Key News
* Dollar Reaches Breaking Point as Banks Shift Reserves (Bloomberg)
* Iceland Shrinks 8% as Prices Increase 11% in Deepest Recession (Bloomberg)
* Goldman’s O’Neill Says Crisis Fiscal Costs Are Exaggerated (Bloomberg)
* China to Seek WTO Ruling in EU Dispute, Official Says (Bloomberg)
The Event Agenda
Morning Run-Down
Last week the theme in currency markets continued to be centered around gold as a currency play. The moves in gold have been a speculators bet that central banks and world investors will leave the dollar because of the inflation effects of the emergency policy decisions that have been in enacted by the U.S. government and the Federal Reserve.
The problem with the bet for gold and against the dollar is that there have been no signs of inflation. Consumer prices continue to fall. That’s De-flation. Asset prices like crude oil, stocks, commodities, real estate….all remain far from pre-crisis levels. When I say far, I mean 30%, 40% … 50% below pre-crisis levels. So there are no signs of inflation despite the Fed’s expansion of the money supply.
And this is precisely why the interest rate market is not taking part in the buy gold/sell dollars inflation fear trade.
That being said, U.S. interest rates rose a bit on Friday (yields higher) after Thursday’s speech by Fed Chairman Bernanke on the Fed Balance Sheet. The dollar responded by moving higher (not lower) on the prospects for higher yields. Did Bernanke say anything newsworthy? Not really. It was more reiteration of the available tools at the Fed’s disposal to remove the monetary stimulus when the time is right. The latter part of that sentence was irresponsibly omitted in some early news reports on Thursday and that got the markets moving a bit. In fact Bloomberg ran an article that said “Fed ready to tighten”…they later pulled it.
The trend of recent days in currencies has been to buy commodity currencies and sell those currencies with exposure to more aggressive quantitative easing programs. As a result the Australian dollar and the Canadian dollar have been strong and the British pound, the U.S. dollar and the Japanese yen have been weaker.
Key Charts
For the inflation theorists…there is no inflation. Inflation comes with sufficient demand. And so far demand remains heavily depressed. The massive excess capacity in the system shows the economy has a lot of demand to absorb before price pressures pick up…
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