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Minyan Mailbag - House of Sand Follow-up


March is getting more interesting all the time.


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

This article refers to a previous mailbag.

Hi Toddo / John

Fast forward:

Here is the same chart as of this moment. The CRX (CRB also) has broken out above the small congestion and sits at a multi-decade high. The 5-year note contract is finally starting to fall (inverse correlation to the CRB). It is at a critical juncture as it tests the up trend line connecting May 2000 and March 2002 reaction lows. A close below 106.25 (low today 106.26 thus far) will break that trend line and lead to a test of the 102.28 level. The yields also have broken above all the downtrend lines and are set to test the 4.865 level (March 2002 reaction high and upper end of the current up trend channel).

The JPY/USD is quite a bit away from the 101.26 support. Does this mean the BOJ will not be motivated to intervene until the 101.26 level is hit again??? Secondly, assuming the 5-year note contract cracks the trend line today on a closing basis will this bring on more selling by the foreign central banks, which could also affect the Dollar????

Your thoughts would be greatly appreciated.

Minyan RK

The Japanese fiscal year end is the end of March. They most likely would not let the dollar weaken further before then to mollify any further mark to market losses on their foreign currency reserves, which are 98% in dollars and are around $840 billion. They have already indicated current losses on foreign currency reserves will be around $110 billion. They certainly don't want to show more. After March end I think things could get interesting. As oil prices rise it puts pressure on the Japanese to strengthen the yen (let the dollar fall). Perhaps the Bush administration could alleviate some of that pressure by releasing SPR (Strategic Petroleum Reserve).

I continue to see market forces working against the central bank coordinated liquidity plan. We are seeing that friction in the CRB. The five year note yield breaking through 4% and currently trading at 4.2% is not yet a level that would cause the equity markets over-concern yet, but the direction and momentum is something to watch. Another key to watch that would indicate that yields are being yanked up by dollar selling would be the spread between the Fed Funds rate and the five year note. That spread is currently 130 basis points, an average spread. If the spread ratcheted up to around 250-300 basis points, that would indicate that the Fed needs to catch up to the market and has little choice but to raise rates, perhaps just when they don't want to.

So I think the table is set in the currency and bond markets, but the Fed and the BOJ are still at the head of the table. They may be a little full though at this point.


Professor Succo

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