Notes From Underground: Watch Your Blindside

The Dollar continued strengthening today as highly leveraged carry trades were unwound in a highly volatile holiday season market. The newest proxy for European uncertainty,the German/Greek 10-year spread, made new highs for the recent move as the Greek tragedy was met with a resounding chorus of disaffection. The Greek administration is talking tough but the market is not signing on to what Greek officials are promising. There is no way a democratically Socialist government is going to squeeze public sector pay enough to begin to bring down the budget deficit to Maastricht levels. The discussion then hinges on whether or not the Germans provide the funding that will be needed and our readers know our thoughts on this possibility. It may happen but the question will be at what price.

Tonight there is a breaking story about a possible coup in Pakistan as the High Court of Pakistan overturned a previous decision on political amnesty. Previous Pakistani officials were granted relief from prosecution for crimes committed under President Bhutto. However, with the court’s ruling it could be open season on some very high government officials. Political uncertainty is popping up all over the globe and this is causing the DOLLAR to be the recipient of safe haven status. This is interesting for when Bernanke most recently commented on the DOLLAR when it was selling off, he was not greatly concerned because it reflected the markets just unwinding the effects of its safe haven status. Dollar buying has brought the EURO to within being almost unchanged on the year, as are the Swiss and YEN. This will force the FED to rethink the stimulus pullback if the DOLLAR rally continues.

We think the rally in the long end of the Treasury market today was in response to this possibility. The risk off algorithm was turned back on today as all the variables were in sync, but we doubt that this will continue for any duration. Even with all the political uncertainty, the market seems tired of this theme and is looking to find the real global growth stories. It may be that the DOLLAR is simply ahead of the slower growth in the developed world. The significance of the YEN will be, if it continues to fall even in a risk-off environment, that the DOLLAR would lose its status as the major funding vehicle. Today’s leading indicators lent salve to the further healing of the U.S. economy but we have to see the JOBS picture brighten more before we butt into this theme.

Being a holiday-thinned market, we warn all who trade to be cautious for you can see levels that will astound you. Keep your powder dry and wait for opportunity from others leaving the market to give you the most beneficial price. Many hedge funds who were/are involved in the carry trade have found they have stayed too long and are watching the erosion of profits before year end. If you are bullish GOLD or wish to buy out of favor currencies have your support levels prepared for your best risk profile. This is a refrain you will hear from us over and over. Most of all stay focused on global events to prevent being blindsided!

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One Response to “Notes From Underground: Watch Your Blindside”

  1. AEB Says:

    Enjoyed the read Yra, Happy Holidays – AEB

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