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US central bank accused of unleashing an inflation shock that will rock financial markets - Telegraph.co.uk

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".
Investors will do well if they can preserve their wealth."
Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.
Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said.
"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box."
Barclays Capital recommends outright "short" positions on Asian bonds, warning that yields could jump 200 to 300 basis points.
The currencies of trade-deficit states like India should be sold.
The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders.
David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said.
We're still in a very large deleveraging cycle and we're seeing losses continue to mount. We think smaller banks will struggle to raise capital. We're very bearish - in the long-term - on high-yield debt. The default rate will reach 8pc to 9pc next year."
Bernard Connolly, global startegist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".
He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.

Link to the news

Things getting nasty in Middle East: U.S. Won't Let Iran Shut Strait of Hormuz, Fleet Says (Bloomberg.com)

The U.S. won't allow Iran to shut the Strait of Hormuz, through which the bulk of Middle East oil is shipped, a spokesman for the Fifth Fleet said.
``They will not close it,'' Lieutenant Nate Christensen said in a telephone interview today from Bahrain, where the fleet is based. ``The Strait of Hormuz is vital international waters.'' Vice Admiral Kevin Cosgriff, Fifth Fleet commander, made similar remarks to reporters in Bahrain today, Christensen said.
The narrow waterway between Iran and Oman at the mouth of the Persian Gulf handles the shipment of about 20 percent of the world's daily supply of oil, according to figures from the U.S. government's Energy Information Administration. The oil's main destinations include the U.S., Western Europe and Japan.
The fleet's comments are in response to remarks by the head of Iran's Revolutionary Guard two days ago that his country may close the strait if attacked by Israel.
``Naturally, every country under attack by an enemy uses all its capacity and opportunities to confront the enemy,'' Major General Mohammad Ali Jafari told the Iranian Jame Jam newspaper on June 28, according to the state-run Fars News agency.
``Regarding the main route for exiting energy, Iran will definitely act to impose control on the Persian Gulf and Strait of Hormuz,'' he said.
Crude oil was little changed after rising to a record above $143 a barrel earlier today. Crude oil for August delivery rose 22 cents to $140.43 a barrel at 11:36 a.m. on the New York Mercantile Exchange after rising to a record $143.67. The price has risen 98 percent in the past year.
Israeli Fighters
The New York Times reported on June 20 that more than 100 Israeli F-16 and F-15 fighter planes took part in a military exercise over the eastern Mediterranean and Greece during the first week of this month. U.S. officials told the New York Times the maneuvers appeared to be training for a possible attack on Iran's nuclear sites.
The U.S. and many of its allies have accused Iran of trying to develop nuclear weapons. Iran insists the atomic program is intended to produce electricity and is legal under the nuclear Non-Proliferation Treaty

At the Close. The JPY yo-yo and other stories.

The markets have turned silent in the last couple of hours, by 'silent' meaning that the good deal of volatility seen earlier in the day evaporated, but I do not think that is gonna stay that way for a long time.

Basically, in such an eventful week like this, we should see large moves taking place, and I feel we've just been setting ourselves up for that. No doubt the JPY will take an active role from now on as both sides are being funded heavily, hence the swings back and forth, making of the currency a buy-on-dips at one point and a sell-on-rallies afterwards.

EUR/JPY remains capped by dynamic resistance 167.20, with GBP/JPY just about to test important 211.60, in what has been a solid comeback after this morning's sell-off. Indeed, the USD/JPY stayed in OS or extreme OS territory for the first part of the European morning, just to finally reverse gains from out-of-bounds and options defenses @ 105 to hit 106.20+, aiming at important 106.40-50 area. I don't feel the unit will break it the level on a first attempt, but who knows, that could also be an indication that the JPY might be in trouble again.

Among the European majors, EUR and CHF present a better technical picture than GBP vs the USD at the moment. The Euro is trading inside the old original intraday uptrend channel, eyeing its baseline and tough level 1.5710, which might come into play short-term, but that I don't think will break on a first attempt. However, seeing a test of that level along with a 1.0260 test in USD/CHF should ring all alarm bells among USD bears as that could be a first sign of a reversal. I firmly believe that the Swissy will test the magnet line coming in @ 1.0230 (off 1.0490 highs June 23). As for Cable, there still is a magnet line around 1.9855 that has not been re-visited, and I still believe a visit to it will be paid.

As always, any trades left open can be squared here or once one of the 2 boundaries is hit. I am not particularly excited about that small long EUR/USD opened earlier.

Calling it a day here, hoping you enjoyed today's show. Look forward to meeting you all again tomorrow. Bye 4 now.

And speaking of Fibos...

That the GBP is stronger than the EUR today can easily be seen by the speed of the GBP/JPY retracement compared to that of EUR/JPY.

If we get the highs @ 214 and 169+ and connect them with today's lows, we see that the GPB/JPY cross has already covered the 23.6% (210.45) and the 38.2% (211.20) Fibos, while still capped by the 50% (211.55) retracement, with next one being 61.8% is coming in @ 212.10. Last Fibo to take into account is 76.4% @ 212.85. So far, a very speedy recovery in the cross which is not good for JPY bulls.

However, EUR/JPY has only covered the 23.6% (166.95), while it is still capped by 38.2% (167.40). Further, we have 50% (167.75) and next we find 61.8% (168.15) and 76.4% (168.65).

JPY crosses comment

Both EUR/JPY and GBP/JPY have broken the steep downtrend lines off 214 and 169+ highs, and now only a second downtrend line also off those highs seems to be the last hope for the JPY bulls, who have seen their earlier rally reversed fast and strongly. 167.65 and 211.60 is where we find those lines, I wonder if the market will pay any attention to them at all.

Comment on Crude Oil

I have re-started a short position in Crude Oil around $142, stop above $148, target $127. Previous one was stopped out at BE + $1 (I do this when am $5 positive). Still believe daily indicators will drag it lower, but obviously momentum traders could just earn from my money as well...

Trade Idea: EUR/USD

Having one of my systems signaling a long take, so am half long @ 1.5740, stop 1.5705 and target 1.5805 for now.

USD on the move

The fact that EUR/USD has broken middle line support of the 3-line range @ 1.5750, has sparked some real USD buying across the board, with the USD/CHF as expected gaining good ground towards 1.0215-25 resistance area, and USD/JPY doing the same towards the tough 106.40 resistance. Nearest EUR/USD support is 1.5715-20 magnet line; such a magnet line is coming in @ 1.9860 in Cable.

Markets at this hour

Not much happening at the moment, the JPY crosses remain within a shooting distance of important resistance lines, while the USD remains a bit off the lows of the day. I feel the JPY being the most active currency in FX will be the tone for quite a few days.

Technically speaking, the most remarkable thing is that USD/CHF declined to immediate support line (former downtrend line) @ 1.0160 and bounced up nicely, and I feel positive about it going to visit the 1.0215-25 area soon.

JPY backfiring continues

We find USD/JPY having broken the 105.80 resistance line, and that has sparked an important rally (off extreme levels, remember the 'backfiring' warning?) in the JPY crosses, with both EUR/JPY and GBP/JPY testing important downtrend lines @ 167.20 and 211.30. Shorts might be tried but with caution, these levels looked very good for a short in the morning, but now momentum is clearly against the JPY, and could continue in the afternoon (in fact, the USD is only posting solid gains against it, a confirmation of what I just said).