You would be hard pressed to call Obama a big fan of the French government, and developments from this week-end’s G7 meeting have done little to help the situation. A French official, who asked not to be identified because the discussions were private (I guess private means something different in France), said Obama indicated the strength of the US dollar posed a problem. The French official should know better. Governments talk about sensitive matters in private all the time with the expectation it won’t be blabbed to the press. The value of the US dollar is a sensitive matter that should not be commented on lightly. The President obviously has the prerogative to talk about anything he wants, but there is no way he was trying to send a message to the markets through a French government official.
Obama’s camp immediately denied the comments, but what was he expected to do? Of course he denied it. You simply can’t have these sorts of signals being transmitted through leaky foreign officials. But did Obama say it? Well, what do you think? Does a bear shit in the woods?
Of course Obama said it. The French official did not make it up.
So what does it mean? And should markets be reacting to it?
Markets did take the US dollar lower on the news. But since the initial reaction, the dollar has been clawing slowly back up.
The initial knee jerk reaction has been followed with a realization that although the Obama doesn’t want the US dollar to continue appreciating, at this point there is little he will do about it.
At some point US dollar strength might pose enough of a problem the Obama administration might try to jawbone it lower, but we are far from that level of desperation. For now the Obama administration is watching the markets. And I guess that is the real take away from the French official’s blunder. We now know the US government is worried about the dollar’s strength. And a slight US dollar sell off makes sense because the market is now “on notice” that further dollar strength will not be welcome.
I have a Japanese bridge to sell you
The other big news in foreign exchange markets is Bank of Japan’s Kuroda’s comment that “it is desirable for FX to move in a stable manner.” If you think this comment isn’t the result of the G7 meeting, then you probably also believe Obama’s denial that he didn’t say the strong US dollar was a problem.
Out of the major Central Banks, the Japanese have the most aggressive monetary expansion policy. Everyone knows the Bank of Japan is devaluing and printing like mad in a desperate attempt to break the multi-decade deflationary slump. When the USDJPY level was 78, the rest of the world was sympathetic to their plight and encouraged the policy actions. When the Yen moved to 100, it seemed like Japan was on the right track and other Central Banks were hopeful that Japan had broken the back of deflation. But now we are at 124, and further Yen weakness is beginning to smell like competitive devaluation.
I have warned against getting too bearish on the Yen. The major purchasing power parity overvaluation has been corrected, and although there is nothing saying the Yen won’t go from being severely overpriced to dramatically underpriced, to bet against the Yen at this point is relying on the Japanese losing control of the devaluation. It might happen, don’t get me wrong. But I don’t think it is the right bet.
The Kuroda comment shows how quickly sentiment can shift. Going into last week-end, the Yen was getting heavy as all the fast money guys were climbing aboard the technical breakout. But in a flash, the Yen went from 125.75 all the down to 122.50. All it took was one comment.
I know it is popular to speculate on the trend of weakness continuing indefinitely (I heard Dennis Gartman bandy about a 175 to 200 target the other day), but this trade is getting crowded, and more importantly the risk reward is no longer so obviously skewed towards so favourably for Yen shorts. The rest of the world will not sit idly by and watch the Yen decline another 20 or 30 handles.
The US dollar strength is causing concern in Washington, and the Yen is the weakest of the major currencies. Shorting Yen into this environment might work, but if the Yen declines significantly from here, the markets will be a complete mess. I still contend the most likely outcome is for an extended sideways period for the USDJPY. I think Kuroda’s comment and the French government official’s slip about Obama’s concern about recent US dollar strength gives some pretty clear signals that further Yen weakness will be not be welcomed.
US bond market
I will write more about the US bond market tomorrow, but today I want to bring one chart to your attention.
Sentiment is getting extremely lopsided against bonds. I am not sure it is time to push on the short side, and if you are nimble and recognize you are trading against the recent trend, it might make sense to take some well defined stabs on the long side of the bond market. That 1.8% resistance level might just hold one more time…
The top is in for Canadian Real Estate
My US hedge fund friends have been calling for the collapse of the Canadian real estate market for the past five years. So far, it seemed more probable the Toronto Maple Leafs would win the Stanley Cup than Canadian real estate prices would correct.
But I present the following chart with little explanation needed:
That’s it. I am not afraid to call it. We have hit the top. A year from now Canadian real estate prices will be lower. The top is in….
Thanks for reading,