Friday’s Test Level
Economic releases continue to have little impact on markets as the Fed desire
to stay the course has taken hold;
Greenspan’s speech in Germany on Tuesday revealed much about Fed thinking;
Friday will be a critical day technically for the euro currency.
Friday will bring a slew of new economic statistics as we will see the capacity
utilization and industrial production released. The consensus is 76.1% for
capacity utilization and .7% increase in factory production. As good as these
numbers may be they will have little impact on the Fed for the course of low
rates will be maintained until the ‘excess gap’ is removed. What these numbers
are we don’t know but from all the Fed chatter this week we don’t appear close
to the Delphic level.
Chairman Greenspan gave a fine speech on Tuesday in Berlin, being more
forthright than he has been since his days in Ayn Rand’s coterie. (Go search his
musings on gold in the 1960s). He told the Europeans that the greatest threat to
the world financial system was the imposition of trade barriers and rules that
would hamper the free flow of global funds. He strongly stated that the U.S.
deficits were resolvable as long as there were no infringements on the flows of
global capital: “More generally, the vast savings transfer has occurred without
measurable disruption to the balance of international finance. Certainly,
euro area exporters have been under considerable pressure, but in recent months
credit risk spreads have fallen, and equity prices have risen, throughout much
of the global economy.†(Emphasis added)
This
quote from Greenspan reveals much about Fed thinking. First, the Fed monitors
government/corporate swap spreads to measure stress in the financial system.
Second, the fact that these swaps in European markets have narrowed means that
the sell-off in the dollar has not yet caused stress in the system. Corporate
swap spreads are the interest rate differentials between similar duration
government and high quality corporate bonds. When the swap differential widens
corporate debt is more risky and when it narrows corporate earnings are presumed
to be healthy and a safe bet. If the weak dollar was weighing upon European
corporate profits the swap market would be widening. Chairman Greenspan walks
into the European market and tells them that the dollar is not undervalued. The
fact that the dollar didn’t get hammered was a testimony to its over-bought
condition.
As a
trader, I look for signs that tell me when the trend is due to change. Not all
signs are 100% or 75% — but some certainly have a high probability of being
right than others. Friday will bring a test of the level we discussed last week:
125.50 cash euro. If the euro cannot hold this level after all the
chatter this week (both pro and con the dollar) it will mean that the new term
trend for the dollar will become favorable. A market that has sustained a rally
for months will ultimately see profit taking and this may be the start. I am by
fundamentals not a dollar bull, yet when the technical support gives I take note
and trade accordingly. The collective wisdom of the market is the greatest voice
of reason I know.
Good
luck and be disciplined,
Yra
Harris
yra53@aol.com