By Michael Trinkle, ForexTraders

A report by Barclays Capital, quoted by newswires, notes the holiday season being over with the arrival of September. The seasonal trends in markets tend to be established in such a way that much of the most significant activity in each year tends to be clustered in the first and fourth quarters. All that points to a pretty active period of time for much of what remains of 2010. We expect a significant rise in volatility to dominate the price picture until governments and central banks are forced, however reluctantly, to intervene once again.

The Euro saw some selling today in response to yet another study, this time by the WSJ, to the effect that banks did not fully disclose their exposure to sovereign debt during the stress test period. It must be unnerving for the ECB that the credibility of the tests are being questioned one month after their completion. In any case, we suspect that the sovereign credit and bank exposure issues will be with us for a much longer time to come, which means that the markets may have to readjust in order to reconsider the overly bullish stance that has been adopted for the moment.

Meanwhile, gold is continuing its measured, controlled run towards 1275, and then 1300. That gold futures barely reacted to the rather significant revisions to the NFP release is remarkable from our point of view, since just about everything else was forced to rebalance subsequent to the bullish data. Gold prices will eventually bubble up to exceed the all-time high of the 80s, so our bullish stance on the metal remains unchanged. Only a change in the monetary policy stance of major nations will lead to a sharp and permanent sell-off in gold, but that seems a distant prospect at the moment.

Finally, the BoJ Governor Shirakawa is being quoted by news agencies to the effect that the Bank of Japan cannot control FX rates. After two very active weeks of continuous verbal intervention by the Japanese the latest statement, coming from such a high level official constitutes an anti-climax to the story. It is clear that the Japanese have capitulated and resigned themselves long ago to a downtrend in USDJPY.

Intervention remains a possibility only because the FX policy of the BoJ is ultimately controlled by the government. Politics can be unpredictable, and politicians are not famous for their accurate assessments of facts, so, even if futile, they might just go ahead with a little JPY selling if only to charm the electorate with some cosmetics. Even that is unlikely, however, since even a small amount of this kind of makeup, while pleasing to Japan’s electorate, will have the Americans turning their backs in disgust.

The USDJPY rate went as low as 83.54 today in reaction to Mr. Shirakawa’s comments. The all-time low, which is undoubtedly being targeted by JPY bulls over the next six months or so, is at 79.75, touched in April 1995.

Chinese hospitality sees the American delegation snubbed as the Renminbi issue remains untackled

U.S. National Economic Council Director Lawrence Summers, and Deputy National Security Advisor Thomas Donilon are in China today, continuing a visit that will have them meet the Premier and the President of the PBOC at some point in order to discuss the significant issues that trouble the two nations and the region. The Chinese have been doing their best to be constructive, with official after official making comments to the effect that the Renminbi and the trade deficit between the two nations should not be politicized, that China will not bow to pressure. Especially truculent were comments by Jiang Yu, the foreign ministry spokeswoman, who noted that the two countries should “avoid politicizing economic issues”, and “Our exchange rate reform cannot be fasttracked through external pressure.” Comments by Wen Jiabao, the Premier, were a lot more restrained, but the thrust, and tone of their approach to the Renminbi problem remains clear: “It is our currency, and your problem”.

That may well be the case, but for an economy as dependent on the U.S. for economic performance, and at least for now, as diplomatically isolated in spite of the recent improvement in profile, this is clearly not the way out. The Chinese have made major mistakes by cornering themselves into an inextricable situation on the Taiwan, and South China Sea issues, while successfully dealing with their border issues with India. With each passing day, the Yuan issue looks more and more likely to become another of their blunders, although there is still time before U.S. politicians take the fin al steps act to punish China with severe tariffs.

The PBOC is continuing is series of lower fixes for the USDCNY rate today, possibly as a welcome gift to the visiting U.S. delegation, as they are wont to do. The central rate was fixed at 6.7799.

This is an active day, with political as much as economic factors having a role in determining market sentiment. Now is still early September, however, and a large number of issues continue to fester in the background. This winter may prove to be hotter than usual.

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Some of the JPY weakness this morning is being attributed to a rumor making the rounds that the BOJ has asked Japanese banks to prepare for possible fx  market intervention tonight. Seeing how the BOJ has been full of nothing but hot air, and other byproducts recently, we are confident that nobody will buy it – traders now want action, not words. The brief spike in JPY crosses has been promptly regained. Furthermore, with new EURCHF record lows every day, we believe the likelihood of intervention in the Swiss currency is far larger, and we are surprised nobody is wondering how Hungary is doing these days, where the Forint has been in freefall, and domestic borrowers are about to embark on a default tsunami.

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Cable has broken above the Resistance at 1.5380-400 and is currently trading above 1.5450. A close above 1.5450 may be bullish for the markets in the coming days. In the coming sessions today, we see good chances of the pair moving in a range of 1.5350-500 before a strong break

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Cable has just dipped below the narrow range of 1.5350-400 in which it was trading since the US session yesterday. We continue to hold our view of a fall towards 1.5300 on the pair today befoe a bounce on the higher side in the coming days. please note that 1.5300

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Euro 1.2815 Initial support at 1.2588 (Aug 24 low) followed by 1.2434 (61.8% retrace of 1.1877-1.3334). Initial resistance is now located at 1.2933 (Aug 12 low) followed by 1.3000 (Big figure Resistance)

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I published this report on FX360.com this morning (if you haven’t read it already)

The U.S. dollar skyrocketed after the stronger than expected non-farm payrolls report. Not only did the headline number surprise to the upside, but private sector job growth beat expectations with the July figures also revised sharply higher. This positive non-farm payrolls number will bring relief to both the currency and equity traders and suggests that September may actually be a good month for the financial markets. Given the global impact of the U.S. recovery, everyone around the world will be cheering this report.

Non-farm payrolls fell by only 54k in August, compared to the forecast for 105k job losses. The July figure was revised higher from -131k to -54k. Private sector payrolls rose 67k against a 40k forecast with the July number revised up from 71k to 107k. Excluding Census workers, August payrolls increased by 60k. Cutbacks forced government workers to slash 121k jobs last month but U.S. corporations picked up the slack. The only black mark in the report was the unemployment rate which rose from 9.5 to 9.6 percent.

Although this was the third consecutive month that more jobs lost than acquired, this is the best outcome that investors could have hoped for. The stronger non-farm payrolls report will reduce the pressure on the Federal Reserve to implement additional Quantitative Easing and practically guarantees that the central bank will make no new announcements on Sept 21st. Central bank officials will be able to enjoy the Labor Day holiday with a lighter heart knowing that the labor market is moving in the right direction.

It is no secret that U.S. corporations are flush with cash and the non-farm payrolls report suggests that they are beginning to spend their money by increasing their workforce. The sustainability of the improvement is important but the August number along with the July revision already indicates that job losses in the third quarter was not as bad as previously feared.

As long as the non-manufacturing ISM report at 10am NY Time is not horrendous, we expect the U.S. dollar to hold onto its gains against the Japanese Yen and the EUR/USD and GBP/USD to remain firm as long as equities trade higher during the North American session.

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Cable has been moving in a small range of 1.5350-450 and may move within the same region till the US session today. Later today, or in the coming days, we expect the pair to move down towards the Support at 1.5300 (honour it or test it on a weekly basis),

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Seeing Past The Hologram, by Mike Krieger of KAM LP

There is no distinctly American criminal class – except Congress.

- All quotes by Mark Twain

We Need Real Confidence to Return, Not Confidence in a Ponzi Scheme

Last week I pointed out that what I got from Banana Ben’s speech in Jackson Hole was that he realized any major public statement of interference in markets was too risky at this point following his announcement at the last meeting to keep the balance sheet steady by reinvesting MBS proceeds into treasury securities.  The operative word in this sentence being “public.”  Anyone that believes this means the Fed and government will just take a back seat and do nothing behind the scenes is deluding themselves.  Washington D.C. and the Fed still fail to comprehend how to increase standards of living in the real world, rather they remain completely addicted to the short-term buzz of printed money heroin as it flows through the house of cards they have created.  They also think that the only thing that really matters in an economy is “confidence.”  As Madoff can attest to, that is indeed the case when you are running a ponzi scheme and since the U.S. government is basically that I can understand where they are coming from.

 I agree that confidence is a huge part of any healthy economy; however, I do not define confidence in the way these arrogant bureaucrats do.  They think confidence comes from rising asset prices, including stocks and homes.  They think this is enough to spark growth in the real economy.  This is nonsense.  The confidence that is needed more than anything else today is two-fold.  First, confidence that there is the rule of law and there will be the rule of law in the future.  The second is that the money issued by the government will maintain its purchasing power over time.  As I have made clear on various occasions, I do not have confidence in either of these things based on how the government has responded to the crisis.  I do not like buying physical gold.  I do not like feeling the need to write these emails every week to warn people.  I wish I could employ capital into businesses and the real economy.  I hope that one day I will be able to do so, but at the moment I do not trust my government and I certainly don’t trust the fascist Federal Reserve.  So I will hoard what I have as the government prints and let the storm pass me by.  I am not the only one.  People are collectively starting to understand this.  So what happens when the big, smart money takes itself out of the investment and capital allocation game because they don’t trust anything?  What happens when the government’s response to this is to print money to keep up the spending habits of people with no jobs or people with government jobs that produce no goods for the economy?  You get the worst case scenario and that is exactly what is staring us straight in the face.

Is a Trade War with China Coming?

The quicker the dollar is devalued the better.  This is not to say that I think dollar devaluation is a good thing.  It is to say we are past the point of avoiding it.  We could have taken the pain in 2008, but instead it was extend and pretend all over again.  Now the debt and promises are too big.  The behind the scenes manipulations are too entrenched.  There is no avoiding a devaluation relative to things people need (food and energy) and capital goods that are imported.  The best thing would be to get it over with and then change policies and restore the rule of law.  The problem with this is that the main currencies the dollar needs its major adjustment against are those in emerging Asia and China.  What has prevented the realignment from happening in a quick and healthy way is China’s refusal to allow the yuan to appreciate.  This creates a situation where Central Banks throughout emerging Asia take steps to prevent their “free-floating” currencies from adjusting either.  If China does not change its policy I fear that what we are looking at a trade war with China after the November elections.  I think Congress and the Administration will start to introduce aggressive policies to discourage Chinese goods and encourage goods made at home.  Think it can’t happen?  We are a lot closer than you think.  This all goes back to my “think local” theme.  While I am inherently a fan of free trade we do not have free trade in any sense whatsoever.  We have policies that are geared to advantage the multi-national corporations at the expense of the U.S. citizen.  The U.S. consumer has merely been spending borrowed money.  This gave an illusion that the U.S. was benefiting from the global multinational corporate rigged market whose model mainly thrives on companies moving abroad to exploit the labor arbitrage caused by a combination of what was a labor surplus (no longer it seems) and a rigged currency.  As more people realize this, more pressure will be placed on politicians and ultimately this will overpower the corporate lobbyists and a trade war of sorts will begin.  Then the chaos could really ensue as we engage in a trade war with our biggest creditor!

Seeing Past the Hologram

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important.  Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch.  If anything is a hologram and a PR tool it is the U.S. treasury market.  How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government!  The Fed is merely the fiat drug dealer to a government addicted to spending and false promises.  The equity market is the second most useless market in my opinion.  There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing.  Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%.  So what you have seen is high volatility with no real direction.  How can anyone have confidence this that thing is for real?

So what markets do I watch?  I get the most from the FX markets and the commodity markets.  While these markets are no doubt manipulated heavily as well, I think this is where the players that really understand the macro are playing.  The first currency I check in the morning is the dollar/yen.  The reason for this is that the yen is back to the highs of 1995 and if it does not stop appreciating around this level I think the Bank of Japan is going to absolutely panic.  While the yen has not broken higher yet as market participants are afraid of such intervention, unless the BOJ does something extreme soon the market may test their resolve and push this thing further.  I guess the main point I am trying to make is that with the Chinese yuan NOT strengthening and the yen threatening to break out we could be in for some major fireworks.  Meanwhile Japanese 10 year government bond yields have really started to spike lately (chart GJG10 Index on Bloomberg).  Something big is happening in the land of the rising sun.  In the back of my head I think that any panic move from the BOJ could be the spark that breaks government bond bubbles globally and ushers in a period of massive global commodity driven inflation as every country tries to devalue their way to prosperity.  Essentially, a fiat money version of the 1930’s beggar thy neighbor policies.  When this begins the rush into gold and silver that we have seen thus far will look like a trickle.  I don’t think people will be able to find supply anywhere near the quoted price on comex (or as some like to call it “crimex”).

This brings me to silver which potentially experienced a game changer last week.  I can’t remember the last time silver bounced back almost immediately after every attempted raid.  I am starting to wonder how much physical silver is available.  What we do know is that Central Banks do not store silver to manipulate markets.  Even if it doesn’t break out right now, there is no asset in the world that has more upside than silver.  Don’t buy SLV either.  Buy physical silver not something with JPM as a custodian. 

I also continue to watch food prices very closely.  Wheat, which has come off of its high now seems to have found a base at a price that is 50% higher than the end of June.  Corn prices are threatening to break above resistance at levels 30% where they were at the end of June.  Rice looks like it could have a long way to go on the upside as it is only 20% off of its June low.  If I were a foreign government I would be using this opportunity to buy every single grain of rice I could in order to feed my people when things get dicey in the months ahead.  After strong performance in recent months lean hogs and live cattle also look set to make another push to the upside.  How people in the investment world still focus on the government inflation statistics is beyond me.  It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008.  This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt.  It seems the whole play is starting again and people remain focused on deflation.  Deflation in some things yes I agree (discretionary things like homes, technology, stock prices, etc), but not in the things you NEED to buy!!!

Onto oil which is also exhibiting some strange moves.  The Asian benchmark Tapis has not experienced the recent volatility and weakness that WTI has and is currently trading at $80/b.  The Asian price is the one I really pay attention to since that is where the demand growth resides.  The spread between the two now is back above $6/b, which is toward the high end of the range for the past two years.  This tells me that one price is wrong and the spread should narrow.  Given what I think about currency debasement and lack of appropriate investment in the space I think WTI should rally.  We shall see…

A Primer on the Federal Reserve

For those that read my commentary on the Federal Reserve as an immoral an fascist institution and think to themselves “what is this guy talking about,” I have attached a video from G Edward Griffith (the author of The Creature from Jekyll Island).  It’s a great description of how the Fed was formed and who it answers to when push comes to shove.  http://video.google.com/videoplay?docid=6507136891691870450#

Also in case you weren’t aware of the power grab that the “Financial Reform” legislation allowed the Fed, read this Bloomberg article. 

http://www.bloomberg.com/news/print/2010-09-02/bernanke-meets-buffett-in-new-role-conceived-to-protect-markets.html

All the best,
Mike

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Here is a great interview featuring my colleague Boris Schlossberg talking about the surge in FX volume

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