Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Currencies Surge Against Gold Led by US Dollar as Carry Trades Unwind

Currencies / US Dollar Aug 30, 2008 - 10:19 PM GMT

By: Ashraf_Laidi

Currencies Best Financial Markets Analysis ArticleThe events of the past three weeks in foreign exchange markets continue to be dominated by prolonged dollar strength and a fierce bout of selling in the British pound. The charts below show the secular performance of the major currencies, measuring their performances against gold -- whose price is determined by the forces of supply and demand rather than by central bank monetary policy or printing press.


As the left charts shows--since the beginning of the second half of the year--the US dollar is the best performing currency against gold amid the major 8 currencies. The dollar's strength remains largely a manifestation of the same dynamics; deepening weakness outside the US rather than strength inside the US. More specifically, the confirmation that the Eurozone has seen its first negative quarterly GDP growth since the inception of the euro as well as the sharp decline in commodities resulting from slowing global demand have been the key catalysts to the dollar rebound. Speculative flows have also helped drive the dollar rally as futures traders unwound their dollar shorts vs the EUR, GBP and JPY. As the chart in the speculative futures section shows, short positions in EUR against USD are nearing their highest level in nearly 3 years .

Dollar Rises Above All Majors Despite Negative Trifecta

Although ECB president JC Trichet and his colleagues have not hinted at any interest rate cuts, their increased acknowledgment of the widely anticipated technical recession in the Eurozone is prompting bond markets to expect ECB easing to start in 2009, the same year in which the Fed is widely expected by fed funds futures to begin raising interest rates. Nonetheless, our view remains that the Fed will cut interest rates by at least 50 bps this year, while the ECB will follow suit in Q2 2009.

The reason to our US interest rate forecast is largely driven by the deteriorating trifecta of weakening macroeconomic fundamentals, worsening conditions in US credit markets and the persistent uncertainty with US financials. Slumping consumer demand and rising joblessness comprise the first part of the trifecta. Our view for the Fed to continue easing rates has been held ever since the central bank began hinting at a pause of its easing campaign earlier this spring. Now the Fed funds market is coming to terms with this trifecta, reducing odds of a 2008 tightening down to 20% from more nearly 60% one month ago. Our anticipated rate cuts are likely to provide support for EURUSD above $1.43 rather than subject it to renewed selling below that level.

From FOMC to FDIC

Aside from macroeconomic issues, the credit situation and impact on US banks will likely have an increasing impact on Forex markets. On Tuesday, the Federal Deposit Insurance Corp (FDIC) reported 117 "problem" banks as of June 30; up from 90 problem banks at the end of Q1. The FDIC says that lenders on the problem list had assets of $78 billion at the end of Q2, compared with $26.3 billion at the end of Q1.

The main question is how these figures reconcile with the fact that the FDIC has only $53 billion of funds, and has already used 15% of that to bail IndyMac. Conservative estimates place the number of troubled US banks at about 700 banks, which is 7 times greater than the number in the FDIC's "watch list".

As I argued in Eurozone vs US , none of these banking troubles constitute the challenges in the Eurozone, thus, will serve as the principal drivers for renewed Fed cuts, Treasury bailouts and falling US equities. The dollar impact remains largely negative against the Japanese yen. Indeed, owing to the escalating uncertainty with Fannie Mae and Fredie Mac and the persistent increase in LIBOR rates, the Japanese currency is the second best performer against gold due to frequent bouts of reduced risk appetite.

High Yielding Aussie, Kiwi and Sterling Underperfom

The Aussie, kiwi and sterling have fared the worst against gold during the same period. What do GBP, AUD and NZD have in common? They represent the 3 highest interest rates amid the 8 currencies with NZD at 8.00%, AUD at 7.25% and GBP at 5.00%. Unlike the Bank of England and Reserve Bank of New Zealand , the Reserve Bank of Australia has not yet cut interest rates. This renders the Aussie as the next likely victim of an interest rate cut. But it's more than that. The sharp tumble in the Aussie has been a result of unwinding carry trades (from all time highs against the USD) as well as rapid declines in commodities, especially gold and copper--two principal sources of Australian production and export revenue.

By Ashraf Laidi
CMC Markets NA
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