk to sustained good economic performance", absent
further interest-rate increases, according to the Federal Open Market
Committee (FOMC) minutes released Tuesday, the Journal reported.
It was the engineering of the emergency Fed Funds rate, to save the world from
the clutches of deflation (denying thee as the proper cleansing agent for
economic sins past) that proved most impressive as bubble fuel. It's now the
long march toward the elusive "normalization" of benchmark interest rates that
will draw Zeppelin-like comparisons from observers as long-bond prices head
toward earth, I recently wrote in Currency Currents.
Despite the references to inflation a la the FOMC notes, I believe the Fed’s
goal is more basic. They know they are behind the elusive curve in which real
interest rates, based on our methodology of measuring such creatures, are
extremely low relative to economic growth. Estimates of just how far the Fed
trails the rate curve ranges from 200 to 300 basis points depending on maturity
level and who you ask. Either way, Uncle Al Greenspan & Co made it clear it's time
to remove the bubble juice.
We
didn’t
need FOMC minutes to realize that grinding sound of slowing liquidity -
a gander at commodities prices would have done the trick:
A few
weeks ago, I shared a simple gold buy/sell zone chart with clients. It had entered
a sell zone. I use it not to trade gold, but to provide background material to
help me judge the direction of the dollar. But if we look deeper into the
gold/dollar relationship in this cycle, I think we find China at the core. For
it was the Chinese gold trading and commodity demand as far as the eye can
see that was a major part of the story for the yellow metal. I have been concerned
about overheating in China for sometime - as many have. But the
evidence is mounting against this core driver of gold and all things raw;
especially now that the lowly dollar emerged with an Atlas-like attitude so far
this year.
These are some recent tidbits
from Morgan Stanley's Asian economist on the
scene, Andy Xie:
"The negative sentiment towards the dollar was behind the sustained surge of
liquidity into emerging markets, which kept emerging economies buoyant, mainly
via surging fixed investment in China and the resulting high commodity prices
for other emerging economies. The buoyant emerging economies caused the global
economy to grow at the highest rate in two decades.
"When the dollar bottoms, I believe it will signal the peaking of all risk
assets globally (eg, Shanghai property, commodities, and emerging market
debt).
"If the dollar reaches a convincing bottom in 2005, major reversals in asset
markets could follow. The overvaluation of commodities and emerging market debt
and stocks, for example, could correct quickly. A sharp slowdown in the
emerging economies as well as the global economy would follow."
Ding! Ding! Bing! Bing! Does anyone else hear a bell ringing?
Emerging markets have been the darling of the hedge fund and mutual
fund crowd on both the equity and fixed income side of the ledger thanks to
the Fed's squeezing the life out of the Fed Funds rate. But, the Fed Funds
are bounding back to life. We could be seeing a set-up for the classic
self-feeding dollar rally where the dollar plays the role of both cause and effect, ie
if the players in the emerging markets get spooked, and they should be
getting nervous, the flow back into the US will be another driver added to our list of
good news for the buck.
Stranger things have happened.
It is shaping up to be a very exciting year.
Jack Crooks has actively traded in global equity,
fixed income, commodity, and currency markets for more than 20 years. He is
president of Black Swan Capital, a currency and commodities market advisory
firm - BlackSwanTrading.com
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