The weather outside was frightful, but it was nothing compared to the frostbite that all the DOLLAR bulls were subjected to as analyst after analyst laid out their bullish DOLLAR scenario. U.S. assets are very attractive so the foreign buyers are going to be pouring money into the U.S equity markets and all sorts of other investment venues. Today was a perfect example as CNOOC announced it was taking a small stake in Chesapeake Energy projects in Colorado and Wyoming. Foreign companies are searching for U.S. assets as are the sovereign wealth funds, but the inflow of cash into what could be perceived to be strategic assets is much smaller than it ought to be because of the fear of CFIUS.
Money that would be coming to the U.S. economy is fearful that many possible deals will be blocked under the guise of national interest as we saw in 2005 with the CNOOC -UNOCAL deal and then again with Huawei-Palm. Dollar bulls have not gotten the burst that they have hoped for because of “regulatory” interference. It seems to have gone unnoticed but the President’s SOTU address made no mention of reining in the CFIUS group and its nefarious effect on the use of foreign capital to aid U.S. competitiveness. It will be interesting to see if the oversight committee that is under the authority of the TREASURY DEPARTMENT moves to block CNOOC‘s small stake in Chesapeake’s energy projects.
If Treasury continues to block certain foreign acquisitions, lobal investments will find other opportunities in more welcoming environments. DOLLAR bulls need all the help they can get for it is hard to be bullish while the FED is actively maintaining QE2. Every fundamental bit of positive news in the U.S. still has to overcome a historically steep curve and its implications.
Tonight we will hear from the RESERVE BANK of AUSTRALIA on its interest rate decision. The consensus is for no change in rates, leaving it at 4.75 percent. As always, the Bank’s statement will be an interesting read as Governor Stevens provides the markets with his view on the global economy. Also, we will wait to see if the bank discusses the economic impact of the flooding in Australia and hopefully removes some of the present uncertainty that is overhanging the market.
One of the most interesting moves today was the strong rally in the BRITISH POUND. Readers of NOTES FROM UNDERGROUND know that I don’t believe in fighting market action. After reading Mervyn King’s speech again today, I find it difficult to see how the market thinks the BOE is going to raise rates. I’m struggling to ascertain if POUND strength is indicative of overall DOLLAR weakness as the market is searching for all alternatives. If the previous weakness in the POUND is correcting due to rising exports? Or, is the market providing us with a selling opportunity as it tests some level of resistance? I’m not a technician so I advise for all those as skeptical of the POUND to do your work and find the trade that provides the lowest level of risk. If the POUND is rallying on the back of expected rate increases, I must have read a different Mervyn King speech, for I fail to see the possibility of a rate rise in the near term. And, the fact that the 10-YEAR GILT is near its recent lows just does not provide a bullish backdrop for the POUND.
The U.S. 10-YEAR NOTE has added 70 basis points since Jackson Hole and yet the DOLLAR is 7 percent to 8 percent lower, the argument of a rise in long rates supporting a currency doesn’t hold. Again, let the market be your guide and be prepared in your work.
Tags: 10-Year Gilt, BOE, British pound, CFIUS-UNOCAL, CNOOC, Dollar, Fed, Mervyn King, QE2, RBA, SOTU, Treasury Department, U.S. 10-Year Note
February 1, 2011 at 6:24 am |
With regards to the rise of the British Pound, if you were a wealthy prince living in Saudi Arabia looking at the turmoil in Egypt, where would you put your money?
February 1, 2011 at 7:11 am |
Mike–I know there is an affinity for the Arabs and London—but not because of a rate rise as again I am taking Mervyn King at his word