Japan Intervenes as Gold Hits $400 amid Dollar Selloff by Jes Black


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November 19, 7:00 AM: EUR/$..1.1903 $/JPY..108.78 GBP/$..1.698 $/CHF..1.3023 AUD/$..0.7208 $/CAD..1.3017

Japan Intervenes as Gold Hits $400 amid Dollar Selloff by Jes Black

At 7:00:00 AM Canada October CPI m/m (exp n/f, prev 0.2%) Canada October CPI y/y (exp n/f, prev 2.2%) Canada October CPI-x m/m (exp n/f, prev n/a) Canada October CPI-x y/y (exp n/f, prev 1.7%) At 8:30:00 AM US October Building Permits (exp n/f prev 1.88 mln) US October Housing Starts (exp 1.85 mln prev 1.89 mln)

The dollar reached new lows against the euro, yen and gold as concerns over growing deficits, war in Iraq, protectionism and four consecutive days of decline on Wall Street rattled the markets. This week has been marked by extreme volatility, with gold prices yo-yoing from $400 to $385 and back to $400 again, while the euro dipped from 1.1860 to 1.1740 and then rallied to new all time highs. The yen also reached new 3-year highs of 107.60 this morning before Japan intervened in large order sending the dollar to a session high of 109.11.

Stock markets are looking increasingly nervous as the Nikkei plunged again on Wednesday, falling nearly 3% to 9614 from last week's highs above the key 10,000 mark. Wall Street has closed lower for four consecutive days with many traders discouraged by yesterday's laundry list of events that weighed on the greenback.

Bush Adds China Textiles Protectionist List

The dollar began Tuesday's sharp decent just before the newswires reported that the US approved one-year import restrictions on certain Chinese garments. The Bush administration appears willing to pull out all the stops to ensure job growth by election time next November and the dollar is taking the brunt of traders' fears.

China's Commerce Ministry said today that the government is firmly opposed to the US decision and that it reserved the right to protest to the WTO. Recall that China had already threatened action against the steel tariffs and today China's cotton lobby said China should retaliate for the new import quotas.

Conventional Wisdom Misses the Point

Conventional thinking in Washington is that China's currency peg to the dollar is the source of US ills. Recall that the trade gap with China reached a record $12.7 billion as the deficit widened in September to $41.3 billion. The total deficit with China this year alone may reach $130 billion, which would be the most with any country in U.S. history. Yet China's growing imports are set to bring its total surplus into balance, highlighting that this is a US-centric problem.

The truth is that US manufacturing has been in a decline since the 1970s when the US abandoned its policy of settling trade balances in gold and instead embarked on a dollar IOU policy of epic proportions. This made it possible to finance a growing trade imbalance, which other countries took advantage of and foreigners now hold over $1 trillion in dollar assets. Prior to closing the dollar for gold window in 1971 this vast amount of dollar reserves held overseas would have seemed unfathomable.

Therefore, under a system that actively encourages more consumption via cheap credit creation and deficit spending, achieving a textbook type of trade balance may not come without first cutting off the cheap credit tap. Meanwhile, a simultaneous policy of currency debasement and protectionism is eerily reminiscent of previous deflationary cycles and will only add to emerging tensions in global trade.

Foreign Investors Flee Dollar Assets

While often noted as the world's economic engine, the fuel has increasingly come from foreign savings, which the US consumes voraciously from willing lenders.

One half of last quarter's US government Treasuries were sold to the central banks of Japan and China. But aside from Asian central banks, investors have pared back their purchases of US stocks and bonds, making it harder for the US to fund its fiscal and current account deficits.

Traders therefore acted accordingly when a Treasury Department report showed foreigners investment in the US hit a 5 year low in September. Foreigners bought a mere net $4.19 billion down from $49.9 billion in August, the smallest since $1.17 billion in September 1998.

Dovish BoE Minutes Hurt Sterling

The much awaited MPC vote showed a split 8-1 decision to raise rates in November. This was seen as dovish especially since one member voted to keep rates steady. Markets had anticipated a unanimous decision and the short sterling market had previous priced in a near certain chance of another rate hike in December. This now looks less likely and sterling may have lost is interest rate expectations edge.

In this weeks reports we highlighted the possibility that for sterling the rate expectations game could be seen as a lose/lose situation as another rate hike would slow the nascent recovery, while taking away the possibility of a forthcoming rate rise would diminish the interest rate differential expectations, which has been priced into sterling.


The euro slipped back to the 1.19 level this morning on profit taking after reaching a peak of 1.1975 overnight. On Monday we said a correction back below 1.18 in the near term may be necessary to clear out more longs before the euro climbs back above 1.19 but over the medium term we should see a the rally. This now appears to be the case and any corrections from here should be met with buying interest as traders now anticipate a move to the 1.24 level before year's end.


The dollar fell over 3 centimes yesterday from a session high of 1.3263 to a low of 1.2916. Key support is seen at 1.2770 but new lows are likely to be had as the Swiss franc follows the euro higher.


Sterling followed the euro higher against the dollar despite its own weakness against the single currency. Yesterday's volatility saw sterling struggle with key resistance at the 1.6880/1.69 level then explode through. Nevertheless, sterling failed to take out its previous top at 1.7075 two weeks ago, which will now act as key resistance. Support is seen at 1.6950 and 1.69.


The yen spiked higher on probable Japanese intervention after the dollar reached a new 3-year low of 107.58 in London. The inability to hold above 110 may bring forth further weakness and it is looking increasingly likely that a move below 108 will target the more bearish outlook of 105-106. However, if this were to coincide with a EUR/USD top around 1.24/26 then the dollar may very well find a bottom at these new lows.


The Australian dollar rose to a new 6-year high of 0.7245. With gold attempting to break above $400, new highs in the commodity currencies cannot be ruled out. But given that the Aussie has rallied for 11 consecutive weeks, and the pair has now reached our targeted resistance of 0.72/0.74, the Aussie is vulnerable to a larger correction soon.


The dollar rallied to resistance at 1.3150/60 on Tuesday before falling back to the 1.30 mark this morning. The move from last week's 10-year lows against the Canadian dollar at 1.2951 may not be the bottom, but the US dollar's decline against the CAD should be nearing an end. Further weakness is still possible with gold attempting to break above $400. But if new lows are reached they may be shallow allowing the dollar to bottom in the 1.27/1.28 area that we forecast last week.