Here’s Why You Should Keep An Eye On The Gold/Yen Chart
The unemployment report was disappointing
from every perspective, though the drop in the headline
rate from 5.9% to 5.7% will play well in Republican leaning
newspapers. Hours worked was soft as were average hourly
earnings. The most significant feature is that the manufacturing
number has failed to improve, even with a dramatic decline in the
Dollar over the last eighteen months. This unemployment number
was dismal at best.
As for the currency markets, it will be
a continuation of the present trend as the Dollar failed in its early
week attempt to rally. This weekend brought headlines from
global periodicals about worldwide concern about the US twin deficits
and the eroding Dollar. At what level of Dollar decline will we
begin to see the concerns of world central bankers aroused enough to
force a major policy change? At what level of Euro currency
strength will the ECB finally cut European interest rates? At
present there is a G-10 meeting going on in Switzerland so we must
stay attuned to any jawboning coming from that group. An immediate
problem for the dollar will be the accusations by former Treasury
Secretary Paul O’Neill. The painting of President Bush and his
economic advisors as novices at best will do little to instill
confidence in U.S. financial policy. ( Hell has no fury like a wealthy
man scorned.)
The dollar versus the Yen is an
interesting phenomenon as can be easily ascertained by Thursday night
and Friday’s price action in the Yen. Central bank intervention
in Friday’s Japanese markets created a two figure range in Dollar/Yen
which is equivalent to 200 points at the Chicago Mercantile Exchange.
The BOJ (Bank of Japan) purportedly intervened for around 6-8 billion
dollars driving the Dollar much higher. The end result was the
Yen closed basically unchanged by New York’s Friday afternoon close.
This begs several questions for currency traders: 1. if they bought so
many Dollars who was selling into that buying resulting in the
late market being unchanged; 2. does this mean future Dollar weakness
due to their inability to reverse the trend through all their
intervention; 3. we know that the BOJ bought nearly 200 billion
dollars over the last year and the Dollar is lower yet.
As a trader I would say that when
massive intervention cannot turn the trend there is a major disconnect
between the sentiments of the government and the markets. If
there is one thing I have learned, it is that government can cause
much pain for a short period of time, but over the longer-term markets
will win out. The short-term outcome has been that most day
traders have given up trading the Yen for the risk reward balance is
just not there. Hence, the voluminous increase in the Euro currency as
traders head for the path of least resistance.
Food for thought — In discussing the
Yen and BOJ intervention I surmise that the Federal Reserve Bank is
pleased by the Japanese intervention. Let me explain why.
In November, 2002, when Ben Bernanke made his major statement about
the Fed’s ability to pump liquidity even when rates are low by buying
U.S. treasuries, the interest markets rallied dramatically.
However, the markets sold off quickly as they realized that this was a
theoretical supposition and was not an actuality. If the Fed is
ever forced to buy five and ten year treasuries in the open market it
would probably lead to a major sell off in the U.S. dollar and the
equity markets as it would be a signal that things were rotten in the
financial system. But the BOJ intervention in the Dollar/Yen
which ultimately led to the Japanese and Chinese (by their Reminbi
policy) buying massive amounts of U.S. treasuries thus providing a
support base to the long-end of the curve. The one thing the Fed
fears most is that a weak dollar would result in foreign bond holders
selling Treasuries, pushing the curve steeper and preventing the
incipient recovery. If the Fed was the intervener it would be a
grave warning, hence the BOJ intervention creates the perfect
symbiotic relationship. The Japanese get a gradual rising
currency and an added benefit that it weakens against the Euro and
Bernanke et.al get market support. Keep your eyes on the
Gold/Yen chart to see if this confirms out as this relationship made
12 year highs this week.
Events to be aware of this week are the
G-10 meeting and BIS in Switzerland and Greenspan addressing a
Bundesbank conclave Tuesday and our favorite Ben Bernanke speaking on
monetary policy Wednesday in Geneva. Also, as something to be
aware of- the DAX (German stocks) made an eighteen month high last
week but closed lower on the week. Is the Euro strength finally
starting to bite into European corporate profits? We will have
to begin to watch this and see if there is more weakness to follow and
what it means for the Euro currency.
Yra Harris