Ralph Shell @ 9:40 AM, Thursday February 10 2011
The Bernanke performance at the US House yesterday failed to provide anything new. He did suggest that the government spending needs to be curtailed. Coming from a Keynesian disciple, is this not a changed approach. Might this be an attempt to cultivate good will with the new Congress, who is already committed to spending cuts.
Bernanke did continue presenting the fable that there is no inflation, because what is going up does not count. The origin for the exclusion of the volatile food and energy sectors goes back to the 1970's, the period when the Great Grain Robbery happened. US government permission to sell massive quantities of grain to the Russians at bargain prices was a factor that resulted in much higher food cost.
Will history repeat with another massive increase in the demand for US agricultural products, and a consequent surge in domestic food costs? The Chinese are the largest producers and consumers of wheat in the world. There are consistent reports their winter wheat crop is suffering from drought and other problems. Chinese officials, not wanting a repeat of the Egyptian riots which were in part caused by higher food prices, are preparing to take any measures necessary to avoid a food shortage. This includes releasing reserve stocks, and importing wheat. Last year the Egyptians imported almost 10 million tons of wheat for their 77M people. How much wheat would the Chinese buy if their were a serious shortage? Chinese domestic wheat is about $465/MT, a hefty premium to $363.00/MT FOB the US Gulf. The Chinese do have the currency reserves. How much is too much to pay when insuring there is adequate food and no riots? They could purchase 10 million MT of US wheat for $5B and not put a dent in their currency reserves, but what would this do to domestic prices.
Will the threat of higher Chinese food prices influence the currency markets? It seems obvious that the .25% hike in the Chinese interest rate is merely a feeble attempt to slow the economy down, when the domestic inflation rate and the interest rates are about the same. Further measures will follow, and will this tightening affect the yen or the A$?
The withdrawal of Axel Weber as a candidate to succeed Jean-Claude Trichet whose eight year term ends this fall, has left the field wide open. I'm curious. How does one campaign to become the new president.
Euro debt problems have again surfaced to hurt the euro versus the USD. The Portuguese sale of five year notes did not go well, trading up to a yield of 6.93%. Ten year notes traded as high as 7.6%. After the ECB supported the five year note by purchasing them in the market, the yield went down to 6.59%.
Last Friday's Brussels meeting failed to resolve issues concerning ECB activities, and the size of the their rescue plan. The next meeting is not scheduled until late March. Another bout of peripheral debt concern during this interim could easily send the euro reeling.
This week the EUR/USD had a nice rally from the 1.3507 level but faltered at the 1.37, and the 1.3740 level. We have since retreated to the middle of the range at 1.3620. It looks to us like the failure to assault last week's high above 1.3840 is negative. Unless there is some compelling bullish euro news, we think the pair could retreat to the 1.34 area.
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.