Ralph Shell @ 1:05 PM, Tuesday November 23 2010
For those predisposed to be worriers, this week has been a series of beautiful events. Briefly Monday morning, the bulls did get to celebrate because Ireland had agreed to take up to €100B or so, bail-out money for the overextended Irish Banks. Then, a collective epiphany occurred. There are more, probably bigger bail outs, on the horizon, and they will test the will of those supporting the single currency. Down the euro went!
This morning, North Korea, a perpetual enigma, decided the time was ripe to shell a nearby island in neighboring South Korea. The South Korean currency was down 2.5% against the USD, and global equity markets worked lower. Since N. Korea is a rogue nation with nuclear capabilities, their actions are causing global concerns. After the Korean incident Japanese credit costs rose marginally but the yen strengthened.
The Korean conflict is cited for one of the main reasons why US equities are trading lower. The Dow is currently down about 150. Is it possible, though, that a stronger USD, is another reason for the equity weakness. The anticipated fear of QEII seemed to boost the market prior to the formal announcement of the program.
This morning the US preliminary 3rd quarter GNP was released and the number exceeded expectations. Growth in the quarter was 2.5%, better than the 2.3% expected and 2.0% in the previous period. The US grain exports, with Russia withdrawn as an exporter, and increasing Chinese needs with their domestic prices soaring, is a bright spot. The US has the production, interior transportation, and port capacity to continue to be the biggest grain exporter in the world, often overlooked when evaluating comparative economic strengths and currencies.
Chinese inflation remains a concern. This morning an article in the Asia Times Online by Olivia Chung touched on some of these issues when she said:
"Inflation is higher than expected and, more importantly, the authorities are giving up the thought that inflation is going to peak soon," said Dong Tao,
The consumer price index (CPI) in October rose 4.4% from a year earlier, higher than the consensus 4% and up from 3.6% in September. With the country's money supply also surging on higher lending, it is increasingly likely that the government will raise interest rates by 25 basis points by year-end.
Food prices, which account for one third of the basket of goods used to calculate the CPI, contributed 74% of the October increase, with a 10.1% year-on-year rise. That was up from 8% in September, 7.5% in August, 6.8% in July and 5.7% in June."
Concern that the Chinese will tighten further, fearing the damages of inflation, and the unpredictable behavior of the North Koreans, has unnerved A$ and the kiwi. Loaded with longs, these markets will probably not handle adversity well. But what about Japan? They are the biggest trading partner of China, and separated only by the Sea of Japan from North Korea.
After flirting with the 89 level versus the USD, the yen has subsequently lost a little ground to the USD trading to 83.83 today. We have since come back to 83. The yen appears to have lost some of the appeal it enjoyed as a safe-haven currency mere weeks ago. The USD, though not perfect, seems to be making a recovery as a safe haven destination. With potential trouble at Japan's door, let's try the long side of the USDJPY in the 83 vicinity, risking 75 points. The yen has broken a major down trend line, and a trip back to the 85.50 level is possible.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.