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Don't Underestimate the Resiliency of the Dollar

Friday, 13 Nov 2009 10:41 AM

The stock market blue-chip indexes DJIA and S&P have now closed higher for eight consecutive days while leaving others, so far at least, beneath their equivalent October highs.

We should not overlook that there are entire sectors and sections of the market that are lagging badly this run up, which normally points to a topping process.

It’s important that 70 percent of the Dow 30 components have not yet seen new recovery highs above the October highs. That leaves us with only 30 percent of the Dow that have brought the DJIA to new rally highs.

This doesn’t mean the rally should end right here, right now. No, the intraday Dow high yesterday at 10,342 placed the index within the 10,334-10,495 price zone. That suggests that if the market holds up into next week, near-term market action may carry the index modestly higher.

It is clear that until we see a break of the Nov. 2 lows, 9,679 in the DJIA and 1,029.38 in the S&P, that uptrend should remain in place. Closing below these marks would signal a trend reversal.

In the meantime, at the 21st Asia-Pacific Economic Cooperation (APEC) Ministerial Meeting that includes 21 Pacific Rim countries, in Singapore, they stated today that recovery is coming back but that the crisis is not over.

At that same occasion, Dominique Strauss-Kahn, the International Monetary Fund director, said in an interview with CNBC that reduced U.S. savings will force emerging countries, including China, to find new growth engines.

"As U.S. households decide to save more, the good news is that it will reduce the deficit, not only the fiscal deficit but also the current account deficit,” said Strauss-Kahn.

“But the bad news is that then we have to find some other engines for growth."

Strauss-Kahn also said on the subject of the dollar that, “What I'm surprised is that the dollar has been very resilient during this crisis; most of economists could have expected, because the crisis originated in the U.S. housing market, that the dollar would finally collapse. It didn't happen.”

About the Chinese yuan, the People’s Bank of China stated yesterday in a quarterly report that policymakers will improve the setting of the yuan’s exchange rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies.”

Investors shouldn’t misunderstand the meaning of their statement because that new wording from the Chinese central bank doesn’t suggest a change in the yuan’s exchange-rate policy, wrote Helen Qiao and Song Yu, economists at Goldman Sachs Group Inc. Hong Kong, in their report today.

“It is unlikely that policymakers would give advance warning before an actual change, which would have the effect of rewarding speculators,” they wrote.

The Goldman Sachs economists maintained their forecast that the yuan will stay around 6.83 per dollar in the next three, six, and 12 months.

In my opinion, all that means is that investors have a big probability of betting the wrong direction when they invest and trade on a further weakening of the dollar, in the medium term at least.

The G20 cannot act against its own interests by allowing further serious weakening of the dollar. They could intervene together if necessary, which would be, of course, a world’s first. More and more central banks are being forced to take measures to curb the damaging appreciation of their currencies, compared to the dollar.

Take for example Brazil. After imposing on Oct. 20 a 2 percent tax on capital inflows into both equity and bond markets, yesterday the Brazilian central bank announced it had spent USD $507 million in the spot market already this month.

Brazil’s Finance Minister, Guido Mantega, said his country is contemplating fresh measures to cap the Brazilian real (BRL) rise, possibly by making repetitive increases in the 2 percent tax.

Also, the Taiwanese government yesterday imposed its own controls. It banned foreign firms from investing in Taiwanese time deposits in an effort to deter bets on the ‘New Taiwan Dollar’ (TWD) as foreigners reportedly dumped USD $15.5 billion in Taiwanese TWD accounts in October.

Gold investors also should take notice that yesterday, Aaron Regent, chief executive of Barrick Gold, the Toronto-based world's largest gold miner, cautioned that gold remained susceptible to sell-offs, but, that he also believed estimates of the long-term gold price falling below $900 an ounce were "on the light side."

From my side, I’d like to add that technically, gold appears to be in what’s called a fifth wave, and as a commodity it could experience a blow-off top. Just think of what happened to oil last year.

Interestingly, Barrick Gold total cash costs average $456 per ounce in Q3, which means Barrick is looking forward to a highly profitable Q4 even if gold does not continue to move up.

Keep in mind, while Barrick is bullish on the long-term gold price, I am also. "There is no reason why we should expect gold not to sell off. It is a commodity like any other," said Regent.

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HansParisis
The stock market blue-chip indexes DJIA and S&P have now closed higher for eight consecutive days while leaving others, so far at least, beneath their equivalent October highs.We should not overlook that there are entire sectors and sections of the market that are lagging...
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