Notes From Underground: Check, check, raise

In the dynamic game of central bank poker, three banks announced rate decisions. The FED left the funds rate at .25% and left in the banal phrase,”extended period.” The market yawned and the 2/10 steepened as the long end was sold and the FED revealed that it was still mesmerized by output gaps. The FOMC statement read as a primer for those who adhere to output gaps and the only dissenter was Kansas City Federal Reserve President Thomas Hoenig.

Inter-meeting bravado seems to diminish under the intense stare of the FED chief. The Reserve Bank of New Zealand also checked today as they decided to remain at 2.50% on the official cash rate (OCR) as the New Zealanders felt that risks to the global economy remained elevated. In an interesting comment, the RBNZ noted that because of the present steepness of the yield curve they believed that “any rate increase would prove effective then in the past.” We found this something to watch for because we the believe that the FED has similar leanings and may well be why they feel they can be a little bit slower to increase rates.

With the first two players checking, it was up to the Brazilian Central Bank to up the ante and so they did. The Brazilians raised rates 75 basis points, to 9.5%, from 8.75%. The markets had been anticipating 50 bps so we will wait to see how the REAL responds in the morning. The Brazilians were aggressive as they felt that foreign flows and strong commodity prices were raising the threat of increased inflation. A rate rise was expected in March but the bank held off, but now with prices on the rise they felt they needed to act. Bernanke, take a lesson and realize that you can raise rates in 75bps increments and not just 25!

The FED failed to mention the European debt crisis in its statement so we will have to wait for the MINUTES to discover if the PIIGS entered the conversation. We have to note that the Greek support package is now deemed to be €120 billion over three years. Members of the German Parliament revealed this information after the address from ECB President Jean-Claude Trichet and IMF head Dominique Strauss-Kahn.

As the crisis continues on and the Eurocrats and politicians fail to reach a conclusion, the price of  resolution seems to increase as the market exacts an ever higher price.Greek 2-year debt went to almost 16% as 10-year Greek notes were almost at 10%. The market is asking for clarification for uncertainty breeds contempt and a higher insurance cost. It seems as if the IMF, which had a minor role, is going to have to step up with more funding. It makes us think that maybe the IMF will move to sell off more GOLD to raise funds, so we will be watching for any action in the market toward the end of the day. Remember that IMF GOLD sales have represented great buying opportunities in the past. Interestingly, it is the gold stocks that have outperformed during the last leg of this rally. We have not read anything about this but having traded for 30-plus years, we are always trying to anticipate the erratic moves of the global elite. Just providing food for thought.

Today the British POUND was weak on all the crosses as a typically hawkish member of the Monetary Policy Committee (MPC) delivered a very dovish speech on the UK economy. Tim Besley said the British economy remained fragile and that more evidence would be needed to ensure that the growth story was on solid ground. We still believe that the POUND is a good value relative to other currencies so we will look at technical levels of support for the British currency on some of the crosses. The election will be over soon so the headline-driven fluctuations will end. The technical picture then will be clearer. If Nick Clegg of the liberal democrats were to win, then we will re-evaluate for it seems that he is intent on bringing the POUND into the EURO. For the sake of the Queen we hope at worst that parliament is hung. Britain into the EURO at this time would be a mistake of gargantuan proportions. Does Nick Clegg not read the European papers or are finances all Greek to this daft man?

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One Response to “Notes From Underground: Check, check, raise”

  1. Joe Says:

    We’ll have to start paying closer attention to the $US/Real. It’ll help make sense out of these corn and bean rallies that seem to materialize out of the clear blue skies we’ve been experiencing this planting season. An expected appreciation of the Real would narrow the old crop/new crop bean spread in absence of any new clues on planting intensions. I suppose the Brazilian and Canadian exporters can now commiserate. Thanks Yra.

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