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USD rally
The ECB announced today that two European banks used up $430M in FX swap lines, underscoring the very real shortage of USD at banks and the consequent forthcoming demand for dollars. Meanwhile, Eurostat is forcing Germany to consider its holdings of Hypo RE & WestLB debt as sovereign. The implications, as per Maastricht Treaty constraints, could be enormous for Euro nations if this is a precedent.
Meanwhile, the BEA announced that the United States BoT for June plunged to -$49.9B vs =$42.1B consensus. This, in combination with the revision in inventories, should bring Q2 GDP to around 1% or below. With the ECRI LEI still under -10, the double-dip thesis should find its last needed confirmation in the August ISM until becoming officially representative of the present US economy.
In the markets, today was a total rout. The S&P plunged 2.82% today, while 10yr yields dropped another 96bps. A variety of significant levels and moving averages in FX crosses were broken, as well as in other risk assets, signaling rough times ahead for markets in the near future.
The USD was the biggest beneficiary of today, with the Dollar Index surging to 82.62, as we predicted in yesterday's post. There are large USD short positions, both structural & speculative, and these put the USD at risk for a huge move higher and assets at risk for plunges. The Morgan Stanley FX flow data confirms the short positioning:
After breaking back below the 38.2% Fibo retracement from 2009 highs yesterday, the EURUSD continued its selloff by plunging 330 pips on the news of the USD swap lines use. It doesn't look like EURUSD will make it to the 1.35 level we have been mentioning as a potential topping point and the reversal seems to be here in this cross. The break below the 1.31 Fibo level was confirmation that we're headed downward. We expect USD Libor to continue higher from here, and as the USD-EUR Libor spread tightens, the EURUSD should continue selling off.
Cable seems to have topped out at the 1.60 level we mentioned just days ago and today broke below the important 1.58 level, confirming our suspicions from previous posts. Next stop is the 200d and below if the USD continues strengthening. The recent UK housing data was very weak as well, and if Jeremy Grantham's conception of the UK housing market as a bubble is correct, then crashing home prices could be on their way, and with it crashing GBP exchange rates.
AUDUSD broke back below its 200d today, after following through from its rising wedge breakdown we highlighted right around the top a couple days ago. It has some S/R around the 8850-8900 level, but if/when that is taken out, we could see some serious selling develop. If that support level holds in the short term, it sets up the potential for a head & shoulders reversal. Lots of FX crosses are showing a completed left shoulder and close-to-completed head, with necklines around late July lows. This could result in big moves down in risk FX.
USDJPY was choppy today, as it found some buying near November 2009 lows. It is quite extended here and has been following 10yr yields very closely of late. The 10yr was bid heavily yesterday on the FOMC news of MBS proceed reinvestment into Tsys, and continued its rally today on the risk-off event. However, the 30yr responded to risk yesterday and yields actually went up, further widening the record 10s30s right now. We expect the 30yr to find more buying as risk continues being sold, and while the 10yr may have more upside room, we believe it is extended for the moment, and expect the 10s30s to find tightening in the near-term. Even if 10yr yields continue downward, the tightening of long-end spreads should prove bullish for USDJPY (again, in the near-term only), and catalyze a short-term bounce. We still expect the important 85 level to eventually be broken, even as early as this fall, but a bounce up to about 87.50 or its 200d may be in the cards for USDJPY and going long this cross presents an attractive risk/reward at these levels. Obviously today's lows being taken invalidates that.
In equity, the S&P broke below its 200d today on strong volume and is now hovering right above its 50d. Just like risk FX crosses, there is a potential for some support around late July lows (also near the 50d), and a bounce from there could lead to a lower high, which would confirm a head & shoulders development. A break below the 50d would signal big declines to follow. We expect a bounce off the 50 in coming days and any retest of the 200d to be sold on. Summer choppiness is ending and the new trend appears to be down. This fall could get ugly.
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DXY moving in range; 82.5 to 80.5. That is the range, and it will stay here until everyone realizes that FIAT is worthless, at which point the bottom will drop out and there will be a currentsea crisis. Then the bank will back a new currentsea, a bancor, in front of an SDR which trades between the banks. Then we will tell the banks off, charter State banks backed by gold and silver, at which point we ask for Fort Knox to give up the good stuff. They will, or they won't, and we will proceed accordingly.
Everybody has always realized that the dollar is worthless. Everything is an illusion, including money. That doesn't mean people stop using it. Just because you don't really have a "self" doesn't mean you blow your head off. Know what I mean?
Self, you are. Self, am I. We are....
People, nevermind everybody, realize the dollar is worthless? Who?
Everyone knows that the US has a 370% total debt/GDP. The reason no one cares is that because it also has the reserve currency, it can successfully print away its debt, should it desire to. Of course, eventually it will get to the point where massive monetization will be come policy, beyond QE 1, 1.5, & 2.0.
The world's debts are USD-denominated. Put a chart of foreign bank short-term credit access (as represented by commercial paper outstanding) on top of an inverse chart of the dollar index. They're identical. USD rallying = credit seizing up everywhere, especially abroad. Banks have a net-short position in USD because of its low yield, its liquidity (making it easy to borrow), and its long-term downtrend since the early 2000s. The assets serviced by this USD short position are of questionable quality, especially as the double-dip takes hold. This causes a rush to USD as banks scramble for cash to service USD-denominated holdings.
Like it or not, USD liquidity does indeed run the world. If USD Libor rallies, assets plunge. USD is in ridiculously high demand during times of asset deflation. Forget consumer price deflation/inflation.
The biggest issue about all of this is that it is a GLOBAL status quo. The entire world bought into the USD liquidity system. Which means, even if it is fundamentally flawed, there is no way to just jump out of it. A systemic crisis in the USD liquidity system threatens exporters way more than the USA. What do you think their reserves are made of? In a mutually exclusive destruction scenario, the USA wins.
The USD will go down and inflation will be a big deal as rates rise in the future (1-2+ yrs minimum probably), but it will never suffer a confidence crisis or systemic run. There is not one party on earth that is incentivized for that, except for the tin foil hat brigade.
In the short term, meanwhile, asset deflation & stalling growth make USD a great holding. If the entire world economy weren't in crisis or if Martians were open to participating in Earth's capital markets, then maybe the USD/fiat currency would cease to exist. Unfortunately, the entire world economy IS in crisis in tandem (due to the same flawed system that prevents the USD from plunging into depths of hell) and aliens are smart enough to stay away from the City & Wall Street.
But good luck shorting USD as stocks plunge.
Golf clap....Exceptionally well played
Succinct and mostly well writ, up until the "tin foil hat brigade" comment. This summery would fit nicely in a book title, "How We Screwed you, Sincerely, the Banksters".
These are the rules that were created, you are correct. The paradigm has been set and forced, and now we must all roll over and die, this because there is no other option.
But see here, the dollar is the backbone of this entire system that you have described, so if it breaks, the system does. Inversely, if the system dies, be it by choking on over valued stocks, or what have you, the back bone serves no purpose.
By the way, your outline is circular. The dollar is strong because it is strong. What if the system is weak? Then the dollar is weak.
Your system is weak. Gold is monie, not FIAT. Good luck being long paper. Paper, that which burns.
"Inversely, if the system dies, be it by choking on over valued stocks, or what have you, the back bone serves no purpose."
Exactly, it applies to dollar, and when the system collapses, it will apply to gold. If you or anyone in this forum had walked through war-ravaged Cambodia in the 1970s like me, believe me sir, gold is useless. Even guns cannot save you long. Maybe that is why Lloyd hopes the being up there recognises his "work".
Can't say that I walked thru Cambodia, when I was there in 74 & 75, but I did take the train to the Thai border a few times. Fact is that hyperinflation was rampant, but...the US $ was gold there. No need for gold when $$$ are easier to carry.
Now...when it comes to today, whose currency would you rather have in your pocket that others will accept and trade for? Gold will always have value and can be exchanged on the open (or not so open) market.
I'm a huge gold bull and I'm long 200k of bullion in an Australian perth mint. And I'm bearish on the USD in the long term.
But there's no such thing as a "good" or "bad" asset. Only a good time to buy and a better time to sell. That's it.
And right now is a good time to be long USD.
The "system" is not something that can just implode. Let me ask you, do you have the military of the United States? I don't think you understand the implications of the dollar liquidity system failing. It would be apocalyptical.
Eventually, one day in the far future, the USD won't have reserve currency status and the US won't be able to get away with these shenanigans. But it will be well after inflation hits and is quelled and normality is returned.
My argument is not circular. The USD is strong because of supply/demand. In a system of dollar liquidity running everything, any deleveraging or asset deflation or credit tightening leads to huge demand for USD, demand that is not met with equal supply. That is bullish for USD.
Eventually the Fed will create enough supply or perception of future supply to counteract the systemic demand from USD mismatches on bank balance sheets. Only then will the demand equation change because of perception of USD becoming bearish because of the enormous supply. But even then, the only way we can have a true collapse of the system is if we have collapse of civilization.
naufalsanaullah is correct about the dollar story. Many of you don't consider the fact that now you must buy the least worst investment, there are no good investments. other major countries have as much if not more debt than the US, with the difference that they can't print debt nor buy commodities in their own currencies. In europe we pay 1,3 euros for a litre of gasoline, convert that into gallons, and you'll understand how expensive life is outside the US!
naufalsanaullah is full of shit
you can't be long gold and long USD at the same time
if this is a good time to own USD (we have a strong military, it will be apocalyptic, there's a shortage. blah, blah,blah), why be into gold now when you can get in at lower levels tomorrow?
just another guy hedging his predictions on here
Do you realize gold & the USD just spent months rallying together? I'm short a variety of USD crosses (particularly EUR & GBP) so that in combination with being long gold is a synthetic way to be long gold in european currencies.
Gold is not a hedge against inflation. Not yet. There's no inflation to hedge yet. Right now it's a hedge against monetary & fiscal recklessness. Which may or may not result in inflation in different countries (it will in USA in my opinion).
There will be a time when the USD will be getting sold heavily and gold will be getting bid up as a hedge against USD. It happened post-QE in mar 09 and will happen again.
But were going to go down more before that can happen.
Edit: I've been long gold since Nov 09. I'll be adding on dips. While everything unfolds, I'm trading FX to get exposure to the right currencies at the right time. Risk-on, AUD GBP EUR. Risk-off, USD JPY.
At the expense of excruciatingly high borrowing costs once the bond market blows golden-egg-laying goose out of the water.
This is the most sophisticated apology for the dollar that I have ever read. Does anyone actually believe that all dollars being utilized or held will maintain a steady state through the outright monetization of debt that is going on? As much as our politicians have duped us and as ignorant as we have indeed become in the USA - if people on the outside looking in don't at least prudently diversify - there is another word for that. Most people (sheeple) in the USA will be able to claim ignorance, and be spot on - people with an exterior (foreign) vantage point will not be able to claim ignorance.
'DXY moving in range; 82.5 to 80.5. That is the range, and it will stay here until everyone realizes that FIAT is worthless, at which point the bottom will drop out and there will be a currentsea crisis.'
If the basket of currencies that the USDX is valued against is also fiat, then why does the index have to go down to prove it is in a crisis?
Wouldn't it be more telling to see how commodities and assets are priced in USD's than how the USD compares to other fiat currencies?
This has always puzzled me.
What is your outlook on precious metals in the near term?
Seems like we are going down in the near term, however the long term fundamentals seem to be stronger than ever although I prefer oil I will be ready to load the truck anywhere in the $8-10 range for silver.
Bottle rocket for the dollar and its off to the races.
A shortage of USD at the banks fuels my deepening suspicion about rumors of discouragement re balky Squid wire transfers. Naw, that would be too tin foil....hmmmm.
Phiatz bitchez
"Cable seems to have topped out at the 1.60 level we mentioned just days ago and today broke below the important 1.58 level, confirming our suspicions from previous posts. Next stop is the 200d and below if the USD continues strengthening..."
I am afraid that this is not correct. Nor has the SPX gone into the ever-feared dismal reversal to relative all-time lows.
The Pound Sterling has dropped somewhat over the past 4 days but not to the extent one would expect from a 30-point drop in US equities and the Fed basically sticking it to all the Greenspan putters out there. The ramp is still on for the GBP and I will resume my long approach when the GBPUSD pair reach the 1.5443 level. Same goes for anything against the yen.
Look for the GBP to top out at the 38 percent fiboretrace at just about 1.65 or slightly higher. In fact, the monthly charts show that the long-bound range may be as high as 1.7. Personally, I don't think so and I feel that 1.666 feels about right (remember, the elitists are numerologists as well...).
Stay long here, despite the best efforts of reason to tear you away from pervasive illogic.
gold bugs only want to hear one thing. the fact is the USD will continue to debase against the Asian basket and commodity currencies because materials are what developing economies need and will continue to buy. this whole game is about restarting jobs growth in the US and hoarding materials for China.
Cash is king my ass.
sounds painful...
When the giant corporations producing all the shit that everyone eats, drinks, and uses quits using dollars, lemme know, preferably a month in advance. That is when the dollar will be worthless. The American dollar is a big train that is tough to derail, and everyone is giving the Fed too much credit. Cash is king....for now.
Based on the fact that corporations are crashing (resource and credit exhaustion [both for themselves and for the consumers]), NOW, I'd say that it's not all that much longer before this all unwinds.
We've seen this show before. As fear increases and the economy tanks (again), the flight to safety is based in the USD and UST's. Of course with the global economy still addicted to both as a means of denominated debt and commodity exchange basis, its hard for the junkie(s) to get off the juice. So USDs are required to service debt and buy commodities which in turn drives the demand for USDs higher and its value. Basic supply and demand as I see it (but only over the short-term). Of course the Fed knows this and will make sure plenty of liquidity (i.e., USDs) is available to prevent a complete crash and thus continue to be the world's lender of last resort. Ok so I agree that at least in the near term, the USD will hold or strengthen but this presents a major problem for the Fed in terms of driving economic growth as the stronger USD will continue to support the enormous imbalance of the US economy (way too much consumption and not enough production).
For me, the real game would appear to be based in when the world is so flooded with USD's, US debt, state of California IOUs, and whatever other promise the US can print, that when this reaches a tipping point, the exodus into whatever is real will be re-marketable (and the Fed will have achieved its goal in driving inflation and reducing the value of the USD).
The problem is that when junkies have to go cold turkey and kick the habit, the process can be extremely painful. So the only question in my mind will be based in how the junkies kick the habit. Will it be in the comfort and confines of a clinic where they are weaned off over a time period or will they go cold turkey (i.e., will this be an orderly transition over 10 years which will be far less painful and have fewer shock losses or will it come all at once when everyone is rushing to the doors as they are all on the same side of the trade, USD and USTs)? The junkies have no one to blame but themselves by becoming so addicted and dependent on the juice.
So I'm in both the deflationary and inflationary camps. Short-term (12 to 24 months), deflationary forces should remain in control placing pressure on the market, commodities, etc. However, deflation will eventually lead to hyper-inflation as everyone wakes up and realizes that with a contracting economy, lower earnings, and thus lower tax receitps, the enourmous debt load of the US cannot be serviced. Deflation just ensures the US is going to reach the date of monetization and/or default much quicker.
BTW, the Fed has already done a great job of monetizing the debt. In QE 1 it was direct purchases of hundreds of billions of dollars of UST's. QE 2 just acknowledged more to come. Via taking the toxic debt from the banks and injecting cash so that the banks can buy USTs, we have some more. And let's not forget about all of the Feds other tools including off-shore currency swaps (as I believe the UK is now one of the largest purchases of USTs). Call it what you want, but the Fed knows that the only way for the US debt to be repaid is with future inflated USDs that aren't even going to buy 50% of what they do today.
So in ten years, the end result will be the same. A USD which will be worth (at best) 50% of what it does today. A reblancing of the world economy from the US being consumers to producers. And a significant reduction in the standard of living in the US as it pays for its past sins.
Great opening chapter. Can't wait for the climax and the denouement. The history of this era could be written as a great thriller.
As long as the US government is borrowing more than 10% of GDP, of which roughly half is borrowed from abroad, and as long as China is suppressing consumer imports by effectively confiscating dollars from its exporters and stockpiling them, the dollar's going to be held up well above fair value.
Remember how Geithner crowed at the happy news that China had loosened the dollar peg? Oops. China just slightly devalued: http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aQpahH1MyV8A
http://keynesianfailure.wordpress.com/
There is one difference between right now and back then, not a terribly theoretical difference, only in that we slightly more 'dispossessed' at the moment...and, yes, world trade is denominated in dollars, so while there is less demand for many items, there is still sufficient demand for basic consumption which will have tobe transacted..but..where are the dollars going to come from. The idea of a higher price for dollars is, a little free-market, if you don't mind me saying, it may be worth bearing in mind, since there are issues in the Primary Goods markets.
If the dollar rises then it follows that global trade in money terms also increases relative to other nations..specifically those who are net exporters of Primary goods. Fine, but how many have those sort of FX reserves? I'm just pointing out that against the infallible logic of a rising dollar there are, perhaps, some real-world constraints against. Prices of Primaries can't really come down because that slows consumption, which effectively means there ought to be some sort of international agreement on adjusting dollar-denominated trade.
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