Wednesday, November 07, 2007

The Royal Bank of Australia raises rates.

And the Chinese have "foot in mouth disease".

The Royal Bank of Australia just raised rates and all three of the C$, the Euro, and the AUS$ got on an escalator. If the ECB does the same on Thursday? Oh boy...

I'm not 100% certain that the ECB will raise rates, because the make up of the ECB isn't quite the same as that of the Australian or Canadian banks. Many of the members of the ECB don't even speak the same language, never mind subscribe to similar conservative fiscal policy. So we'll have to wait and see.

Still, the US dollar could become deeply unpopular but that would depend on some things that aren't very predictable. Like, how patient are the members of the Saudi royal family? Did you know they are the biggest shareholders in Citigroup? That investment hasn't been doing well and if you've been reading the Minyanville you'll understand that the Citigroup as such is in a fight for it's life at the moment.

Another unpredictable area are the Chinese. They hold over One Trillion in USD and if they were to engage in a hissy-fit over their suddenly lower buying power. the USD could become "deeply unpopular" overnight and it fact it did.

"Market players showed muted reaction to comments by a senior Chinese political figure who said that China should diversity (sic) its $1.43 trillion stockpile of foreign exchange by buying more strong currencies such as the euro."

That was from last night and that "senior Chinese political figure" might as well have yelled "fire" in the crowded theater. He apparently quickly retracted that statement as the exchange markets reacted. I'm watching the continuation of the market now, in Europe. So far, EURUSD has reached 1.47, in heavy trading.

In order to fight this, the FOMC would have to raise rates and kill the US economy for good. If the Fed doesn't fight this, the dollar will be comatose for a long time to come. Talk about a rock and a hard place.

(disclosure: I own FXECM, FXE 143 calls, expiring Mar08)

1 comment:

pythagoruz said...

Is this the tipping point?