Jim Sinclair’s Commentary

My former partner Yra Harris, a man married to no singular market, speaks of the proceedings in the euro today and it implications across the board. Read Yra not for the penchant of minute to minute madness, but for his enlightened outlook on what this all means to the US dollar and Gold. I am of the mind that things in this world of markets moves now toward the longer term trend and does not get as mired in the shorter term as algorithms fight with their kind to get it right.

Dear CIGAs,

Sit up and pay attention to the question of questions: If the ECB (European Central Bank) were to intervene to weaken the euro against the dollar and other currencies, would this change the present dynamic affecting the high frequency trading currently driving the carry trade oriented market?

We know the drill – dollar down, all assets rally and dollar up and risk comes off the table. Well if the ECB was to intervene by either pumping liquidity into the market by selling euros or by lowering interest rates, wouldn’t the result be a stronger dollar? Wouldn’t the easing move to boost equities around the world as more liquidity would be pushed into the asset pool, thus inflating the global bubble even more? This would be an event that would throw the dollar up /dollar down algorithm into disarray.

The reason we pose this position is that there is much discussion coming out of the European finance ministers’ meeting about some heightened efforts to weaken the euro currency. The argument gains more traction with today’s opinion piece in the FT where Martin Feldstein, one of the few economists who bothers to understand markets, calls for a further weakening of the dollar to correct the global imbalances. Feldstein notes that with the Chinese holding the Renminbi steady the weak dollar is felt more strongly were the euro bears the brunt of dollar weakness. Can European peripheral countries, Spain, Greece, Ireland, Italy et.al. withstand the strengthening euro in regards to their softening economies? This is the problem facing the world today and everyday which is why we keep coming back to gold currency plays. When the Europeans can no longer withstand the strengthening currency they will panic and thus gold will be the haven, and the panic will lead to a dollar rally in the short term, and we would argue move to support equities even with a rallying dollar.

Staying on this topic, we need to address the issue of Tony Blair becoming the European community president. The media has him to be dead on arrival, but we would caution not so fast and believe there is still a pulse. Gordon Brown is pushing hard for Blair even as support from Sarkozy and Merkel softens. We view this as posturing to get the highest price from England for Blair to be president. That price we believe to the pound entering the euro and the question is, at what price? For Ireland a weak pound is choking her as she has no ability to devalue the euro to regain a competitive advantage. Also if the pound were to enter the euro at too low a price it would be a boom to Britain as many European manufacturers would move to the UK to take advantage of that situation. We are not privy to any inside info on this for we write from the great Midwest and not wall Street, but we maintain that this is something to be watched, especially as Europe is openly acknowledging the stress she is suffering from a weakening dollar.

The Canadian GDP number came out as we were writing this and it was weaker than expected, so the Canadian loony has sold off hard. This gets our antennae up about taking advantage of this break to buy the loonie against other currencies, especially the euro. Again as we always advise – consult the technicals or your favorite technician. Also we think it is important to watch how gold performs in the face of any dollar rally for if the rally is based on a coordinated intervention it should rally back after a sell off. All power to breaking the algorithms for then we will be on to a new trading regime. We can only hope at this point but until then trade as the market shows you.

Yra Harris