RBA Playing With Fire - Keeps Rate Unchanged

Today the Reserve Bank of Australia decided to keep the cash rate unchanged at 4.25%. Analyst consensus was for a quarter point cut. Also the OIS market was implying a ~75% chance of a cut. RBA's decision comes as a surprise, given the recent labor market weakness and drop in retail sales. Governor Stevens' statement reads a little bit like "everything is on track and on trend so why change anything?", but does recognize that

Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range.

As inflation is unlikely to present a problem in the near future and given the challenges to global growth (and China in particular) a rate cut might have been a lot more prudent. As always time will tell.

At Least One Seller Cashing Out on Facebook Before the IPO

The forthcoming Facebook IPO has been all the hype - and large amounts of it. Most of the pundits have been negative, citing overblown Price/Sales ratio and a shift in user base from developed to developing countries. Since the sentiment is quite negative, the IPO would probably do OK at least at first. The Nasdaq closing at an 11-year high on Friday certainly indicates strong investor demand for tech stocks and the social network space has a scarcity of liquid public stocks as a vehicle for betting on the future of the sector.

There are signs that the hype may be too much. According to Reuters, a woman in Wisconsin was arrested

Another Step Forward in the Creation of the United States of Europe

In politics crisis only brings opportunity for radical reforms. As WhatIf mentions in a previous post, the ongoing situation in Greece will only help further the fiscal consolidation of the Eurozone. And now the next step along that long road has officially been made. According to this Reuters article,

"If the Greeks aren't able to succeed themselves with... (the austerity measures), then there must be stronger leadership and monitoring from abroad, for example through the EU," added Roesler, chairman of the Free Democrats (FDP) who share power with Chancellor Angela Merkel.

Germany is thus openly asking that Greece give up a token of sovereignity in return for their next bailout. Of course this will certainly not pass this time. But the fact that this radical (some may say outrageous!) step has been suggested and is even considered, very much indicates the future direction of European integration.

Gold No Longer a Hedge Against Currency Debasement

On Friday after the close, S&P issued a credit downgrade on a number of European countries. This had been anticipated ever since they had been placed on credit watch in December. As would be expected, the Euro dropped to a new multi-month low against the USD and stock markets followed. What may not have been fully expected is that Gold also dropped with the news and tracked the US equity market. Gold was supposed to represent a hedge against fiat currencies (read "paper money") and should have spiked when the European situation worsened. Yet this did not happen and it traded like any old investment asset in line with overall risk sentiment. Buy at your own risk. (For more details, refer to Gold Appears to have Lost its Shine and a more recent WhatIf post Technical Bounce in Gold To Present a Selling Opportunity)

Technical Bounce in Gold To Present a Selling Opportunity

The metal has bounced from a low of 1522 reached in thin trading in the last few days of Dec. The precipitous drop from a Sep high of 1920 had taken it into oversold territory amid anecdotal evidence of large funds reducing positions into year-end. There will undoubtedly be fast money playing the bounce, but should it trade into the 1650 level this would present a good selling opportunity. The fundamentals for Gold continue to be quite negative, with the world's biggest consumer, India logging a 50%+ drop in imports in the third quarter of last year (see Reuters article). The US dollar was the first major currency to suffer from the effects of quantitative easing but will arguably also be the first to recover. Since Gold has been heavily used as a bet on the de-dollarization of the world economy, one of its main investment functions is also waning.

Forget Japan - China Is Still in Treasury's Crosshairs

Much has been said in the popular press about the recent semi-annual Treasury FX report (officially Report to Congress on International Economic and Exchange Rate Policies) and how it has targetted Japan for its unilateral interventions, while again choosing not to label China a currency manipulator. See for example Reuters article. This view is not completely without merit. Indeed, when Japan last intervened in the FX markets in 2004, the Treasury described the actions purely factually without divulging an opinion. Compared to that, the current treatment does seem somewhat negative:

"...the United States did not support these interventions. It is worth noting that these operations took place at a time when foreign exchange market activity and risk aversion were being predominantly influenced by financial developments elsewhere in the global economy that were impacting all of the major currencies." (See full report)

What is important here, however, is that there has been no negative rhetoric out of Washington right after the interventions or immediately before the official publication of the report. Also the language used is still very much benign. In fact, I believe the negative mention of Japan is included to make the report appear as unbiased as possible in order to avoid giving China a chance to complain about its objectivity. And while it was not labeled a currency manipulator for political reasons (as in practice it certainly is) China and not Japan is still the main target for Washington's foreign exchange policy.