Market Commentary   August 6, 2008

The dollar is strengthening versus most of the major pairs as commodities, particularly oil unwind their gains. Oil has come down $30 since its high at $147 several weeks ago. Aud/Usd has also come down from .98 to .90 area today. This may be a temporary phenomenon due to summer trading or the begining of something more. The credit issues in the US banking system are far from over and the system may even be insolvent. The one thing that has changed that is impacting this current dollar move is the rapid slowdown in the UK and Eurozone economies. The fall in the price of oil if sustained could allow the ECB and BOE to cut rates later on this year. It is this idea that is being reflected in the dollar move. The interest rate differential has been difficult to overcome for the dollar versus the GBP and EUR, but lower rates would narrow that gap and so would  the notion that the US is already halfway through its recession while the UK and EZ are just starting to enter theirs.  These are all  logical arguments, were it not for the substantial credit issues facing US banks. At some point later this year they will resurface in a major way again. For now lets enjoy this dollar rally. EUR/USD 1.5250 will be the major level to watch. USD/JPY has alrady gone through. AUD/USD will track the oil move so keep an eye on oil at $115, the 200 day MA.

We have left this chart up for some time because we feel its very important and timely:

figure 1

The equity market has  a majority of its 2% up days during recession or what would be considered recessions. So what we have seen recently in the equity market could be nothing more than a bear market rally. The SP500 and Dow are still contending with some key levels at 1400 and 13,000 on Dow. The current rally has been on low volume, so its still somewhat suspect. Currently we would view this rally as a bear market rally. Convincingly breaching those key levels and staying above for several weeks might make us reconsider, but we are a ways away from that. The equity market is either telling us that the worst is over or its has completely gotten ahead of itself.

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