You will find the write up and analysis to be very up to date and helpful. Support and resistance levels are given as well as the news and opinions that are moving the markets.

Of course, things can change quickly in forex trading so you should check back often for the most recent updates as well as carry out your own research. Should you decide to open your own forex trading account I recommend that unless you have some experience with forex trading that you start out with a demo account. That way you can get used to the forex trading platform as well as test out your own ideas without placing real money at risk.

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Gold has already made an all time high against the British Pound Sterling as well as the Japanese Yen.  Gold has not yet made a new all time high against the US Dollar but it is coming close. Gold is trading at about $812 an oz as I write after correcting to about $797 from $832.

While the physical demand for gold is part of the bull market story a lack of confidence in the US Dollar as well as other paper money is likely more significant.

How high can gold go this bull market run? Ahhhhhhh, that is the question, isn’t it? I expect a great deal higher. Some respected analysis are already taking about $2,000 an oz. When you look at the uptrend right across the board in commodity prices as well as the falling Dollar that number no longer looks so ridiculous.

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At Wednesday’s Federal Open Market Committee (FOMC) meeting  a small one quarter percent cut in the Fed funds rate to 4.50% was enough to propel crude oil to new highs about $94.50 a barrel, push gold above $800 an oz., and drive the Euro above 145.00.

While many market analysis thought that perhaps the Fed would pause and leave rates unchanged this time around, the men who really matter, Ben Bernanke and the Federal Reserve Board member partners in crime, apparently were still concerned enough about the sub prime mortgage mess and a declining housing market to go for a rate cut.

In its minutes the Fed did mention that it is becoming increasingly concerned about inflation becoming more robust in coming months and indicated that rate cuts may not be in the cards at the next Fed meeting.

Of course, gold, crude oil, and almost all currencies are in strong up trends against the US Dollar. As the Dollar sinks the prices of commodities in general will rise.

The Euro at 1.50 to one Dollar might have seemed to be a pipe dream a couple of years ago but is now looking pretty darn close to happening.

The only red flag at the moment for Dollar bears and for crude oil, gold, Euro and currency bulls is that it all looks too easy.  I seriously doubt that the bear market for Dollars is even nearly over nor the bull market in gold, crude oil, and most commodities. 

However, with the Fed indicating that the interest rate reduction party may be over for awhile I wouldn’t be surprised to see a sharp Dollar price correction before currencies enter an accelerated parabolic curve to the upside later this year (Dollar sharply lower) or during the first quarter of 2008.

It’s not unusual in the hard ball forex and commodities trading games to see brutal knock out corrections occur just before a market takes off to make new highs.  Stay tuned. Over the next year we will probably see some truly amazing prices and price action in the forex and commodities markets.

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Since making all time highs the stock market has paused for most of this week as it is waiting for the September unemployment report which will be released tomorrow morning. Economic data released this morning indicates that the data may be on the soft side.

The number of newly laid off workers filing claims for unemployment benefits shot up last week by the biggest amount in four months.

This morning the Labor Department reported a total of 317,000 applications for unemployment benefits last week, an increase of 16,000 from the previous week. It was the biggest gain since jobless claims rose 18,000 during the week of May 9.

The rise was bigger than analysts had expected and could be a further sign that the labor market is slowing under the impact of the worst slump in housing in 16 years and a severe credit crunch that roiled global markets in August.

The stock market may rally on a distressing unemployment report as Fed watchers would guess that the Federal Reserve would continue to lower interest rates in the face of a slowing economy. However, lower rates are not favorable to dollar strength so the long term Dollar downtrend would likely immediately kick in given a less than expected unemployment report.

At this time analysts believe the unemployment rate rose in September to 4.7 percent, up from 4.6 percent in August. They are expecting that in spite of this businesses added 100,000 jobs to their payrolls

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There is ample evidence that a good dose of inflation, like an ill wind, is headed our way. For example take a look at this Commodity Research Bureau (CRB) Spot Index Chart that plots the index of 23 industrial commodities.

Then consider that we have wheat at record price levels. Gold is trading at over seven hundred Dollars an oz. There are record prices for crude oil at over $80 a barrel. Milk is at record levels as is the price of beef. I could go on but I’m sure that you get the inflationary picture.

If Ben Bernanke and company were to focus simply on the inflation outlook, the real inflation outlook, not the watered down official government one that excludes energy and food prices, they would not dare to cut interest rates at this time.

However, it is not as simple as that. The trouble originating out of the sub prime mortgage lending market and the resulting infection of troubles throughout the US housing market must be deeply troubling. With housing foreclosures already at record levels and with housing such an important part of the US economy some rate relief would seem to be in order.

The markets seem to have already priced in a 25 basis point reduction on the federal funds rate. Some analysts think that the discount rate will also be cut by 25 basis points. Others think a rate cut of 50 basis points is in order.

Any reduction in rates will likely put further downside pressure on an already weak Dollar. In fact with the Dollar already closing below 80 on the widely watched Dollar Index spot chart just a little additional move to the downside may set off a round of heavy selling as the Dollar breaks important support levels.

Much like the war in Iraq, there seem to be no good options. Whatever Ben Bernanke and the FOMC members decide there will be more trouble ahead. The decisions made at this FOMC meeting will be sliced and diced and discussed by analysts for years.

Truly this is a FOMC meeting for the ages.

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The Dollar immediately sold off hard on the news as speculation mounted that the Fed will cut interest rates by a full 0.50 basis points at its September 18th meeting. The Federal Reserve is in a no win position at this time. A cut in the Fed funds rate may help Wall Street but it certainly won’t help the Dollar which is already under a lot of pressure. And a collapsing Dollar given the extend of carry trade financing that will come unglued as especially the Yen gains strength can not possibility be favorable for the stock market.

There is likely major trouble coming next week for the Dollar and the stock market. The Yen gained over 200 pips today against the Dollar, finishing the week out at about 113.37. This was enough of a move that will force additional carry trade liquidation.

The important thing to remember about forced liquidations is that those forced to liquidate, like hedge funds, are finding there is no real market for their portfolios of funny money marked to model derivatives of which they are holding billions. The smart guys have outsmarted themselves.

In order to raise cash these guys have to often sell what they really don’t want to sell. So perfectly good stocks, commodity futures, and bonds may come to market at distress prices because they are forced to sell what is marketable.

All in all it’s one hell of a financial storm brewing. Don’t expect the Federal Reserve or any other government entity to be able to manage the disaster that they through overly relaxed easy money policies have contributed so mightily to. There is already too much debt in the world. Adding to it will only make matters worst over the long term.

The only way out of the financial storm will be through a liquidation process that will be nasty and fatal for many financial market participants. One way to protect yourself is to move out of dollars before it is too late.

That time is fast approaching. The Dollar sell off can reach the panic stage at any time.

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All of Europe is pretty much on vacation during the month of August. Senior forex traders will be returning to their desks this week, very likely eager to get back to the task of trading forex and of spinning money.

Look for a very busy and active market this Fall starting about now. The Yen carry trade debacle will soon heat up again. The unwinding of the carry trade will likely be the dominant force at work in the forex and equity markets this fall.

Look for the Yen to gain against all currencies as the trade upwinds. In equity markets the fall out from the unwinding of carry trade positions is just getting underway.

The forex market should have an exciting Fall.

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The Japanese government insured that the Bank of Japan supplied copious amounts of low cost credit to the Japanese economy in an effort to fight domestic deflation. During most of this easy money time period interest rates were near zero in an effort to stimulate domestic demand.

International financial operators soon learned that they too could take advantage of the low interest rates being offered in Japan. They were soon borrowing huge sums in Yen from the Bank of Japan, converting the Yen into Dollars, British Pounds, Euros, and high yielding currencies like Kiwis and the Australian Dollar, and then investing the proceeds in high yielding financial investments.

At first the proceeds of the loans originating in Japan were used to invest in traditional financial instruments, like US Treasury bills and notes. However, as what was considered by many carry trade operators as a “free lunch” continued large amounts of funds begin to flow into all sorts of real estate investments, mortgages, and hedge funds that had great flexibility as to how they could invest the funds.

So what started as a domestic Japanese operation used to fight deflation morphed into an international financing mechanism favored by the world’s “smart money” crowd. The sums involved with carry trade investments become so large that a great many people around the world became quite rich by collecting fees and commissions from the placement of these funds.

However, there is a problem or two that can sink the carry trade. One is that the value of the Yen must remain stable or even better weak against the currencies that the Yen is being converted into. Since the carry trade loans eventually have to be settled in Yen any strengthening of Yen can mean losses to the carry trade operators.

Another potential problem is the the spread between the rates paid by the currency pairs must remain wide enough for the operations to have positive carry. Should interest rates in Japan begin to rise as the Japanese economy begins to inflate and if interest rates, say in the US, begin to fall, the carry trade operators begin to be squeezed.

The recent turmoil in the world’s financial markets show just how substantial of an influence the carry trade financing mechanism has become in financing all sorts of asset classes that it was never intended by the Bank of Japan to finance. The Bank of Japan became in effect the world’s banker. That condo that you purchased in the United States last year and the villa your friend purchased in Italy probably used mortgage financing made possible by the carry trade.

In fact carry trade proceeds have been so extensively been use around the world to finance economic activity that without it real estate financing, merger and acquisition financing, IPO financing, and hedge fund operations would be extensively impacted should the carry trade implode. Since many of those operators, like hedge funds, have further leveraged their carry trade financed operations by borrowing even more money, from commercial banks and perhaps even the bond market, the magnitude of carry trade unwinding will seriously effect just about all economic activity everywhere.

In summary, the extensive use of carry trade financing is highly dangerous. Those who thought that the carry trade provided a free lunch were wrong. It merely deferred the piper who must someday be paid.

No one fully understands just how extensive carry trade financed operations are and just how many dollars are involved. Since no one fully understands all of the many financial relationships that have developed around the world involving the carry trade no one can  foresee the full extent of the disaster that will follow in the wake of a carry trade implosion. We do know that a worldwide financial liquidity crisis can quickly develop as the stock market and mortgage market activity of the past few weeks have demonstrated.

The turmoil recently experienced in the world’s stock markets and currency markets gave us a little taste of what may yet come. A few financial analysts even believe that a full unwinding of carry trade financing will lead to a “greater depression”.

It is a time when the prudent investor should be thinking defensively. Cash or gold are not bad investments at the moment. Just be sure that both remain accessible to you should a carry trade induced disaster unfold.

Should it happen, it will be very ugly indeed.

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The Fed cut the discount rate in order to bolster confidence among investors and as an effort to restore orderly trading conditions in the stock market, but the Fed Discount Rate cut has no meaningful action on the commercial paper market. Michael Englund, principal director and chief economist with Action Economics LLC. had this to say. “A liquidity crisis is what’s underlying the commercial paper crunch,” Englund said, “and commercial paper doesn’t have access to the discount loans.”

Those stock market investors who were cheering the Fed’s move on Friday will likely be under pressure again by as early as next week. It will take far more than a symbolic gesture to repair damage already caused by a liquidity crunch that is positioned to become far worse.

The US Dollar sold off as Wall Street rallied. Look for additional Dollar strength as the sell off in stocks begins again in the days ahead. The dollar’s strength may seem strange to some in light of the US list of financial market, fiscal and trade deficit problems.

The perverted nature of this Dollar strength is discussed in a posting called Dollar Strength Forecast.

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In addition, Canada has a relatively small population , about 33.4 million, who stand to benefit from the riches and favorable export position as the nation prospers.

In a world facing storages of industrial commodities Canada is in an enviable position. It can produce far more industrial commodities than it can consume and export the balance to world markets.

In a world with increasing demand and decreasing supplies this puts Canada in a strong position that should last for many generations.

The Canadian Dollar should reflect that strength. The exchange rate with he US Dollar is now about 0.94 Canadian to 1.00 US. The Canadian Dollar should keep trending higher and reach par and perhaps far beyond within a couple of years.

A good source of information on the Canada Dollar can be found at the Bank of Canada website.

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