Asia turning the tap off = local $ bottom

The dollar has weakened against the euro by around a cent this morning, taking commodity prices higher with it. Why? Because the Chinese, who hold nearly $400bn worth of long term agency debt are no longer keen to buy it. This is very significant. Headlines will be written about how it spells the end of the existing financial world order, how the foreigners (mainly Asian) who've financed the US credit binge aren't playing any more, and how the end of the dollar, the US economy and possible the world as we know it is upon us. As a prognosis of the dollar's problems at least, this is all true. It makes little sense that the world's reserve currency is the world's largest debtor nation by a distance. When the British Pound was the reserve currency and made the transition from creditor to debtor nation following WW1 the decline in its value over the following decades and generations was spectacular. But it was also a very slow unfolding. As world leadership passes to a non-english speaking people for this first time in 200 years the same fate surely awaits the dollar today.

BUT, this adjustment will be an ongoing one which will probably take for the rest of my life to play out. Nearer term, the decline which started in 2001 is due a correction and central banks becoming squeamish is likely a good short-term signal that we're seeing it now. Jim Rogers (who is also a huge dollar bear) says in Market Wizards that it should be a central plank of any speculator's strategy to bet against central banks. Financial history is littered with monetary authorities losing control of the internal and external value of their currency. With few exceptions (the BoJ are alone to my knowledge in making money by running the carry trade from JGBs into into USTs so profitably ... so far) it pays to be on the other side of government/central banking activity. Think Gordon Brown and gold in 1998.

Moreover, despite what the headline writers will write about the coming financial armageddon, how much damage can the Chinese or Asian CBS really do? Clearly, they'd have an effect. But the $2.2tr total treasury and agency held by foreign central banks debt represents only 5days average trading volume in Treasuries alone. It's certainly possible that dumping such an amount on the mkt would affect the price, but isn't it equally possible to slowly liquidiate? That Asian CBs refusing to buy Agency debt (while still buying USTs - smart money this is not) somehow seals the inevitably fate of the dollar in the coming months just isn't clear to me. So Central Banks finally waking up to what everyone else has kown for quite some time, and becoming alert to the trend that's been in place for seven years is more likely an indication that we're at a local bottoming in the dollar.

That should mean the commodities "bubble" is burst too. But commodities have risen by a much greater amount than the dollar has weakened in recent years. To suggest, as a surprising large number of people seem to be doing right now, that commods and oil especially is largely dollar driven is quite simply empircally incorrect. The closest inverse $ play is gold though (which has risen in all currencies, not just $) and it will be interesting in the coming months to see how it holds up. If this is a real bull mkt we'll have had the correction and be ready to advance further, regardless of what the dollar does over the next few months.

Anyway, the most important factor affecting energy markets has been hurricane Gustav (another silly name - why don't they call it something really scary like hurricane Adolf, or hurricane Gary Glitter?) It's been downgraded to a tropical storm but is expected to move over Haiti and strengthen again as it hits warm water. Its currently projected path takes it directly onto the Gulf states and threaten oil production next week. That will be the time to sell NatGas.

Elsewhere in commodity land , Argentine and Brazilian soybean output is at risk from unusually dry weather, BBG reports this morning. Argentinian corn planting (2nd biggest corn exporter) is expected to fall by 20% because of the drought. Cocoa, meanwhile, is continues to strengthen on concern that the sinister sounding "Black Pod" disease, which turns the beans black and mushy, is likely to be spread by wet weather. In the metals, India is set to raise taxes on exports of iron ore from 15% to 20%, an unnamed source told the Economic Times.

Other news of note, Pimco is to follow Black rock in set up a $5bn fund to buy distressed senior mortgage backed debt. Wonder how much of the trillions outstanding that'll buy?