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Tuesday October 16, 2007 - 11:25:17 GMT
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Dollar up on crude and gold run? And a G-7 Multiple Choice

Key News
• Inflation in Europe accelerated in September as energy and food prices rose, with the annual rate exceeding the European Central Bank's 2 percent ceiling for the first time in more than a year. (Bloomberg)
• Bernanke said the housing downturn is likely to remain "a significant drag" on economic growth through early 2008 but income growth is propping up consumer spending. (WSJ)
• Poor corporate earnings and renewed worries about credit rattled investors on Tuesday, while record high oil prices threatened to add pressure to world growth. (Reuters)
Key Reports Due (WSJ):
7:45a.m. ICSC Chain Store Sales Index. Previous: unch.
8:55a.m. Redbook Retail Sales Index. Previous: +0.3%.
9:00a.m. August Treasury International Capital Flows. Previous: -$3.0B.
9:15a.m. Sep Industrial Production. Expected: +0.1%. Previous: +0.2%.
9:15a.m. Sep Capacity Utilization. Expected: 82.1%. Previous: 82.2%.
1:00p.m. Oct NAHB Housing Market Index. Previous: 20.
5:00p.m. ABC/Wash Post Consumer Conf. Previous: -13.


“The myth that ‘science is objective’ may tend to be fostered in most cultures today in an attempt to preserve whatever status quo exists by giving it scientific blessing.”

                                               Robert Ornstein

FX Trading – .  Dollar up on crude and gold run?  And a G-7 Multiple Choice

What is interesting is the fact the dollar has strung two decent days together in a row while gold and oil have been soaring. Crude said to be getting a boost on more Mid-East worries and growth; gold on all kinds of stuff; but what in the heck is the lowly buck doing following them higher?

Oil (black), Gold (red), US$ Index (blue) – 240-min chart:

A correction in the buck doesn’t change the longer term dynamics that seem to be setting up, unless of course we are wrong on the G-7 intervention thing! 

We’ve heard analysts refer to the current global market backdrop as fertile ground for another Plaza Accord-type agreement.  The Plaza Accord was an agreement between the industrialized nations to bring down the dollar through concerted central bank intervention. The difference between then and now, as you can see in the chart below, is the fact that the dollar was coming off an all-time high back then, in 1985.  And now it is at an all-time low. 


Explicitly, this was a policy to bring down the dollar.  But implicitly it was a policy to strengthen the Japanese yen. 

Now, it’s China that’s doing all the exporting and currency suppressing for export advantage.  So, the question: Will pushing down the dollar IF China doesn’t cooperate only makes this problem worse i.e. the global imbalance problem of exchange reserve accumulation and all the nasty scenarios that role in along with it?  Maybe not if the tradeoff is to make the US better; or at least keep Mr. US Consumer viable.

It does appear that a lower dollar provides some major benefits for the US economy, as we mentioned yesterday.  At the core we think is the stock market wealthy effect which gives the Fed cover. 

It’s multiple-choice time! 

A) China lets its currency run higher faster (yen follows higher on valuation) and finally some readjustment takes place (and it may not all be pretty); all announced before the G-7 meeting ends.
B) G-7 signals dollar depreciation regardless of any Chinese commitment to stop “manipulating” its currency and let it move up, placing a big pile of global imbalance (as the economist’s call it) on Europe’s back!
C) G-7 intervenes to push up the dollar and the yen, effectively pushing the yuan higher along the way; throwing Europe a bone that global growth is in trouble if the Euro recovery dies in its tracks.
D) None of the above

We will reveal the “right” answer next week once all tests have been collected. 

Jack Crooks
Black Swan Capital


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