So much is happening with the USD and the critical US credit markets, as well as with gold and commodities. Now that the USD broke below the key 73 level on the USDX (US dollar index basket of currencies, heavily Euro weighted) many key issues come to the fore for gold and commodities.
First, the EU is still rather firm on interest rates, but they have a lot of pressure as the Euro breaks over 1.50. The ECB and EU have previously made comments that they could intervene in currency markets if the Euro breaks above 1.50 . Any indication that can happen will cause a significant USD turnaround. That would then apply to gold and oil as well, as these have risen so much recently and are due for profit taking (or that pressure is there). So, the Euro situation needs to be closely tracked, as any significant change in policy can cause oil, gold, and commodity profit taking.
There is a great deal of political pressure in the EU as the Euro rises. France has made rather strong statements that the Euro is intolerably high. The other weaker economies in the EU are also screaming about the strong Euro. That situation is so volatile right now that there are Europeans saying that strong Euro pressures are serious enough to cast the monetary union in doubt. It would seem that is unlikely, but there is significant risk to the Euro going forward (enough to take note of).
As the USD falls below the key 73 level and the Yen around 102 Yen/USD, the BOJ needs to be closely monitored for any indication they will intervene to stop the Yen's rise. Japan has stated recently that they will defend the Yen at the 102-3 level. That may be hard to do since the Yen carry trade is unwinding, and the Yen is relentlessly strengthening. However, any indication that the Japanese will intervene to support the USD must be closely tracked. The Japanese have previously heavily defended the Yen at 110 to the USD.
Likely, the BOJ has to tolerate a lower range this time, as we stated the Yen is in a longer term strengthening trend due to financial markets unwinding. However, as I stated, the Japanese have said they may stop the Yen at the 102-3 level, from continued strengthening.
If any news of that actually appears, the commodity complex, gold, and oil will likely do some significant profit taking, as they have recently risen so much.
Credit situation critical
Gold's recent rise to these new highs correlates closely with the world credit crisis that exploded in August, and there is little indication the credit situation is improving. In fact, US credit spreads (the extra credit/bond interest over key US treasury bonds) have risen to more or less record levels this week. This is so severe that corporations, as well as banks and hedge funds and municipalities, are paying a great deal more for any bonds/financing.
Rising credit spreads and virtually zero liquidity in bond markets is causing hedge funds to fail to meet margin requirements. As of this week, several new big funds are in trouble. They are being forced to sell bonds and other assets to cover margin calls by their banks. The banks are not presently willing to provide any liquidity to bond and financial markets, as they are in such bad shape themselves. The failure so far of Ambac to get $3 billion in new capital from banks continues to cast them in doubt.
As a result, the half trillion plus of bonds they insure continue to be at risk of being downgraded. This is causing relentless losses in all levels of bonds, and is putting huge liquidation pressure on any institutions/funds which have these bonds as they get margin calls.
Caution for USD bears
This margin call driven selling can cause relentless financial market selling if things get out of hand. The last time we saw waves of this selling last year, the USD strengthened several points on the USDX. This was because there was cash hoarding by everyone, corporations included, as they had to hoard cash or stop operating. That causes USD hoarding and resultant USD strengthening.
In this situation, there is also USD repatriation as foreign markets are sold. This also causes USD strengthening.
Severe market selling can cause the already bubbly commodity markets, gold, and oil, to sell due to profit taking, and margin calls. As a result, the dicey market situation due to the credit crisis continues.
Gold has rallied heavily immediately after each margin related sell off, however, to new highs. So this is not a call for an enduring gold sell off.
In fact, since gold is 'cash par excellence', gold has benefited quite a bit from flight to cash since the credit crisis started in August.
Our latest alert about these topics
We sent this alert to subscribers today (Friday) on these topics. We provide this as a sample of our alerts:
PrudentSquirrel alert â€“ USD, Euro, Yen
The USD broke below 73 on the USDX as the ECB appears firm on interest rates. However, there is a great deal of pressure on all our trade partners with a falling USD, in
particular the EU to stop the rise of the Euro at over 1.50
The Japanese have stated that they will defend the Yen rate around 103 (they don't want it strengthening either)
If either the ECB/EU and or Japan step in the USD will rally and gold will do some significant profit taking, but its not clear that will happen.
The stance of the EU and the BOJ need to be closely tracked to ascertain if the USD will rally and gold and pretty much many commodities including oil will do some heavy profit taking - that is certainly very due as both gold and oil have risen dramatically, interestingly coinciding exactly with the onset of the credit crisis beginning August when things exploded.
It does not appear that the ECB or BOJ will for sure act to stop the USD decline and they may allow it to stay in the 73 level. If the USD stays in the 73 level its quite likely gold and oil continue their rises -
There is significant new deterioration in the US credit markets with spreads widening to almost a record. Of course the banks and financials are in trouble and pay a lot for any
credit they get themselves, but also the general corporate credit spreads are widening dramatically - I mean dramatically - in the US
Bond traders have stated this is now as bad or worse than the worst moments of the Aug and Sept credit collapse/market panics
The markets are clearly set up for another dramatic sell off if fund deleveraging and forced selling continues, as has appeared this last week, and the credit panic continues
apace to deteriorate, the banks are not willing to provide liquidity to any bond or credit market, so funds and institutions riding bond values down are having margins called on them and its forcing selling
As far as the USD goes, it can rally significantly due to this factor as rushes to cash and hoarding of cash becomes necessary merely to stay in business, and if markets crash,
flight into cash and repatriation of USD - so this is a very bullish factor for the USD - if there is a big financial panic - which as we know have been on the verge of for
Then Yen carry trade is on the verge of another sell off, and the Yen is rising relentlessly. As we know, that is another bellweather to measure market deleveraging as the Yen carry is a key component.