Current Account Weakness

By Colin Twiggs
November 18, 2008 4:00 a.m. ET (8:00 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.

Imprudent Investors

President Bush and the Group of 20 blame the global recession on imprudent investors who "sought higher yields without an adequate appreciation of the risks" (Bloomberg). That is an interesting statement considering who suppressed interest rates to artificially low levels — forcing investors to assume greater risk in order to earn an adequate return on their investments. Was it not the major central banks, at the urging of their governments? The attempt to engineer a soft landing in 2002/2003 caused far more pain than it saved. The cure almost killed the patient. Political leaders are not prepared to admit that we are currently reaping the results of their past intervention. And they fail to realize that further intervention to prevent falling prices is likely to cause more trouble in the future — prolonging the current recession.

Another Rate Cut

The spread between the New York Funds Rate (1-month) and the fed funds target rate returned to 50 basis points, typical of normal market conditions. The Overnight Index Swap Rate (OIS), reflecting traders best estimates of the effective fed funds rate, is significantly below the target rate of 1.0 percent — signaling another 0.50 percent rate cut. Confidence is not yet restored, however. Financial markets remain on life support with massive injections of liquidity by the Fed.

Gold

Spot gold continues to consolidate between $700 and $770. Breakout above $770 would offer a target of $840, calculated as $770 + ( 770 - 700 ). Reversal below $700 remains more likely, as gold is in a primary down-trend, and would offer a target of the June 2006 low of $550.

Source: Netdania

Crude Oil

West Texas Intermediate Crude broke through $60 and is headed for support at the 2007 low of $50 per barrel. Expect retracement to confirm resistance at $60. Failure of support remains likely in the medium term, however, and would offer a target of $40 per barrel.

Source: Netdania

Currencies

Repatriation of funds by US and Japanese investors and creditors is primarily responsible for the strength of the dollar and the yen. In the long run, the current account surplus or deficit should determine a currency's strength or weakness. Here are a few of the strongest and weakest as forecast by the IMF for 2008.