Wednesday, March 26, 2008

Of rocks and hard places

There are a number of people, including Macro Man, who seem to be caught between a rock and a hard place. The problem facing Macro Man is fairly easy to understand....after a couple of months of watching markets as a spectator rather than a participant, it is natural for it to take a bit of time to get back up to speed. He feels as if he's driving up an intellectual sliproad, trying to pick up the speed to safely merge back onto the market highway.

The market environment isn't exactly a forgiving one, either. The macro trends that dominated financial market pricing over the last couple of months seem to have been put in abeyance by the Fed's recent actions; while Macro Man presumes that this is a temporary phenomenon, there's no telling how long it may persist. Recent price action in EUR/USD provides a useful guide to the volume of noise in current market pricing; since Macro Man's first day in the office a week ago, the rate has executed a rather messy round trip between 1.5725 and 1.5350.
Today's rally was prompted by a higher than expected ifo figure in Germany, which contrasted sharply with yesterday's abysmal US consumer confidence figure. It gathered steam after M. Trichet delivered some rather hawkish comments, suggesting that monetary relief for Europe remains unforthcoming. However, both he and President Sarkozy expressed concern at the level of the euro. Excusez-moi, monsieur, but don't you realize that your vigilance is helping to propel the euro to Everest-like heights? Such is the Scylla and Charybdis of modern central banking (unless you're Ben Bernanke, in which case you don't give a fig for inflation or the level of your currency.)
Swervin' Mervyn seems caught in the same vise; after noting that inflation is likely to rise further, he suggested that the Bank is sensitive to the level of the pound (and that the size of Britain's C/A deficit suggests that sterlign really ought to be quite a bit lower.) Given that the Bank has previously opined that a weaker £ could further stoke inflationary pressures, it's not clear that Merv is prepared to deliver the rate cuts that would give the pound the caning that it so richly deserves.
Regardless, prices have now moved enough that Macro Man is wondering if the correction has run its course and that normal (dollar and equities lower) service is fixin' to be resumed. A number of charts look rather messy and inconclusive, but one that's rather tidy is platinum; it has traced out a textbook 3 wave decline and is now breaking back up through the downtrend line (creating overlap in the process.)

So what Macro Man (and others) have to decide is whether the dollar is a big "give ya" right here and now or whether this is the latest bit of market noise pollution.

9 comments:

CDN Trader said...

What about equities? Have you ever heard so many prominent people call a bottom less than a week after it truly occurred? Looks like a good place to re-enter short positions, IMHO.

Anonymous said...

The dollar is becoming the carry trade currency, something has to replace the Yen might as well be the dollar as Ben is doing his best to make sure that happens.

t said...

When the Fed hits ZIRP then the fireworks begin. After this little pullback seems like a good place to enter to me. But then MM, you're the expert, that's why we read your blog...

Eventhorizon said...

Hmmm, if you're going to hint at Elliott (3 waves and an overlap) probably a double three (7 overlapping waves down) might be necessary to correct the "too far, too fast" rise in Plat (or any of the commodities 'cept maybe oil).

MP said...

Slightly off topic, but a very interesting analysis re debt deflation from Pimco's Paul McCulley:

http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2008/GCB+Focus+March+2008.htm

Gregor said...

Well, Jean-Claude can always try what Bollard (NZ) attempted in the 2006-2008 period, which was to pound the table hawkishly on fighting inflation, and then complain daily that the Kiwi was too high. Didn't work for Bollard. But, Jean Claude could give it a try.

(At least his currency's not nick-named after a flightless bird.)

Anantha said...

Find it surprising that you seem to get itchy fingers once too ofen on going long equities when they had not fallen even half (in the US)as much as they do in a normal recession - let alone in a situation like now. This is confirmation, if one were still needed, that equities have not formed a bottom.

Macro Man said...

Au contraire....I actually want to short equities, but this price action is very diffficult to read, so I am taking my time.

Richy Rich said...

Don't just look at US equities on their own indices. Got to look at them in other currency terms. SPX alread down 35% for Mrs Watanabe. If usd falls fast enough then US indices can go up, (as they are Asset/USD ) yet fall in global terms.