Going quietly into that good weekend

All of a sudden, markets feel like they've had enough. The dollar has tried and failed to extend losses this morning, and equities are drifting higher after yesterday's weakness. 10 year bonds across markets remain on the back foot, though a set of execrable PMI data from Europe have arrested the decline for the time being. After an enormously eventful week, it seems as if Macro Man isn't the only one content to go quietly into that good (hopefully, should Ireland beat France tonight) weekend.

The benefit of quiet days, of course, is that they allow us to take stock of big picture views and developments. Over the last couple of days and weeks, Macro Man has articulated his growing disillusionment with the dollar and expressed fears that the next bubble will be one of dollar weakness.

While the current shellacking of the buck does not yet represent anything like a bubble, it has certainly taken a number of exchange rates to interesting levels. Yesterday, Macro Man noted that the EUR/USD rate is now "bigger" than the USD/DEM rate. Soon after, another historical threshold was reached. For the first time since America's bicentennial year, a Canadian dollar is now worth more than its US counterpart.
The chart above doees not include the current quarter, else you'd see the last candle below 1.00. How sustainable the uber-loony is remains to be seen, though Canadian policymakers have, to date, played down the impact on domestic manufacturing. The recent recommendation of a commission in Alberta to raise the royalty taxes on tar sands developments has attracted some attention, but the sort of extra revenues expected to be raised (some $2 billon per year), while non-trivial, are hardly on a scale that will dissuade investment, particularly if oil continues its march on $100/bbl. The next obvious target is the post-Bretton Woods low of 0.96.

Another financial market price at historical levels is of course gold. Macro Man has highlighted the importance of the $730 level on a couple of occasions, and the chart below offers a belated demonstration of why. The first gold future bounced hard off of $730/oz in both 1980 and 2006. It has now breached this level, and technically it's clear sailing from here to $870. Given sentiment, the pace of the move could prove to be quite explosive.
A final point of interest is the condition of the money market in China. Macro Man expects markets to re-focus on China in coming weeks, what with the formal launch of CIC nxt week and the 17th CCP Congress starting on October 15. The last reserve requirement hike from PBOC takes effect on September 25....could it be that policy is finally tightening?
Recent developments in China's money market have been little short of remarkable. One month SHIBOR has shot up from below 3% at the end of August to more than 7% now. Word on the street is that this is largely due to technical factors, and it is the case that interbank rates at longer maturities, while higher, have not shown the same sort of spike.
So it's probably premature to conclude that policy is finally and legitimately being tightened in China. Nevertheless, these developments are curious in the context of the recent inflation data; clearly, policy does need to be tightened. Whether this comes via higher interest rates, a higher exchange rate, or, more likely, both, remains to be seen.


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September 21, 2007 at 1:38 PM ×

"hopefully, should Ireland beat France tonight"

YES agree 100%, but with 2 poor performances under their belts (Ireland) they are up against it!
I like the rest of your post too!

Captain Currency.

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tmcgee
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September 21, 2007 at 1:48 PM ×

CNY higher for sure. but will the PBOC muster the will for strength against the EUR. doubtful, given that the EUR is at a post-revaluation peak of its own...plus ca change.

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Macro Man
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September 21, 2007 at 2:13 PM ×

Ah, but if I am right about the dollar, then the RMB can accelerate its rise against the buck while not doin g much of anything, or even weakneing on the margin, against the EUR.

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Anonymous
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September 21, 2007 at 5:24 PM ×

At what level do we think the $ gets too weak vs. the Euro ??

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Macro Man
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September 21, 2007 at 5:46 PM ×

Too weak for what? It's already too weak for Airbus to compete with Boeing on price, or for your average American family to afford a European holiday in anything other than budget accomodation.

However, it's not too weak for Porsche to make a profit selligng cars in the US at 60% of their Eurioean cost.

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OldVet
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September 22, 2007 at 1:38 PM ×

China - reverting to type as the interventionist Politburo bestirs itself - has chosen the "third way" to fight inflation. Price controls. That's a real confidence builder.

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Macro Man
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September 22, 2007 at 1:44 PM ×

Just a little reminder ahead of next month's Congress that it is the Communist party we're talking about here. Then again, maybe they're just taking thir cues from Dick Nixon ....

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OldVet
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September 22, 2007 at 9:19 PM ×

I always wondered where old Nixon got the idea, and now remember the demarche of 1972 organized by Henry the K. Maybe he got brainwashed.

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Banker
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September 23, 2007 at 1:43 PM ×

MM

Any ideas on the Euro? The dollar overall is getting crushed and I think in the bigger picture it continues....But are we due a near term correction ?

Banker

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Macro Man
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September 23, 2007 at 2:29 PM ×

To me this looks like a classic set-up whreing the market has identified the thematic trend, but is relatively lightly positioned.

The implication is that corrections should be relatively shallow, as bids left 1-2% below spot never get filled.

At some point, of course, the market gets fully risked-up through paying offers, at which point we will be ripe for a correction. An obvious catalyst would be Ben realizing that he's screwed up and turning hawkish again.

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September 25, 2007 at 3:49 PM ×

CNY funding squeeze -- a few large IPOs:

money market squeeze was triggered by tighter policy and China Construction Bank’s huge Shanghai IPO.

The money mkt has suffered half a dozen other squeezes this year during big IPOs, and each time short-term interest rates have quickly pulled back near their previous levels after the IPO has passed. But the current panic appears to be more serious because it is occurring at a time of unprecedented monetary tightening, and after report showed that last month’s inflation jumped to a 10-year high of 6.5%.


China Construction Bank, one of the nation's top lenders, has attracted a record 2.26 trillion yuan (297 billion dollars) of subscription funds in a Shanghai IPO on Sept 18.

Liquidity is expected to remain tight as early Oct (right after natinal holidays)PetroChina is expected to issue a maximum of 4 billion shares in the offering, which is expected to be one of China's five biggest domestic IPOs.

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