Ralph Shell @ 2:58 PM, Wednesday February 24 2010
It was no surprise when Fed. Chairman Bernanke, in his Congressional testimony today, confirmed that tame inflation and a week jobs market will keep rates low for a long time. Yes it is a long time from February until election day in November when the unemployed and under employed voice their displeasure at the ballot box. It is not that the loose money and the near zero interest rate is going to stimulate new hiring, but perception and symbolism has always been more important in Washington than results.
The disciples of Keynes who advise President Obama, share his view that only Washington has the cure to the current economic morass, and that solution is to spend spend and spend. In a Bloomberg commentary by Matthew Lynn today entitled "Deathbed of Keynesian Economic Will be in the U.K, he said:
"The Keynesian consensus is that things would have been far
worse without the stimulus provided by government. And if the
economy isn’t pumped up with inflated demand, it will collapse
back into recession. If it’s not working, that just proves the
stimulus should be even larger.
It is the argument quacks always push: If the medicine
isn’t working, increase the dosage."
These comments were directed at the UK. leaders but there is little difference with the policies in the US.
Washington has used the tax code to stimulate home construction by giving tax credits to "first time" home buyers. Builder, doing what they like to do, started building houses on the faith that the buyers would come because of the government incentives. Never mind that past policies of cheap interest and low down payments to all, stimulated high prices and a glut of properties. Prices naturally came down, and the government's stimulation of building only adds more supply that is not needed. This morning it was announced that new U.S.home sales dropped sharply to an annualized rate of only 309,000. This would be the lowest rate since 1963. Once again, the involvement of the central government has undesirable consequences.
For the past several months the oil market has been climbing and traded briefly above $80 per barrel. For months when the USD was under pressure, this was given as a reason for higher oil. When the USD turned higher, the oil price did not retreat, but rather continued even higher. This is perplexing, since demand for the products, especially the distillates is slow even despite a very cold winter. This morning US oil inventories came in at +3.0 million barrels, better than the expected 1.8 million. The futures markets have responded to the bear news by going higher, currently trading at 79.59. For the time being it looks like someone wants the oil to trade higher.
As a large producer of oil and natural gas Canada is a beneficiary should the oil prices remain firm. The bullish loonie/oil story is not a new one, and a host of speculators did respond by amassing a very big long. Weakness followed during the past month as specs pealed out many of these longs, forcing the C$ out to almost 1.08. It looked like something spooked the longs yesterday. Open interest was down 5198 futures contracts as the market retreated from the high 1.03's to almost 1.06. The recovery today is feeble and the market acts like it may sell off a little further. We are going to try the buy side of this pair on a break to the 1.0670 zone risking 100 pips.
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.