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Faros Morning Update - Inflation Nation and How to Trade the Fear

|Includes:CNY, KEF, ProShares Ultra Semiconductors ETF (USD)

 Inflation Nation and How to Trade the Fear

The cross hairs of global markets are focused squarely on fear and inflation.  Fear is amplifying things that are fearful, Irish debt woes for example, fiat currency concerns, etc.  Inflation is amplifying things that rise when the World’s reserve currency is devalued, Gold, Silver, Corn, Soybeans, Oil.  The addition of QE2 has added a new element of fear and inflation that is taking people by surprise, sort of like the Gold bug who says “gold 1400” 2 years ago and is now astounded that we are actually here at 1400.  Why?  The implications of what it meant to forecast a Gold 1400 were not necessarily good.  It meant, further uncertainty in the financial system, continued money printing and increased risk of hyper inflation.  Fear is also manifesting itself in the visceral reaction of global central banks and finance ministers around the world, China, Brazil, Russia, South Africa, Thailand, etc, have all expressed concerns or demanded answers to the question of why more money printing.  Even Germany put the cherry on top with Schauble indicating US economic policy was ‘clueless’. 


So what we are witnessing in markets is yet another wave of hard asset purchases vs. fiat currency short sales.  The Gold vs. EUR, Gold vs. CAD, Gold vs. JPY, Gold vs USD charts are all breaking higher and the rest of the commodity complex is moving with it, Corn near 600, Soybeans 1300, Oil ready to finally take out 87.00, etc.  This is only the beginning of this move in commodities.  Looking at a chart of DXY from 2005 to 2010 vs. the CRB index from 2005 to 2010, shows you that last time the DXY traded down to 70.78 area, the CRB index hit 475.00.  The DXY is trading 76.80 now and the CRB is only at 315.  This implies the CRB has another 50% more to rise. 

So in FX, the old commodity favorites are back in play.  AUD and CAD should continue to outperform while EUR/CHF downside remains the best hedge.  AUD and CAD should be expressed in devaluing USD but for those fearful of Irish debt woes, 50/50 short EUR and USD vs. AUD and CAD make sense.  We continue to believe that fear in peripheral EU problems presents opportunity in the face of devaluing USD and reserve managers anxious to diversify USD holdings.  We favor all SDR currencies on that basis.


Overnight saw EUR/CHF make fresh lows down at 1.3320 area on more peripheral debt concerns in the EU.  This took EUR/USD with it down to 1.3822 and sparked another round of fear.  As London arrived the EUR/USD stabilized and rumored Middle East buying combined with an FT article citing German clarification on potential new debt rules, combined with a successful Greek debt auction and rumors of ECB buying, have caused a reversal in EUR/USD.  We rallied sharply through 1.3950 with AUD/USD pushing through 1.0160 after 1.0080.  Short term shorts are scrambling and longer term holders are relieved.


NJA currencies reacted after China fixed the USD/CNY rate 112 pips lower despite weakness in EUR/USD during the NY session, taking markets by surprise.  NJA currencies reversed on the move with USD/KRW from 1120 back to 1113, USD/MYR 3.1050 back to 3.0900, etc.


The direction in commodities seems set in place, the CRB has a lot of catch up to do.  The macro thesis on USD and CNY remains in tact and the EUR will continue to be a release valve for global central bank diversification.  Continue to trade with these core positions in mind and use the fear in the market to add and reduce around that core accordingly.


Good Luck

Disclosure: I do not hold positions in anything discussed
Stocks: USD, CNY, KEF