Thursday, December 2, 2010

Well, glad that's over

It's all 'risk oooaaarrrrn'. And this blogger doesn't buy it.

EQE can't save the euro. It can only devalue it. That stuffs the current macro settings for reflation and sooner rather than later the markets will realise it. The US recovery cannot carry the world without a falling dollar even given it's slow strengthening.

Moreover, the risk of an Irish default looks very high. As this blogger has been saying, and Barry Eichengreen, Michael Pettis and Yves Smith (see links) make clear in a debate today, why wouldn't they? The bailout package is fiscal rape.

As for our dollar. This blog stands by its call that it's in trouble. UBS came out late yesterday and endorsed the call. Here's a sample of their reasoning:
It's been a quiet week here in the US with Thanksgiving really knocking out the week from mid-Wednesday onwards. Even so there has quite a lot going on, not the least in the currency markets where Ireland's bailout has failed to restore Euro strength. To my mind, one of the most interesting developments has been across the Pacific where the risk on currency darling - the AUD - has taken a severe pounding, falling from 0.9954 to 0.9657 versus the USD over the past five trading days. Our FX desk in Stamford noted this morning that "0.9593 is the next level in AUD to watch - is where trend line support drawn off the 0.8084 low of June 8 currently intersects. Dropping through this trend line would signal a trend reversal, opening the way to 0.9220."

...It all looks rather worrying. I am getting a lot of questions about whether the risk on cycle has ended and I am increasing coming to the opinion that it has. My contention has always been that Risk On/Risk Off is just a beta market response to swings in the short-term Chinese economic cycle from relative expansion to contraction. Expansion is when jobs are a priority and contraction when inflation becomes the greatest fear. In the early Northern Hemisphere summer, the rhetoric out of the People's Republic was much more concerned with expansion, now it is dominated by fears of inflation.

Yes, commodities especially metals have so far but for how long under this pressure? This blog adds European disintegration fear and the shift in macro settings and still gets a correcting Aussie.

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