Financial Market Investors & Traders Beware The Ides of March

By: Steve_Betts

“Beware the Ides of March”, Soothsayer to Julius Caesar

Last night the Chinese market treaded water with little change and I would like to continue the discussion started over the weekend with respect to the US’s largest creditor. China’s recent stimulus package was instrumental in preventing a major slowdown in their export sector as the world economy cooled. Now they are busy reigning in an economy that is growing at more

than a 9% pace, and they’ll do that by reducing the money supply, reigning in credit and increasing taxes. One thing they won’t do is appreciate their own currency, even in the face of protectionist rhetoric coming out of the United States.

Although I am convinced that China will come out of the current economic crisis smelling like a rose, there will be serious implications for the US as China tries to but the brakes on its economy. China will subsidize exports and that means that cheap exports will get even cheaper. Right now you can buy a Chinese 4x4 pick-up for almost half the price of a similar Toyota of Chevy, and there is little difference in quality as the motor, transmission, and rear end are all made by Mercedes. What’s left of the US industrial base will continue to try and relocate in China putting further strain on US unemployment. Perhaps the most serious problem will involve China’s desire to accumulate US debt, or should I say lack of desire. Since they’ll need to utilize their reserves to subsidize their own economy, China will end up being a net seller of US debt and that will put further strain on the Fed’s printing press.

This strain will first become apparent in the behavior of the US dollar and then later in the bond market. Although the greenback has enjoyed a healthy reaction of late, mostly due to deflationary pressures, I believe that risk has now been mostly discounted. The budget deficit for the month of February alone came in at an astounding US $229 billion and I now believe the FX market will turn its attention toward the method used to finance US debt, i.e. the printing press. I believe that’s why the US Dollar Index turned down at the 81.32 resistance and may now be forming a top. After all, it’s ludicrous to think that you can expand supply almost exponentially and still believe the price will rise. It didn’t work with tulips, and it won’t work with the US dollar.

This morning the spot US Dollar is trading up .27 at 80.06 and still well below the neckline of a huge head-and-shoulders formation that took close to two decades to complete. Recently the US Dollar Index enjoyed a reaction from the November 74.23 low to the February high of 81.34 that came very close to retracing exactly 50% of the previous decline from 89.62 to 74.23 (using closing numbers). Given the fact that the budgetary pressure will increase throughout the year, we me very well have seen the top and now the rest of the world will go back to the old strategy of trying to control the dollar’s decline. I see the first the three supports at 79.35 as crucial, and any close below that level would confirm a top. Meanwhile the dollar is range bound.

Then we have the anti-dollar, gold, that is in the inverse position as it holds above strong support at 1,048.70 and is trying to break out above strong resistance at 1,148.90, but so far with little luck:

Today the spot gold is trading up 4.60 at 1,106.10 and above good support at 1,090.10. The immediate direction of gold is joined at the hip with the dollar, and both are watching the Dow with considerable interest. Note that gold also has a large upside down head-and-shoulders formation and is holding above its respective neckline. Should deflationary pressures increase you could expect to see both gold and the dollar challenge their respective necklines. On the other hand if the Dow were to finally confirm the new highs in the Transports, you could take that as a sign that the Fed is winning its battle to “inflate or die”. That means gold will soar and the dollar will tank. All in all, this should be a very telling week for gold, stocks, the US dollar and the bond.

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