What a surprise! There is inflation and lots of it. At 8:30 EST on Tuesday, the U.S. Labor Department reported that wholesale prices rose 1 percent last month. Economists had expected a 0.4 percent increase. Wholesale prices rose 7.5 percent over the last 12 months, the fastest pace since October 1981. The breakdown in Core PPI was 0.4 month-to-month and 2.3% year-to-year. Is this a surprise? In my opinion, the consumer has known about this for months given the high food and energy prices they have had to endure throughout 2007. The Gold market has known about it also. Aren't we taught that Gold is an inflation indicator? So why the surprise? Maybe it is the Bond market or the Fed's fancy way of calculating inflation that has hidden it from the rest of us. The question has come up many times over the past several months, is the FED trying to save the financial markets from a major meltdown? If inflation is truly running this high, then it should be reflected in the bond yield. My conclusion is that interest rates are artificially low and someone is going to have to pay for it later.
There was bad news across the board on Tuesday as the wholesale inflation rate climbed, foreclosures increased, home prices fell, and consumer confidence sank. Basically a grand slam against the USD.
The weak Consumer Confidence is the most important. If the consumer loses confidence, quits spending and bails, then the economy will slow to a crawl. A poor job outlook and business conditions were blamed for the loss in consumer confidence, but I have to believe that high energy and food prices should share the blame. Consumer Confidence posted a 75.0 compared to 87.3 in January. There is definitely a downtrend occurring in Consumer Confidence. The trend is likely to continue and most likely lead to a new five-year low in the index through 64.8. This number also represents a lack of confidence in the Fed. Most of all, it is a sign that Fed policy is not working at this time. Here is where the Fed is stuck - fight the economic slowdown in growth with aggressive interest rate cuts, or fight inflation. Bernanke will face some of the toughest questions he has ever faced on Wednesday. The hope is that he delivers tough answers.
In addition to the weak Consumer Confidence, foreclosure issues continued to surge as the number of homes facing foreclosure jumped 57% in January compared to a year ago. Efforts to stem these foreclosures through creative financing do not seem to be working.
U.S. home prices also tumbled; losing 8.9 percent in the final quarter of 2007, Standard & Poor's said Tuesday, marking a full year of declining values and the steepest drop in the 20-year history of its housing index.
An additional negative spin on the U.S. economy came from the mouth of Federal Reserve Vice-chairman Donald Kohn. It was not what he said as much as what he did not say. First of all, he stated the obvious on Tuesday by saying the financial markets are transmitting the housing downturn into the rest of the U.S. economy and the rising cost of energy, food and imports are spilling over into the core inflation rate. Really? No kiddng. This does not sound like a ringing endorsement of current Fed policy.
He did defend Fed policy, however, when he stated we have the tools and we will do what is needed. The question is when does the previous Fed action begin to trickle down into the economy? Apparently, what policy can do is attempt to limit the fallout on the economy. So basically, the Fed is slowing down the rate of decline and trying to soften the bottoming process. The other question is how long will it take before the economy hits bottom? No one can answer that at this time. I guess this is what Bernanke means when he says he wants to prevent financial turmoil.
Kohn also hinted that monetary policy works better in the long run and that it is not just a short term fix when he stated â€¦but easier monetary policy will not forestall a period of economic weakness in the near term. That being said, recovery in the housing and financial markets is also expected to be a long process. The speech was not upbeat at all. He went on to say that changes in how the overall markets do business have to be made. Despite high-energy costs and upward pressure in commodity prices, which have been passed on to core consumer prices, Kohn stated that elevated inflation rates are not expected to continue.
Based on these comments, one can conclude that the Fed expects a slow down during the first half of the year, followed by the start of a recovery in the second half. Some expect Bernanke to repeat most of the same comments unless pressed hard for answers. Any deviation from previous testimony is most likely going to cause sudden volatility in the market especially if he shifts his attitude toward fighting inflation. Both Bernanke and Kohn failed to address the issue of the USD, which leads me to believe that it will be allowed to trade lower against most majors at least in the short run.
EURUSD: The main trend continued up as the EUR reached an all-time high against the USD. Look for this trend to continue with the upside objective 1.50 the next psychological resistance area. If the market should meet short-term selling pressure in this area, then look for a buying opportunity on a pull back to 1.471 to 1.465.
GBPUSD: The GBPUSD main trend turned up on the breakout over 1.97364. The close near the high sets up a further rally to the next upside target at 1.99568. If the market meets short-term resistance at the current level, then look for a buying opportunity on a pull back to 1.96167 to 1.95564. Look for profit taking at a weekly down trending Gann angle at 1.9881.
USDJPY: The USDJPY main trend is up despite the short-term sideways to lower trade over the past few days. The main trend will turn down on a trade through 106.725. Currently the major retracement support zone is set up at 106.78 to 106.35. This zone supported the market on the first test last week and will be key as to the short-term direction of the market. If it fails to hold as support, then 105.00 will be the next downside target. Be careful adding new shorts near 105.00 as the BOJ may intervene at or near that level. On the upside, if the current levels hold as support, then watch for a retracement to sell at 107.66 to 107.88.
USDCHF: The sharply lower close has the USDCHF in a position to challenge the low for the year at 1.07282. Under this price, more selling pressure could come in which takes the market to 1.05. If support is reached at current levels, then look for a short-covering rally back to 1.08890 to 1.09229 for the next selling opportunity.
USDCAD: The main trend turned down on the trades through .99187 and .98722. The next downside target is an old bottom at .97549. The next major support zone is at .9668 to .9561. Look for profit taking and a technical bounce off this level. On the upside, the new resistance target is .97831 to 1.01967. Look to sell rallies if given the opportunity.
AUDUSD: The AUDUSD surged to a new high on Tuesday as the close on the high showed no sign of a let-up. Look for a buying opportunity on a pullback into the support zone at .9106 to .9051.
NZDUSD: Another new all-time high was posted in the NZDUSD. Expect the trend to continue higher unless acted upon by a closing price reversal top. On the downside, the next buying opportunity comes in on a pull back to .8029 to .7999.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.