Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Multi-FX Gold View and Shanghai Currency Reserve Currency Reminder

Currencies / Forex Trading Oct 07, 2009 - 07:53 AM GMT

By: Ashraf_Laidi

Currencies

Best Financial Markets Analysis ArticleThe story from the Independent about Arab Gulf States & China looking for alternatives to the US dollar could be dismissed for now due to the lack of immediacy about its implementation. Neither such a story nor the immediate denial from Saudi Arabian officials is new. But the Arab Gulf State element certainly adds to the Chinese diversification element in highlighting the structural impediments of the US currency (zero interest rates at least into Q2 2010, budget deficit at 10% of GDP, tepid prospects of consumer-led recovery).


Only when China has attained the building blocks for currency convertibility (widening the band of the peg, become an invoice currency, reduce FX controls) would the notion of a reserve currency basket gain more credence. Thus, the next concrete step (that the USD should fear) is an outright revaluation of the yuan by the PBOC, as was done in July 2005.

Multicurrency Gold LookToday's golds surge to a new record high of $1,043 was a result of renewed concerns with the USD hegemony (Independent article), RBA rate hike and improved risk appetite. But while gold has hit a fresh record in USD terms, it remains more than 30% below its highs in AUD terms, 15% below its highs in JPY terms and only 6% below its highs in GBP terms. The top chart has the strongest advances, reflecting GBP secular weakness and increased chances that the metal gold would reach a new record against the pound. Considering the periodic bruising the pound obtains from the economic data, BoE, IMF and rating agencies, there remains ample room for broader losses, which may not necessarily be seen against USD.

Both AUD and JPY have consolidated against the shiny metal, thereby, highlighting their hefty advances in currency markets over the past 6 months. The steep decline in GOLD/AUD from its March highs illustrates the aggressive recovery of the Aussie (+85%, +40% vs. JPY and USD respectively from the Feb lows). Meanwhile, JPY did not show any sharp appreciation in gold terms (no sharp decline in GOLD/JPY chart) because the Japanese currency held up firmly throughout the crisis. And so with both AUD and JPY looking robust, which one will get the upper hand over the other? Heres our view on AUDJPY.

Sterling Rising to the Occasion of Disappointment Despite the deepening losses in the USD from the from the Independent story on the future of USD hegemony, the British pound manages be biggest loser of the day--underperforming even the USDafter the biggest monthly decline in manufacturing output in 7 months. Whether it is persistent reminders on prolonged QE by the BoE or dissipating second derivative economic data in the UK, sterling remains the path of least resistance to the bearsparticularly at times of risk aversion. Thus, any disappointment emerging from US earnings season should raise the risks of seeing $1.55 in GBPUSD and 0.94 in EURGBP.

RBA Move = Prelude to USD's Yield DeteriorationThe 25-bp rate hike from the Reserve Bank of Australia is a prelude to further USD yield inferiority, as other economies (Korea, Sweden, Norway, and New Zealand) are set to raise rates as early as Jan-Feb 2010, a prospect that would only exacerbate the outlook for the US dollar. A wave of rapid USD selling is inevitable once the ECB and BoJ start to give real signals (beyond mere rhetoric) for higher interest rates, especially if these are not matched by the Fed. Such would be the return to yield differentials, a losing race for the US currency. The opposite was seen in 2006, when the Fed stopped raising interest rates that summer, while every other major central bank continued its tightening cycle until summer 2008, accelerating the USD damage in 2006-08.

For more detail on the recurring topic of USD reserve status, Arab Gulf States currency concerns and the threat of diversification by central banks and sovereign wealth fund, check out Chapter 7 of my book on the topic.

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in