Two Elements I Watch
Faithful readers:
The currency and metals markets
performed as expected
following the poignant remarks of
Fed Governor Bernanke. The dollar has been sold off, especially
against the Euro currency, as that has been the point of least
resistance as far as central bank intervention is concerned. I believe
though that the easy money has been booked in the short term. The
Swiss franc is beginning to appear tired and the fact that Gold made
new highs for the entire move today and closed lower may signal a
point of needed retrenchment. Markets can’t remain vertical forever
and some correction is healthy for future market action.
Friday will bring the unemployment
number or as some have called it – the “unenjoyment” number. This
statistic can cause severe market action if the actual is vastly
different from the anticipated. The markets seem to be predicting a
payroll number of 150,000, with a small improvement in manufacturing
jobs and a slight increase in hourly earnings and the average work
week. I would personally like to see a non-farm payroll number with a
200,000 handle or more for it would test the basic underpinning of how
the market reacted to the Bernanke speech. If the dollar is unable to
sustain a rally even after a strong number, the battle to test the
resolve of the world’s central banks will be on. Some analysts believe
that the world’s monetary authorities are treating the depreciation of
the dollar as a policy of “benign neglect” and if indeed this is the
case, the trading world will look for the level at which the resolve
of central banks will be tested.
Bernanke stated that the slide in the
dollar has not been that dramatic over the last ten years and in that
perspective, he is correct. But, though the old D-mark saw higher
levels against the dollar in 1995, Germany and Europe were in a far
different environment. Germany was still attaining growth benefits
from the process of unification which today has become more of a drag
on the economy than previously. Also, the unemployment rate for Europe
as a whole hovers in the 9% range and it is questionable how much
strain the European economy can take from a strong Euro. Touts of the
markets keep guessing at what level the Euro will appreciate to —
maybe 135 or 140. I don’t pretend to know nor will I venture a guess.
I will let the market tell me by watching certain elements — short
term Euribor rates will tell me if the ECB (European Central Bank)
will cut rates to lower the stress on the currency. I will also be
watching the Bund/T-note spread as the demand for European money
should push long-term Euro rates significantly lower than Dollar rates
which would help alleviate the constraints from an appreciating
currency.
Anecdotally, traders should listen for
the jawboning of the Dollar higher by foreign politicians and bankers
showing some real concern about the declining value of the dollar. One
piece you may be seeing is that Boeing begins taking back market share
from Airbus for as the Euro has appreciated over 25%, it has made
Boeing that much more competitive. A headline of that nature would
cause alarm in the rigid labor markets of Europe. Also, the Europeans
may begin to make comments alluding to the fact that the Japanese
currency is being artificially held down, allowing them to attain a
trade advantage. Stay alert and be attuned to all the above events for
it will lead to much more productive trading. I will discuss the
unemployment number and its potential impact in more detail on
Thursday.
Yra Harris