Profitsee – Future Economic Surivival

Divinations in Forex, Commodities and Economic Patterns

From Scotia – Gold – Safe Haven “Panic” selling

Commodities Gold ($959.05) • Gold significantly trimmed some of its recent gains by falling almost 3% yesterday, with selling continuing today to push the metal to just above $950. This reinforces the degree to which gold is being driven by panicked “safe-haven” sentiment as the losses can be traced to the strong equity rally yesterday.


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EUR/USD, Citibank, banking, Eastern Europe

From Scotia Capital Global Reasearch 2/23/09

Gains in European equities are helping to keep the momentum moving against the USD in early trading. GBP is the top performer with the aussie and kiwi not too far behind. Only the franc and yen have fallen behind the USD today, reflecting the increased willingness of markets to make more aggressive bets, though it seems that volatility is a bit more elevated within today’s trading ranges for a number of currencies (EUR, CAD, JPY). The news that Citi is in talks with the government for more capital in return for an increased equity stake is helping to provide a bit of a sentiment boost, though it seems a little bit premature as it is unclear whether any such move would leave the bank a private sector entity or whether the government could eventually move to take a greater than 50% stake. The precondition for a US (and global) economic recovery is a return to certainty in banking sector stability, which would be a definite positive market driver. However today’s sentiment boost is based on the assumption that Citi gets more capital without nationalization. Given that incremental steps have repeatedly proven to be a failure in the markets eyes, we’d view the current rally (and USD selling) with at least a little bit of skepticism, and keep in mind that it was last week that equities were taking a throttling due to the notion that the banking sector would indeed need to be temporarily nationalized. More capital for a large US bank doesn’t erase the possibility of a return of the nationalization threat down the road as policy makers may grow tired of steps that run the risk of continued failure (though nationalization is not the desired route in the US). Nevertheless, it is still the financial sector that is driving the market as we begin the week, and positivity runs a little higher than last week. Another major currency market driver in recent sessions, the worries over banking exposures of Western Europe to Central and Eastern Europe, seem to have gone away for the time being as EMEA currencies have all rallied against the USD and EUR, moving away from recent (and in some cases record) peak levels of weakness (most notably HUF and PLN). The easing in the degree of pressure on these currencies is definitely a welcomed event, though again we wonder how long this will last, as all the market received from the larger European economies last week is reassurance over the stability of the Eurozone and some hint that support would be available through certain facilities for struggling EU member states not in the Eurozone. Talk is cheap however, and the proof is in the pudding. While the market is taking its focus off of this problem for the time being, a resurgence in pressure on EMEA currencies will show just how willing Europe is to act and with what kind of firepower. We’d note that the failure to act to help a struggling EU economy that is a prospective Eurozone member would definitely do little for general euro sentiment. Also, the knock-on impact on the Eurozone (and EU) of such a failure could be something very much like allowing another large US banking institutions fail, filled with unpredictable and unintended negative consequences.CAD is quite resilient today, though has given back some of its earlier gains which saw USDCAD trade down to near the 1.2355 level before retracing to around 100 points higher as North America comes online. There is currently a down trend in play for USDCAD over the past four sessions, as last week’s early USD gains are in danger of being completely unwound. Outside of large one day equity driven strengthening moves in USDCAD, consolidation dominated by a

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Eastern European Insolvency Risk & Treasury Purchases

From Scotia Capital Global Research

The signs of easing tensions in markets yesterday have followed through today and shown an even greater propensity in that direction as the USD is being sold against not only the European currencies, but all majors. Equities are firmer and we should get a good positive open once North America comes online. The worry over Eastern European financial stability has constituted the major force driving trading patterns of late, and yesterday’s rebound has continued into today, bolstered by the increased sentiment in the market that support from either the West, international organizations, or both will come should it be required. This has provided
the backdrop justification for the across the board USD selling, however, the cost of insuring against the sovereign default of Hungary, the Czech Republic, Poland or Slovakia still remain extremely elevated. This shows that even though we see some definite improvement in sentiment, we still remain in a high risk period for these countries (and currencies) and an event driven reversal in the easing of market
pressures on HUF, CZK and PLN could easily ensue before the West has an opportunity to put in place emergency support mechanisms for their Eastern neighbours.
In the US, President Obama’s aid to struggling homeowners is also helping market sentiment via announced measures to lighten the burden of mortgages through reductions in monthly payments and more favourable refinancing opportunities.
This should help to put a floor under prices somewhat as it eases the amount of liquidations of foreclosed properties, and the lighter burden of monthly costs may also help to do something to prevent consumption from slipping into a worst case scenario.

The release of yesterday’s minutes from the last FOMC meeting proved to be interesting but not all that market moving as the details were revealed in the lead up to the release. The Fed lowered its growth outlook, with the “central tendency” for real GDP growth now at -1.3% to -0.5% this year and rebounding to 2.5% to 3.3% in 2010. Employment is expected to peak out around somewhere just south of 8%, but not return to 5% until at least 2012. As we know, the Fed is concerned with the potential that inflation stays subdued for much longer than is consistent with their goals (hence the extensive and extreme monetary policy measures up to this point), which may be why Mr. Bernanke has decided to introduce longer
run forecasts for inflation (as well as growth and unemployment). This is to be interpreted as the FOMC’s views on the longer term rate of price increase that is consistent with the Fed’s dual mandate and is something of a substitute for an official inflation target. These forecasts should serve to help anchor inflation expectations in the economy, and fight deflationary expectations as well, though being
somewhat weaker than an official target because they remain only forecasts and not an official goal. This is evident as we see the variation on the central tendency for the longer run inflation forecast running from 1.7% to 2.0%, with the lowest forecast at 1.5%. This will however help to ease worries that the Fed is not concerned with the longer term monetary implications of their measures, a worry amongst the market
that could eventually spur significant USD selling. As expected, the potential for purchases of Treasury securities still remains a debated topic at the Fed and we will have to wait and see what future communications bring as to the ultimate likelihood of this policy being enacted.USDCAD is moving to the downside as general USD selling has helped the Canadian dollar gain ground, up 0.8% at the moment. However, outside of JPY and CHF, CAD is behind the rest of the majors, despite its gain against the dollar. The price action has turned much more neutral on the pair, but some downward pressure is becoming evident after a failure to break January highs. Still, one may suspect that in the absence of the current general USD selling, we would see more sideways price action in the pair, rather than the stronger downward tendency being exhibited over the past 24 hours. While we see Canadian leading indicators today, more focus will be on tomorrow’s January CPI data as expectations are for monthly declines in core and headline, to bring the y/y pace of decline to 2.2% and 1.1% respectively. Unless we see some kind of strong upside surprise (which is pretty unthinkable at this point), it is likely that Mr. Carney’s focus for monetary policy is going to be much more geared to the dim unemployment and growth outlook.

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Frothy USD; Equity Level Tests; CAD 1.25 Play (From Scotia)

(Following from Scotia Capital Global Research for 2/13/09)

Yesterday’s strong USD buying was reversed by a late day equity rally that helped US equities cut losses and generally get back to even on the day. The USD still ended the day up but saw large gains against most of the majors cut significantly. The rally was explained by news that the government was working on a plan to ease the burden of mortgage payments to homeowners, however we suspect that it may have had more to do with the fact that indices were testing (and some breaking) two and a half month lows with the market looking for any reason to rally away from these levels. The optimism has continued into today’s Asian and European sessions as buoyant equities have helped to induce strong USD selling. This kind of currency market action reiterates how keyed to equities and the ebb and flow of pessimism that the USD remains.

CAD has had its general movements continue to be dictated by the USD, as has most of the major currency universe this week. We’d remain of the opinion that in a perfectly functioning world where everything is decided by economic fundamentals, that USDCAD should be trading somewhere north of 1.25. However it would be foolish to not recognize that, yet again, fundamentals take a back seat to risk driven flows and the gyration of market sentiment between a thirst for risk or safety.

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Akmos sentiment indicator in GMT




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