Big Wheels Keep on Turning - Will they soon Stop?

Thursday, September 17, 2009

What can save the economy? If anyone had a clue I am sure they would have done it already, but the fact remains that no one is sure as to what is going to happen.

The speculation of the traders is that the crisis is over, the stock markets are n their way to record September highs while the Forex market is providing good returns for many of the major currencies.

The one to suffer seems to be the US Dollar, and many are even attributing this to enthusiasm about the return of risk appetite – there is no need for a safe have now.

But as usual, I tend to not agree with this philosophy. There is a disturbing trend in the Australian Dollar and Japanese Yen – typically, when one rose broadly, the other fell, but this is not proving to be the case at this time, in fact, they are almost mimicking one another.

It is as if the Aussie has replaced the greenback as Japan’s safe-haven compatriot, but this too is not the truth. The JPY is getting a boost from a newly elected government which is promising to change the way things have been done for 50 years.

Can you imagine, that in 50 years the same party has led the government? That is mind blowing to me and yet as the Japanese people watch history in the making, the new government, the ultra-liberal government, is hinting that they do not care to intervene in “trivial” matters such as the plight of the currency on the Forex market.

Investors have been finding this way of thinking to be refreshing and great – “quick, mom and dad went away for the weekend, let’s have a party” or “ooooh, the candy store is empty, lets raid it” – they are like unattended children.

This cannot last. In contrast, the strides that the Australian Dollar has made are real and true. The economy is not as bad as some of the larger Western ones and the commodity rich country is benefitting from a sharp rise in core prices. This is the real deal and I believe that this will continue. There might be some profit taking in the Aussie, but the overall trend line will be upward.

The economy as a whole is poised for a comeback, but with too many unknowns right now, the Forex traders need to proceed with caution.

I hold that we will see another drop in GDP and production in the coming months, I believe we will see banks fail – or struggle – as I have written before under the weight of the commercial real-estate market and illiquidity issues. The need for vigilance is apparent, trade safe and keep your eyes open.


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