Thursday February 28, 2008 - 12:35:23 GMT
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Black Swan Capital - www.blackswantrading.com
Where Does One Start?
FX Trading â€“ Where does one start?
Thereâ€™s so much going on that I donâ€™t even know what to highlight in this Thursday installment of Currency Currents. Weâ€™ve got Bernanke on Capital Hill, regulators patting Fannie and Freddie on the butt, and commodities going ballistic all while the U.S. dollar index stumbles to new all-time lows.
Whether you look at the recent changes in the Fed Funds rate or analyze the most recent Fed minutes or tune in to listen to the Fed chiefâ€™s testimony to congress, Bernanke has obviously shifted his focus to growth concerns. Unfortunately this shift allows concerns on the inflation front to move in and fester.
Texas Congressman and Republican Presidential hopeful Ron Paul was the only voice on the committee to firmly argue against the Federal Reserveâ€™s chosen path. His argument was based around rising prices and the effect money supply growth has on the ever weakening dollar. Paulâ€™s key point was that Fed board members completely ignore the buck and risk destroying the currency when determining their course of action for monetary policy.
Unfortunately, dollar disregard is nothing new and is exactly why the dollar is trading near all-time lows. So as traders sort through the mess they can count on one thing: the dollarâ€™s yield differential is worsening and will continue to do so; sell dollars.
Perhaps the only thing the dollar had going for it lately was the presence of risk-aversion. And that seems to be all but controlled. In the last two months weâ€™ve seen short periods where risk-taking was washed away, stock markets swooned and the dollar rallied. But stimulus plans, bailouts and lenient regulation has been enough to plant the seed of hope in investors minds.
The latest concern over the bond insurers has blown over with the rescue of Ambac. And yesterday the Office of Federal Housing Enterprise Oversight (and no, I didnâ€™t just make that up) decided to ease regulations on the amount of capital held by Fannie Mae and Freddie Mac â€“ the two companies responsible for the majority of mortgage loans in the U.S.
So even though Fannie dropped a bomb and lost $3.56 billion last quarter and warned of even worse results ahead, the market seemed unconcerned. Lowering the capital requirements will obviously solve their problems. Ha, right! Freddie Mac is set to blow us away today with their most recent quarterly results.
In the meantime, price action in the currency market is wild and crazy â€“ even the yen and Canadian dollar have rallied against the buck. And nothingâ€™s stopping the Swiss franc and the euro at these levels.
I showed you a chart of the euro on Tuesday and I asked if it would be able to push above overhead resistance after a few already failed attempts. I think we got our answer.
[Chart not available in text format]
We may see a pullback to end the week, but the damage is done. If traders keep ganging up on the buck, the euro now has uncharted territory to roam freely.
John Ross Crooks III
Black Swan Capital
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