27 Dec Euro moves

FOREX COMMENTARY

If there is no concerted effort to penetrate 1.4700 in coming week till 7 Jan, we may see Euro dropping back to test 1.3000, or even 1.2000.

Though I may not rule out an immediate drop to 1.3500 then rise again to test 1.4700, with target 1.5000-1.5200 and then drop back to 1.3000, this moves have to be executed in short timeframe and thin liquidity. (Probability low).

Hence a likely scenario would be a slow deterioration of Euro, dripple down to 1.3800, then 1.3500, and then sharp moves below 1.3000 again, gunning for 1.2000 this time. This would be accompanied by a Gold now at resistance 880 (slopping downtrend channel) into 800.

If Gold can hold 800, then Euro test may just stop at 1.3300-1.3500.

If Trichet signals more cut coming for Euro to 1%, then differential between all currencies would diminish making holding USD preferable in the short term.

Long term view is still for USD to drop, bços of Democrats inclination to weaken currency to jerk export, which eventually leads to the next wave of commodity bull markets.

Hence Oil and Commodities still have quite sometime to consolidate before the next wave begins.

EQUITIES COMMENTARY

Checked the monthly SPX, the averages just crossed down, i.e. we are in for a long long Bear Market, with further plunge. The deeper the plunge, the shorter the recovery period.

With all the intervention, bailouts of Autos, FED buying of mortagage securities, eventually corporate debts (to alleviate the Commercial Real Estate market), further sharp plunge is more remote by the days. Looking at the CDS market, CDS prices on Equities have been dropping. TED spread narrowing.

The Bulls and Bears looking for the retest of the bottom, for the Bull to go into short term long, and Bears to take short term profits. Hence a significant retest would not be forthcoming. Plunge and Rally would be short lived. Essentially the market is in a trading range of 800 to 950 for next few months.

Critical time would be end March towards April, when the Obama Euphoria wears off and the world turn attention to the next G20 meeting in April.

It is better to hold cash in the right currencies.

SURPRISE

The bond market bubble may just burst and monies flow suddenly into Commodities, metals, Crude.
China is embarking on big Infra building, as well as its next fleet of Aircraft Carriers, the demand for metals would be immense. When China start importing metals,
(it is already importing agriculture,and setting price bottoms to protect its domestic production).

Protectionism would rear its ugly head in 2009, where exports of commodities would be disrupted. Hence we may see the next Commodity Rally, which leads to the next Hyper Inflationary Cycle (justified by the monies supplies).

Economies may just toggle into Hyperinflation at the flick of a switch. Speculators would capitalise on the reduced capacities to mount the next crude rally. Probably they would allow another 3 months for the deflation cycle to play out.

If I am a large Speculator, I would not want to fight the FED with its promise of using all possible tools to support the economy. I would just turn around and ride the wave of liquidity promised by Bernanke and other central banks.

We would see Slow or Zero growth and Inflation by end of 2009.