January 2nd 2014 Daily EUR/USD, GBP/USD Ananysis
Here we are at the beginning of a New Year which has potential to be the big correction year but to be honest I doubt it. As I mentioned in my year end commentary I really don’t think they will let it happen until after President Obama is out of office. However most of the time when things do blow up or correct in my view its not because somebody let it happen like they should have so the correction can be somewhat controlled. Most often there is exactly what happened this time and the people who think they can control something as large as an economy do what they think is best to protect them and their buddies at the top for as long as possible. So just what is it that happens to cause the proverbial domino effect?
Well it starts with just one big bank or large hedge fund looking at their books and seeing they have potential to lose substantial money in the near future. A very good example is the movie called Margin Call. It don’t have to be just like that where the realize their model is flawed and need to exit massive positions. It really only needs to be someone thinking the top is in and its time to protect their profits. This scenario unfolds slower since there will still be those willing to buy but once the wind gets around that one or more of the big boys are protecting their profits and exiting the market the domino effect has much greater potential as others do the same. Of course catching the fools willing to buy at the top caught off guard as always too.
Japan The Model?
Many have said and could easily be correct that Japan will be the catalyst for the big crash. They could be right but the fact that it hasn’t happened yet does show that there are dynamics at play that they didn’t expect. These differences in the dynamic structure of Japans debt can largely be what has kept Japan from imploding. Believe it or not even Ambrose Evans-Pritchard has claimed that the 20 years of QE in Japan has been a wonderful success. Be careful what you wish for buddy.
Having said that I would like to point out that there is a historical example we should be looking at and Ambrose seems to have missed. Thanks to Grant Williams this morning I felt it was important to share since we do have the US and China trying to start a taper and if inflation starts to take off in Japan next year they will too. So what is the example? It comes from the last time the Japanese had a similar situation and started to think things were all good and started their tapering down in the mid 1930s. This from todays release of Things Than Make You Go Hmmmm.
Yes, Japan has a chance of averting a slow collapse … and it may now be able to avoid that fate — in favour of a swift one. Back in the 1930s, the rub came when Takahashi’s policies needed to be reversed once Japan, too, was on a somewhat “even keel.”
Forex News Today
The Economic Calendar starts off with Italian, French, German and Euro Zone Manufacturing PMI data. Most are expected to be flat and with the holiday season just over I expect a surprise to the upside if anything. There is the slight chance of the disappointment and we will get a larger reaction as I would expect a surprise upward to be more priced in.
Just 30 minutes later the UK Manufacturing PMI is released. Expectations are for a slight drop but still being well above the 50 level it will take a big disappointment to create a large reaction. Otherwise if it does manage to beat expectations the GBP will likely keep going up and this first push be true.
The US has Thursday Unemployment Claims. Thy expect a small drop but as usual a big surprise in either direction will cause a temporary stir but it will have to be very large to create a sustained move. I noticed they have made it a medium impact event now on our calendar but I still consider it high impact depending on the miss. Later is ISM Manufacturing PMI data expecting a small drop but well above 50 also. The way I see this is it will most likely be a non event barring a rather large miss also.
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