Friday February 29, 2008 - 13:21:20 GMT
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Black Swan Capital - www.blackswantrading.com
Comdols -- A Breather?
FX Trading â€“ Comdols â€“ A breather?
As I am sure you know, the comdols (thatâ€™s fancy forex trader-talk for commodity dollars; clever isnâ€™t it) have been on a tear. But we wake this morning to find Aussie, Kiwi (fancy forex trader-talk for the New Zealand dollar; itâ€™s a fruit thing), and Loonie (some say it has something to do with the name of their money, I say it signifies how the currency trades most often, as in â€śa very loonie wayâ€ť) sucking wind.
Is it a breather, or did Mr. Bernankeâ€™s candid, calm, and cool assessment of the carnage we call a banking system concentrate the collective around the idea that risk aversion may rear its ugly head once again?
You remember the old risk aversion; it is the flip-side of risk appetite. We last saw it a few weeks ago. Like a bad penny it keeps popping up. From a currency perspective, I think the key cross that best signifies the risk aversion trade is the Aussie $ - Japanese yen (AUDJPY).
I have juxtaposed the AUDJPY cross rate (red line) against the S&P 500 futures, or SPU (black line). I have also added some sarcastic commentary, the type one is able to do given the gift of hindsight. You will notice a couple of things, I hope. First, AUDJPY tends to track SPU tightly. SPU representing stocks; and stocks represent the premiere risky asset class. Also, notice how AUDJPY and SPU have diverged a bit lately. This represents the idea that everyone is a commodities trader now, except of course Mr. Dooley from MF Globalâ€™s Memphis office. He hasnâ€™t been eating his Wheaties and has been washed out of the game.
[Chart not available in text format]
So commodity currencies should rock and roll, thus the rally in AUDJPY relative to SPU. This may be exactly right. And what we are seeing today may simply be a correction in the comdols. But, if banks here and abroad start going belly up, as Mr. Bernanke indicated yesterday, it may once again throw a wet blanket on the idea that global demand for commodities will remain intact.
I know it seems like heresy to suggest that in the end if demand isnâ€™t there, or perceived by the market not to be there, commodities might just range. And oddly, prices might just fall. And that would surprise a lot of folks now thinking the new game is to buy hard assets. Mr. Market is a wily beast.
I donâ€™t know about you. But John Ross and I are looking forward to Saturday, and a nice relaxing weekend. Itâ€™s been a wild week and looks to be a wild Friday.
Take care and be careful out there.
Jack Crooks, Black Swan Capital
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