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“Weather forecast for tonight: dark.”

                           George Carlin

FX Trading – Two points and one chart may suggest a comdol bloodbath—that’s all!

We noticed these two seemingly unrelated news stories this morning:

1) “The International Energy Agency Wednesday lowered its 2010 world oil demand forecast, its first substantial cut in a year, on weaker-than-expected consumption in emerging markets and revisions to 2008 demand data,” according to The Wall Street Journal.
2) “China’s accelerating inflation and surging house prices are adding pressure on policy makers to raise interest rates and allow yuan gains even as their concerns over Europe’s debt woes persist,” reported.

And to give you an insight into how my scary mind thinks about this stuff, I have created the following chart in an attempt to link these events in some convoluted way to suggest that just maybe a comdol (that’s fancy FX-trader talk for commodity dollars) bloodbath is in the making. [Caution Note: We often see what we want to see in charts; that may be the case with the next one. But heck, let’s take a look anyway…]

First, some description of what you will see on the next page. The black line in the chart below epresents the ratio of Gold to Oil i.e. gold price in dollars divided by the oil price in dollars. The red line is the Australian dollar – US Dollar pair. I have labeled some key events that either led or where coincident with the surge in the Gold-Oil ratio and circled the related peaks.

Now, as gold surges into new high atmosphere, moving nicely with the world reserve currency, the other major safe haven—the US dollar—the Gold-Oil Ratio is on the rise again. Could this be a precursor of trouble ahead? Oh yes Virginia, it could!

Here is where the two news stories from today come into play:

1) If we have learned that oil demand is set to fall even though we are told the US is in the midst of this so-called V-shaped US recovery. This V-shaped recovery is being dragged along by the insatiable demand from emerging market economies. Hmmm…”Something stinks in Denmark,” as our good friend Willie once said. If the International Energy Agency is correct, it means demand for the oversupply of Chinese goods being manufactured could be a major problem for China. And if China shrugs, all markets get whacked, especially those of the commodity variety.
2) As much as China does not want to tighten, we have to take the Sinophiles’ at their word when they tell us stability is more important than anything for the Chinese leadership. Inflation is one thing that has proven very unsettling for the Chinese social picture during the modern era of the Chi-Com leadership. Thus, if we have China tightening in the midst of fading global demand, as the Eurozone is taken out of the growth picture entirely, bada bing bada boom.

Comdol bloodbath! Stay tuned.