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East Vs. West!

By Mike Conlon | September 17, 2010


This morning, both the US and the Euro zone reported less than expected CPI and PPI data respectively, showing that while inflation is positive is still underwhelming the market.  It is apparent that all of the accommodative monetary policy around the globe is not causing runaway price increases, and may be setting up for a soft landing.

Meanwhile, the war of words continues between China and the US, with the former making veiled threats about US dollar instability affecting the US recovery and at the same time justifying their stance for currency stability.  Now the congress critters are joining the act, loathe missing out on an opportunity to get in front of the camera.

Japan is also catching heat from their intervention, and frankly I don’t think they care what anyone else thinks at this point.  Everyone is out for themselves and global cooperation is a farce.  So it is now being confirmed that the intervention is “unsterilized”, which was different from the last unsuccessful attempt in 2004, as the Japanese are just simply printing money.

Wait until Big Ben tries to counteract this move with further quantitative easing of his own.  I wonder if his “QE2” will end up more like the titanic, sinking the US economy.

The morning started with markets higher, though it appears to be giving back earlier gains.  In addition, today is “triple witching” which can bring volatility.

In the forex market:

Aussie (NYSEARCA:AUD):   The Aussie is higher on risk taking on a day that is devoid of news Down Under.

Kiwi (NZD):   The Kiwi is also higher on risk taking, as gains in Asian stocks boosted demand for carry trades.  This comes even after the RBNZ left rates changed the other day.

Loonie (NYSEARCA:CAD):   The Loonie is mostly lower despite some risk appetite as oil prices are lower and US CPI data came in less than expected showing that Canada’s largest trading partners’ economy is slowing, in contrast to the Aussie and Kiwi.  (Click chart to enlarge)


Euro (EUR):   The Euro is lower this morning as German PPI figures came in lower than expected, and chatter about the Irish banking system is picking up thereby putting the debt issue to the forefront.  While this is not enough to encourage risk aversion, it should be noted that construction outputs were also lower foreshadowing an economic slowdown.

Pound (GBP):   The Pound is mixed this morning, trading lower against risk currencies and pulling back from earlier gains.  Next week, the minutes from the rate policy meeting will be released which will show if there are any other dissenters beside the lone board member calling for rate hikes.  (Click chart to enlarge)


Dollar (NYSEARCA:USD):    The Dollar is lower this morning, as CPI data came in less than expected but still showing slight gains of .3%.  The Michigan Consumer confidence data is due out just before 10 AM EST so it will serve as a gauge of sentiment.

Yen (JPY):   The Yen is weaker against all but the Loonie and Dollar, as today’s currency action is highlighted by geography.  Today the East a beast and the West ain’t the best!  Intervention seems to still be in the minds of traders who while tempted to test the resolve of Japan, haven’t done so yet.

This is all setting up like a bad Rocky movie, with an East vs. West flavor to the currency market.  With no major news to move the markets, there’s lots of chatter coming from both sides of the Pacific.

Today is triple witching for the markets, which means that we get options, index futures, and index futures options expiring so there could be some wackiness in the US equity market which could then move currencies if the correlations hold up.

My guess is that correlations are starting to break down with Yen intervention being the major anomaly.  In addition, gold is at all-time highs around 1280–without inflation!

Now is a time to be cautious in the markets, as uncertainty abounds!

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