Last week, I wrote about the pending fall in the major currencies vs. USD, and a subsequent fall in oil and other commodities.  As the charts below show, EUR precipitously crumbled 6 big figures last week, along with all the other major currencies.  As well, oil is down another $6.00 for the week. 

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"Whatever man can conceive and believe, he can achieve...." -Napoleon Hill

It was 1985 when world finance ministers from the G5 (then just France, Germany, Japan, the United Kingdom and the United States) led a coordinated effort to devalue the U.S. dollar.  It was known as the "Plaza Accord" because it was signed and agreed upon at the Plaza Hotel in New York City.  The idea was to lower the value of the USD vs. its trading partners to reduce the United States' trade deficit, and to pull the economy out of a deep recession.  The Accord was a planned and systematic approach to revaluing the dollar in order to make American exports more competitive. 

In order to understand what might unwind the carry, first, look at what makes the carry. To begin with, in order to determine a yen cross rate, say the GBP/JPY, you have to multiply GBP/USD times the USD/JPY. That's the way the market determines the exchange rate of the crosses, off of the majors.

Looking at the past few years, interest rates here in the U.S. have been lower than other countries, thanks to Greenspan. Because of that, investors around the world have favored other country's interest rates, and the USD was subsequently sold off.

So, we've got higher interest rates here in the U.S. That is very likely to translate into a higher USD vs. the JPY. The yield appeal will be great enough to draw funds into the U.S., vs. other major currencies. This, of course will translate into a perpetual motion of the carry trade for some time to come. Although I was prepared for the apocalypse on Friday, the USD/JPY 121.00 level not only held, but soared like a rocket. That kept the carry nicely in place.

With all of those kinds of reports, we're also very likely to see the equity markets perform just as nicely. Why not? If you have consumers who are seeing an increasing income rate and confidence rate push the service sector (You know, that sector that represents 65% of our economy) then it's only natural to see higher revenues for companies.

Here are my long-term thoughts on the U.S. dollar going forward:

Or not.

The overnight rate in China is sitting at 1.6%. That didn't change. And why would it? Why would a country who's looking more and more intent on curbing excessive growth target their overnight bank rate when they can hit borrowers where it really counts, with an increase in the 1-year rate up to 6.57%. My point exactly. This is almost a no-brainer. Their overnight rate is so low that it makes sense to borrow on the 1-year and just lend the money right back to whomever. Yeah. This is really going to slow growth.

So, if you were him, what would you buy?

Interest rates are going up.... probably.

What is important to understand is that I build my analysis up with the framework that the consumer is the foundation of the economy. Being around 65% of our economy, that's not a far fetched statement. I also believe that our consumption habits are what ultimately drive how our economy will look, especially GDP.

With that, here are two charts for GDP and Personal Consumption:

Yesterday afternoon and evening, I looked at the implications of the RBNZ's rate increase, as well as economic data coming out of Great Britain. I felt that the British pound was pushing towards the "egregiously over-valued" level. More so, I felt that the currency would fail in finding new buyers up above the $2.0000 level. Woke up this morning, and I guess the entire market agreed with me.

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Here's my take: I see this scenario potentially playing out, but for different reasons.

That kind of spurred some thinking of my own. Should the markets have moved lower after so many days up? If so, or if not, then what's the basis behind this thinking?

Hmmm..... Are markets random or is there method in the chaos?

There's an election in July that the BoJ is very likely to not step on any toes with. After that, I'm thinking the BoJ may push their interest rates up a bit. That could be one of the catalysts for the carry to come to a halt.

The question remains, however: Will we be seeing more interest rates in the future?

We're going to get a glimpse at the minutes to the last Fed meeting yesterday. This will likely give us an idea as to what to expect in future for the greenback.

Really?

Currency trading really got going in the late 1980's. The Brenton-Woods Agreement that allowed currencies to move on their own occurred in the 1970's. But, the real business of it didn't catch on until the mid to late 1980's. That's when you can really start looking at charts to find out what historical prices of currencies were. That's when real market forces were allowed to dictate exchange rates.

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The blue line is factory orders. For the most part, factory orders show up ever so slightly ahead of the markets. So, with that in mind, the rate of growth on a y/y basis is slowing down. And perhaps the equities markets are going to do the same.

... except, wait a second, what was that one thing in the Fed Statement that we were supposed to be cautious about? Wasn't it resource utilization? And aren't incomes, which moved up a whopping 1.0% last month and another 0.6% this month, resource utilization?

Here... Just a subtle reminder:

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I really like this chart with its correlation. There are a few times when this correlation failed. The early 1980's was a great example. But, that's also when Reagonomics showed up in the world, and the government began to spend like there was no tomorrow. Personal consumption finally caught up a few years later. Also, during the mid-late 1990's there was another obvious push higher in equities when personal consumption failed to keep up. That would be the "new economy" and the dot com era when the way we function as human beings was forever to change, which was a justification for pushing equities up just because the company had a mere notion of going online. We all know how that turned out.

It's an amazing correlation that when we are confident, we spend. Or, is it that when we spend, we are confident?

Answer that question, and you'll be better suited to approach the next move in the economy. What comes first: Confidence or spending?