What's Holding Up Amid Global Market Chaos

Joined : 23 Dec 2007 Posts : 217 Location : Nigeria

What's Holding Up Amid
Global Market Chaos

Today's commentary is by Sean Hyman, Currency Director and editor of The Money Trader.

Good Day Currency Traders! Very Happy

Yesterday, Ben Bernanke stated that "fiscal stimulus" along with additional rate cuts could help heal the markets. Basically, he's saying that he's going to cut rates by 50 basis points or more. He's also implying that Congress could provide some sort of tax relief to help fuel an economic recovery.

Bernanke Cries "Uncle!" Embarassed

In other words, Bernanke is saying he needs help. He KNOWS the U.S. economy is in bad shape and it's about to get worse or he wouldn't have called in the Calvary.

Data poured in yesterday which just confirmed Bernanke's concerns. The Philly Fed Manufacturing Index fell off the map. Analysts were expecting the number to be around
-1%, instead the number was -20.9%! That's a huge difference.

Then both Housing Starts and Building Permits missed their estimates as they came in at 1.01 Million and 1.07 Million respectively.

So it's clear that the U.S. economy is slowing down. And the U.S. is dragging the global economy down with it. Canada and the U.K. have already lowered rates because their economy has already started to feel the effects of the U.S. slowdown.

Now the Eurozone may be joining that camp as well. Just a week ago, European Central Bank (ECB) officials were screaming about fighting inflation. Then yesterday, ECB's Mersch came out and said they were worried about "downside risks." So this tells me that they are expecting the Eurozone to slow down too. So I'd count them out for any further rate hikes.

The Land Down Under is Still Holding up Strong
So who does this leave? Is there any major economy still doing well? Yes, Australia. sunny

Why? They are still hiring (not firing) workers nationwide. Wednesday's report showed that the Aussies hired another 20,100 people in December. Not only that, but their unemployment rate dropped from 4.5% down to 4.3%. So right now, basically anyone who wants to work has a job over there. flower

Meanwhile, in the U.S., we only employed 18,000 workers in December. The unemployment rate also just rose from 4.7% up to 5.0%. Australia's unemployment numbers are still falling due to an expanding economy. With jobs abundant and money sloshing around all over the place in the "land down under," inflation will persist. Heck, inflation has already climbed much higher than the Aussie central bank's comfort zone at 3.0%. In fact, right now, inflation is growing at 3.7% annually.

So once again, while the U.S. cuts rates by at least 50 basis points on January 30th, the Australian central bank may have to raise interest rates as soon as the following month. If so, either one of these central bank moves could boost the AUD/USD exchange rate higher as the Aussie economy remains strong.

Australia Gets Ready for Another Leg Upward

The U.S. slowdown may eventually ensnare Australia, but it doesn't look like it will happen anytime soon. Australia is piggybacking off of the boom that's happening in China right now. China is more prosperous than ever and the Chinese are buying tons of goods from Australia, their trading partner. cheers

So this is why I think that Australia could be the last one to fall on the global slowdown. All other major economies are feeling the heat right now. So with everyone else on the start of a "down" cycle, it should benefit the Aussie as it's still in its "up" cycle economically.

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Making 'Cents' of the Headlines
Who's Left in the Rate Hike Rat Race?

What Happened:

The Australian economy continues to impress while others are talking about "downside risks" and interest rate cuts.

Wednesday night, Australia reported that its unemployment rate declined from 4.5% previously to 4.3% presently. Now that's a tight labor market. They also hired 20,100 more people in the economy.

So what does this mean for the Australian economy? It means that the economy is still hitting on all cylinders. There's a lot of money sloshing around out there now. Aussies have tons of money to spend. This will continue to push up inflation which is already well above their central bank's "comfort zone."

Formerly, I'd written that there were only two major candidates left that could have interest rate hikes left in them: The Eurozone and Australia.

Now let's take that down to just one candidate.

What I Say: study

The Eurozone Drops Out of the "Rate Hiking" Race
On Wednesday, the European Central Bank's Mersch is looking for "downside risks" to the economy. What does this mean? He's looking for their economy to slow down. If their economy slows, then they don't have to worry about hiking interest rates further.

However, Australia's labor market has been tight. If there's one gauge that central bankers watch, it's the unemployment rate. When it's falling, they can raise rates if they need to. If the unemployment rate is increasing then they can't raise rates and may, in fact, have to reduce rates. So for now, Australia can fight inflation and stay in "rate hike" mode as the sole currency left in the "rate hike" race.

So look for Australia's interest rate to go from its present 6.75% up to 7.0%, possibly as soon as February's central bank meeting. Sleep