Archives: 2007 December

The Chinese Yuan may make big gains in 2008 as the Chinese government increasingly makes comments about the fall of the US Dollar and seems prepared to protect their huge forex and US Dollar denominated investments.

“If the [U.S.] federal funds rate continues to fall,” said the director of the Chinese foreign exchange administration, Hu Xiaolian, “this will certainly have a harmful effect on the U.S. dollar exchange rate and the international currency system.”

China is reported to have $388 billion in U.S. Treasury securities, as well as hundreds of billions of additional exposure in other US Dollar holdings. Of course, Hu Xiaolian and other Chinese officials are worried that the Dollar may lose additional value in 2008.

The dumb ditter heads in the US congress and those at the US Treasury Department complained for years about the Chinese “manipulating” their currency, the Yuan, by floating it with the US Dollar. Under US pressure about two years ago the Yuan was allowed by the Chinese to trade in a narrow band. When the band was initiated US officials still complained about what they viewed as an artificial weak level for the Yuan at just over eight Yuan for one US Dollar.

Yesterday the Yuan reached 7.3383 to one US Dollar. However, the important thing is that the Yuan strengthened by 0.37% overnight. This was the biggest one day gain for the Yuan since the Chinese central bank altered the Yuan’s Dollar peg. This large of a movement in one day indicates that the Chinese may be about to give the fools in Washington what they have been lobbying for.

Brave new US Dollar forecast for 2008. Warning. I could always be wrong. But I doubt it.-)

Here is a quick and easy US Dollar forecast for 2008. The Dollar is going to get tanked. Deep sixed. Really hit hard.

Of course, anyone who has ever traded forex knows that I and all of the other forecasters out there could be wrong. Forex forecasting is a risky business and forecasters often get it wrong. So in the end you had best trade, if you must, based upon your own short term research and not look too far ahead or become too opinionated.

However, the US Dollar looks to be a doomed currency over the next few years and 2008 is likely to be the year that sends it unhappily on its way to currency hell. That is where currencies go when no one in his right mind still wants to hold them.

The subprime mortgage lending fiasco is likely to be the initializing event that drives the stake into the Dollar’s heart. Those who think that the liquidity crisis caused by that event is over will be sadly mistaken. The housing crisis in the US is just getting underway and will be much worse than that which seems to be the consensuses forecast.

The thought that you can solve a problem caused by too much liquidity in the banking system, much of which found its way into real estate, by pouring more liquidity into the system just doesn’t make sense. The present credit crisis is caused more by lenders being afraid to lend to each other because they are unsure as to the financial standing of the entire banking system than a shortage of funds to lend. Fear has taken over in the financial world.

With another FOMC meeting set for tomorrow forex traders are wondering if the dollar is to trashed once again with a rate cut? As things stand now forex market watchers are guessing that the answer to that question is yes. There is still some disagreement as to the interest rate cut guessiment. Market analysts seem to be uncertain if it will be for 0.25 or 0.50 basis points.

Should the FOMC members in their great game of attempting to manipulate interest rate markets cut the FED funds rate by 0.50 points there is a good chance that the dollar will resume its long term downtrend. Where it may stop no one knows. We are getting into uncharted territory for a number of currencies, including the Euro.

What is the Federal Open Market Committee (FOMC) and what are they supposed to do? Well, according to their own website here is the story.

“The Federal Open Market Committee (FOMC) is the monetary policy making body of the Federal Reserve System. It is responsible for formulation of a monetary policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The FOMC sets monetary policy by specifying the short-term objective for open market operations–purchases and sales of U.S. government and federal agency securities. Open market operations, the principal tool of monetary policy, affect the provision of reserves to depository institutions and, in turn, the cost and availability of money and credit in the U.S. economy. Currently, the objective is a target level for the federal funds rate (the rate that depository institutions charge on overnight sales of immediately available funds among themselves).

Is this the lull before the forex storm?

The US Dollar has finally managed to rally over the past couple of weeks moving from about 107.50 yen to 111.25 and 149.00 Euro to about 146.00 . The Dollar rally has coincided with an impressive over 500 point Dow rally in the US stock market. Action in the forex market has been fairly subdued after the big Dollar fall after the last US interest rate cut.

The Dollar rally and the stock market rally came from deeply oversold technical positions. In addition, the stock market rally came in the anticipation of further cuts in the federal funds rate at the next FOMC meeting set for December 11, 2007. It is widely anticipated the the Fed will cut rates by either one quarter or one half of a basis point.

A further cut in interest rates in the US will more than likely lead to another sharp drop in the Dollar. Don’t expect the current lull to last for much longer. 

I wouldn’t be surprised to see a sell off in the stock market if rate cuts are announced as the rally, so far, has been in anticipation of the cuts.  The old saying “buy on the rumor, sell on the news”, will probably prove to be true.

Looking ahead to 2008 I expect that it will be a year to remember for stock, forex, and commodity traders. The stage is set for a deep recession in the US, a drastic fall in the Dollar, and further large increases in commodity prices, especially oil and precious metals.