Short squeeze could short lived

The last few weeks have been a struggle to say the least in currency land. I myself have at times been awfully confused at some of the price action we have seen lately. What is becoming clear is countries need to make a choice between extraordinary growth and huge debt or responsible budget's but risk snuffing out growth in the short term.

The bond market has been very agressive lately, confidence plays a big part in this market, Japan has serious debt worries, any confidence loss by the bond market in Japan could see catastrophic consequences for Japan, new Prime Minister Mr Kan is acutely aware of the consequences that his country faces without drastic policy change and are making noises about tax increases and other budget cuts. This is a dangerous tightrope that Japan is walking it hardly needs another lost decade, there history does not read well with massive booms alongside massive busts.

On the contrary in the USA the Obamma administration is faced with mid term elections a soft at best recovery, massive losses in the Gulf thanks to the Oil spill, many US states facing serious public finance problems. The administration is currently not listening at all to those market participants yelling from the sidelines that budget responsibility and cuts to government spending not only have to be achieved or soon they will be forced against their will to make these changes completely, changes that most politicians will find completely unacceptable. The current administration seems unwilling to strike a mix between economic growth and responsible spending, like the past several administration's they are spending like drunken sailors, the day of reckoning is coming eventually and the bond market spotlight will turn on the US and not in a good way.

With china their are commentators in the world that seem to believe that as long as their is no slowdown in growth in china they will drag the rest of the world out of their economic duldrums, those that believe that statement are living in a fantasy world. Whilst I am definitely not in the camp that believe China will dip under 9.5% economic growth at least not this year, they will slow, you can't have deep recessions in the Eurozone, and the USA and not see knock on effects in other countries. China predominantly makes it income from manufacturing and this will only continue if its customer base in europe and the USA are able to buy their goods.

Elsewhere in Asia India has raised rates saying that they need to curb inflation, Singapore has taken similar steps manipulating their currency late last week and Australia has left rates on hold as expected
and also noting in their statement that they will be monitoring developments in europe and the USA.

I often bang on quite a lot about how the equity markets can shape and lead what we see sometimes see in currency land and the news for risk dosen't look good in the weeks and months to come. the SP500 has finally posted the death cross last week, this is where the 50 day MA crosses over the 200 day MA, a very bearish sign normally, check the chart:

The SP500 is also highly correlated to the AUD and a quick look at the daily chart here also dosen't exactly look bullish despite the yield attractiveness differential for carry traders.

The FTSE 200 seems to be a pretty good risk barometer for the pound, when its flat or getting sold off then pound tends to follow, although this hasnt exactly been the case since the latest budet release with long term shorts rushing for the exits or summer holidays. The strong economic measures brought down a few weeks back by the new government seemed to have pleased some market particpants, the worry now is will this stiffle economic growth in the UK, the recent data coming from the UK has been somewhat soft, GBPUSD looks like a pair that has gone a long way in a little amount of time, if I was to predict its next move then I am saying down, both the weekly and daily charts look bearish to me. In just todays trading GBPUSD has retested the top at 1.52 and again been sent packing for now despite a strong bounce back rally in the London equity markets and a sell off in UK paper. It remains to be seen if US traders will want risk like the pound after their long weekend but more importantly going into the traditional slow period of the year for currency markets.

Next month signifies the start of the wedding season on the sub continent a traditionally a strong time for gold as demand for the metal goes up in response. In recent times gold has been the fear favourite and I don't see this changing anytime soon. I know its difficult to look at a gold chart and think buy and I am certainly not advocating that, but I also don't see a massive fall either, for now it could just tread water as traders prefer to hold this instead of risk and it also diversifies their equity and general risk holdings.

I haven't posted for a while and I know it got a little long winded but I had a bit to say it seems haha, as always trade safe be safe and good luck out there.