Wednesday January 9, 2008 - 13:50:05 GMT
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Black Swan Capital - www.blackswantrading.com
Stimulus coming, but a mixed bag still
FX Trading â€“ Stimulus coming, but a mixed bag still
Many are expecting US policymakers to dispense generous amounts of help to the market. The latest calls from on high, delivered by Harvard Professors Feldstein and Summers, is for a healthy dose of both monetary and fiscal stimulus. Keynes is feeling good again.
So, we await the seemingly inevitable â€śstimulusâ€ť package. We say inevitable because it is an election yearâ€”fake compassion is thick.
We are uncomfortably and firmly ensconced in the consensus view that says a stimulus package leads to yet another bout of risk appetite i.e. fresh new air being pumped into the bubble world driving stocks and commodities still higher. But the major currencies arenâ€™t yet pointing in that direction. Itâ€™s still a mixed bag out there.
The Aussie dollar is playing along a bit. But the Canadian dollar is flailing, the pound is getting hammered, and the yen and euro are ranging. A real mixed bag out there it is.
And thatâ€™s what makes it confusing and uncomfortable to be part of the consensus here. If major stimulus is now expected, it doesnâ€™t seem weâ€™ve seen the potential for the dollarâ€™s diminishing yield differential discounted yet. Why do we say it doesnâ€™t seem the dollarâ€™s yield differential has been discounted? Gold!
Given the blow-off move in gold, we expected the dollar to get hammeredâ€”it hasnâ€™t. In fact, it has held up very well.
[Chart not available in text format]
Itâ€™s multiple-choice time! The dollar price action relative to gold says:
a. The stimulus package will be disappointing i.e. and not provide enough juice for the stock guys. Gold and the dollar become â€ścoupledâ€™ as safe haven plays i.e. back to the idea we have shared many times that the US is still the center of global finance and a real debacle means money from US-based international fund managers runs home to hide
b. The stimulus will be so good that the US will get a growth bounce and the world will see just how flexible US markets can be relative to Europe during a time of turmoilâ€”confidence returns.
c. Itâ€™s just a bunch of short-term uncorrelated noise and itâ€™s only a matter of time before the dollar dives again on dwindling yield as soon as itâ€™s revealed the Fed will cut the funds rate aggressively in the months ahead.
d. None of the above
Eenie, meenie, miney, moe!
Black Swan Capital
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