BONDS, DOLLARS and POUNDS

Bonds - We've been pretty bearish here on interest rates. It seems so long that we've had that view that we wonder whether the original reason for doing so is now lost on us. Last week, bond traders sold U.S. debt after strengthening retail sales and new housing starts data both improved and edged the Federal Reserve mercurially closer to an interest rate rise.

We're not suggesting the time is nigh as the FOMC meets this week to discuss policy. We doubt a rate rise will be forthcoming through the end of 2009. And don't forget that the Fed tends to not restrict monetary policy within a year of a peak in unemployment. We don't expect that to occur within six months from now.

Still there is plenty of opportunity within the bond and interest rate complex on a daily and weekly basis to keep our interest up. Last week bond dealers sold the living daylights out of yields. It was a week between auctions and in creeping fashion they sold U.S. debt just about everyday. Their mandate - sell bonds and notes ahead of this week's $112 billion in auction and then buy fresh supply from the government. Brilliant! Works every time. And so yields headed from 3.30% to close at 3.47% as the week ended.

Expect no change from the FOMC this week, but we can see the rising yield complex continuing in the event of a lack of data suggesting the economy is grinding to a halt. The 10-year yield should rise towards 3.75% this week in the face of the avalanche of debt. Meanwhile, look out for any signs of discourse emerging from the FOMC meeting. Should there be members raising concern that policy needs to be tightened faster than usual - given these are unusual times - that would really send bonds into a tailspin.

Dollar - Something to be on the lookout for to start the trading week is the performance of the greenback. Commodity prices have been kind to us in recent days partly on account of a slip and slide for the dollar, which fell to its lowest level in a year against the euro, the Aussie and the Canadian dollars.

As some tiny, nagging doubts resurfaced that was all that was needed to send dollar-sellers scrambling for cover. And as they did, it raised the stakes on a rise in risk aversion.

In our minds, the higher the equity markets go, the greater the chances for a large rebound in the value of the dollar due at the precise time the market figures it's gone too far. The question is what to do when that happens.

We'd probably be buyers of Aussie dollars if we see the potential for a dip.

Pound - This week, for Jurojin Weekly we have to weigh up the prospects for the British pound. Last week it took a bashing on account of the resurgence of fears over the banking system. While the problem is legitimate, it's a worry that keeps coming back to bite the pound. So for us, the question is how much is already baked in. Is the pound a buy or a sell at these levels? If there's money to be made as we research our recommendation, we'll be sure to find it!

The Supreme Council of the Secret Order of Jurojin

Tyche Research