Thursday, June 25, 2009

Gold & Forex Update

I have been on a hiatus of sorts over the past month and I apologize to my regular readers who got no warning of such a break. I have of course continued to follow the markets, although trading activity has been choppy and inconsistent. Switching between long and short positions on a daily basis doesn’t allow me to post my outlook. This article is intended to be a summary of my thoughts on the money markets.

As competitive currency devaluation looms, the USD may gain on a relative basis. The black swan remains the possibility of a loss of confidence in the U.S. dollar.
1) The Euro is being tested - The idea of a unified currency has always troubled me, it seemed to be more of an experiment than a logical conclusion. To be more specific it is not the idea of a unified currency that is troubling, but rather the idea that countries with independent fiscal policies are all tied to the same monetary system. It was only a matter of time until disparities emerged in the various member countries with respect to inflation expectations and output trends. The unified currency reduces options for struggling economies who are forced to stimulate ONLY through the fiscal approach. That means that deficits balloon, but with a 3% of GDP limit imposed on member nations, fighting between members may quickly emerge. With more than €1 trillion in Euro-zone debt issuance expected this year, the EU is not far off from the numbers being reported out of the U.S.

2) Exporting nations currencies are feeling the pinch. This was highlighted by Gregory Weldon of Weldon Financial in a report out yesterday. He specifically mentioned the bearish outlook for the following export reliant currencies: Korean Won, Indian Rupee, Polish Zloty, Hungarian Forint, Czech Koruna, Canadian Dollar, Chilean Peso, and the Mexican Peso. The trend over the past few years has been for the U.S. to import an ever increasing dollar amount of goods and services. That resulted in selling pressure on dollars and buying pressure on exporting currencies to purchase the local goods for export. With the sharp decrease in U.S. imports over the past few months, export reliant currencies have felt the sharp decrease in demand. Added to that pressure, the sharp drop in the price of crude has led to a double hit on currencies such as the Canadian dollar.
Is pressure easing on these export nations? It doesn’t look like it. In fact, if we use the Baltic Dry Index as a leading indicator of global trade, the outlook is pretty dire. Consider that this Index was sitting higher than 11000 less than a year ago. Although the index appears to be stabilizing, global shipping prices are still extremely cheap, highlighting the lack of demand.
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Gold & Forex Update

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