more the 10% rise in the price of oil in less than two weeks has been
markedly different than that of the bond and equity markets. Currency
traders seem to reckon that the effects of the oil spike on the world
economies will be transitory. They have given modest credence to the
increased risk of an economic slowdown or depression in the US or
elsewhere. Consequently risk appetite and the euro have gained. Their
brethren in the stock and credit markets, but, are far more cautious.
The equity markets have just had their longest sustained negative run
this year. Profit-taking on the recent powerful rally is only one
reason for the promotion. Downward adjustment to economic growth
expectation is another.
The Centralized Reserve has amply demonstrated its conviction that low
rates are necessary to support a weak economy. The yield of the US
10-year Treasury has fallen nearly 30 basis points since February 8th
as the credit markets anticipate Fed difficulty on rates and the
effective permanence of its zero rate policy. US statistics have been
strong but the credit markets are reacting to the economic stress
coming from sustained higher oil prices. Tempting as it might be to
ascribe the recent dollar fall the decline in Treasury rates it would
be incorrect.
The normal correlation between Treasury rates as the leading edge of
Centralized Reserve policy and movement in the dollar has been largely
broken since the financial crisis. Just a recent example from many:
from April to October last year yield on the 10-year Treasury dropped
from 4.0% to 2.4%. During that time the dollar rose against the euro
from April to June (1.3500 to 1.1950) and then turned around and fell
until October (1.1950 to 1.3935). Treasury yields are not driving
dollar trading.
The current pro-Euro consensus is due to several non-financial EMU
factors
* Strong German economic growth and statistics especially the recent
Ifo, ZEW and PMI numbers
* ECB hawkish inflation comments, though there is also an element of
the campaign for the ECB government in the comments
* The Fed focus on QE and unemployment. No one thinks the Fed will
bring to somebody's attention rates. Even if the same is right of
the ECB, European hawkish talk is just that, at least they are
adage something. The Fed seems unconcerned about domestic or
international inflation.
What is being ignored in this pro-euro consensus?
* The events in the Middle East have been so rapid that their
damaging effects are not in the statistics -but they will be soon.
* Risk aversion and safe haven flow are evident in other markets.
Gold, the Japanese Yen, the Canadian Dollar and the Australian
Dollar are at or near records
* The effects of American tax cuts and government spending are
already waning, QE2 ends in four months.
* The political changes in North Africa are permanent. The new
governments will be far less interested in the economic reputation
quo. Change will come soon and it will be as disruptive of
economic arrangements as it has already been of political
structures.
* Plates's attempt to slow its economy will bear fruit and combined
with the disruption inflicted by oil, assumptions for world
economic growth will be adjusted down.
* Edna Kenny, the leader of the Fine Gael victors in the Irish
election, has pledged to regonotiate some of the terms of the
EMU/IMF bailout
So far the currency markets are betting that the effects of the oil
price increase and the increase itself will pass without much
notice, and that there will be modest hurt to the underlying world
economic recovery. The smaller factors of excellent German economic
statistics and hawkish ECB inflation commentary have been enough to
keep the euro on the upswing.
But higher oil prices will not be transitory because the circumstances
which bent them is not transitory. The result of these higher prices
must be slower worldwide economic growth, particularly in countries as
the United States where a large percentage of GDP is dependent on the
consumer.
The rapid rise in equities since last December has masked the world in
excellent feeling. But the economic underpinnings of the world
recovery remain fragile. They will be severely tested by the economic
effects of the revolutions in North Africa. The safe haven trade to
the US dollar is not yet dead.
Source: ActionForex.Com
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