Friday, February 11, 2011

Out Of Touch!

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By Mike Conlon | February 11, 2011

At least those are the claims of the opponents of Egyptian President Mubarak, who yesterday pulled a head-fake and defiantly is staying on as President. It had been reported that he was going to resign prior to his speech, but that clearly wasn’t the case. Now there is increased instability in the region as the protests have gotten bigger and the uncertainty of outcome has caused a flight to safety ahead of the weekend.

While this is obviously the major global story today, we also got some price data from different regions around the globe which are supportive of rising inflation.

In New Zealand, they are seeing biflation where the price of food has gone up and home prices have gone down. This is going to be a major theme going forward as asset bubbles (housing particularly) are bound to pop at some point. Because of the cheap flow of money around the globe, demand for housing pushed prices to levels could be deemed excessive.

In the Euro zone, German PPI data came in mostly as expected but UK PPI data came in much higher than expected. Luckily for the BOE, they made their rate decision yesterday so they bought themselves some more time to let inflation creep into the economy.

So this morning is marked by risk aversion in the currency market with Dollar and commodity strength, and equities weakness.

In the forex market:

Aussie (AUD): The Aussie is lower and has fallen under parity with USD as risk aversion has increased in the market. It should also be noted that RBA chief Stevens came out and said that leaving rates unchanged was “sensible” and that the RBA was “ahead of the curve”.

Kiwi (NZD): The Kiwi is also lower on risk themes with the added weight of biflation weighing on the economy. Home prices decreased 2.6% and food prices increased 1.8%, highlighting the dilemma that the global economy is facing. (Click chart to enlarge)


Loonie (CAD): With no news on tap, the Loonie is also susceptible to risk aversion though faring better than other currencies as higher oil prices due to Egypt have mitigated the selling.

Euro (EUR): The Euro is mostly lower on anti-Dollar sentiment as safe haven seeking is taking place. PPI data in Germany came in as expected which shows that they have a good handle on pricesâ€"for now.

Pound (GBP): The Pound is lower across the board after yesterday’s rate policy meeting left rates unchanged which helped the Pound move higher, only to fall back to lower depths after PPI data confirmed what the market already knows: that inflation is prevalent in the UK and that the BOE may be on an economic collision course with the government over the economic climate. (Click chart to enlarge)


Dollar (USD): The Dollar is putting in 3-week highs as risk aversion has induced a flight to safety and demand for the greenback. Yesterday’s initial jobless claims finally posted a 3-handle, meaning that only 383K people officially lost jobs last week vs. the expectation of the usual 410K. I find it amazing that the same media that blamed bad weather for the lousy Non-Farm Payrolls report completely discounted it in the analysis of the jobless claims. I expect this number to be revised higher. Later this morning, consumer confidence figures are due out.

Yen (JPY): The Yen is finally showing some strength but not nearly what would be expected under risk aversion scenarios. This highlights the fundamental weakness of the Japanese economy and could mean major weakness in the ensuing months.

The situation is Egypt is a microcosm for what is going on around the globe. Food and energy prices are rising, but economies are lagging. High unemployment and falling housing prices are dragging on various economies and this situation is highlighted by the turmoil.

The irony of Egypt is as the unrest and uncertainty continue, the higher both food and energy prices are likely to go! Instability in Egypt could set off a domino effect around the Middle East which topples governments and causes oil prices to rise. Add this too the already incredibly cheap money that is flowing around the globe and this is an inflation powder-keg ready to explode!

So I expect to see some more selling today as traders won’t want to carry the risk over the weekend, and I’d advise you to do the same.

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