Israeli Strike on Iran Appears Ever More Likely

In a recent interview for NBC quoted by Reuters, Obama says

I don't think that Israel has made a decision on what they need to do. I think they, like us, believe that Iran has to stand down on its nuclear weapons program.

What he does not say, however, is that the US would be against such an attack. He appears to leave the diplomatic door completely open for Israel to do as they see fit to protect their national security. The timing
of Netanyahu's statement that

In such a region, the only thing that ensures our existence, security and prosperity is our strength

as quoted by Bloomberg is certainly no coincidence. Overall it looks ever more likely that Israel will resort to military action against Iran, barring a breakthrough in the talks on Iran's nuclear program.

US Sanctions on Iran May Backfire

On Saturday Obama signed the most recent and toughest US sanctions on Iran, effectively shutting out Iran's central bank from transactions denominated in USD (see Reuters article). Their aim is to provide Iran with an incentive to end its nuclear program but has so far only prompted Iran's navy to threaten closing the Strait of Hormuz (through which 40% of world's crude oil is transported). So far nothing out of the ordinary - politics does get boring without a little brinkmanship. What the US probably miscalculated is the internal economic collapse this has caused - Iran's currency has dropped around 30% since the sanctions were announced. This will certainly punish the regime but will also drastically affect the lives of ordinary people and provide further domestic support for the government to play tough with the US. North Korea is a good example against driving an opponent into a condition where he has nothing left to lose. The last thing anyone wants is an Iranian submarine sinking a US warship and potentially taking the conflict to the brink of an all-out war.

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.