Thursday March 6, 2008 - 12:49:28 GMT
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Black Swan Capital - www.blackswantrading.com
The Euro is Splashing Around and Having a Great Time Doing It!
FX Trading â€“ The Euro is Splashing Around and Having a Great Time Doing It!
Today is Central Bank Day! And tomorrow is Jobs Day! Wa-hoo. Can you sense my sarcasm?
Basically, over the next two days we can expect FX traders to be jumping in and out of the market like a bunch of six-year-olds hanging around a swimming pool. The Bank of England, the European Central Bank, U.S. jobless claims, and U.S. pending homes sales should provide for volatile markets today; and the U.S. Non-farm Payrolls will be more than enough to make investors go crazy tomorrow.
Those of you with well-reasoned positions should be prepared to get splashed.
The Bank of England already announced their decision to stay put on interest rates. Apparently inflation is a concern again. Unlike the Federal Reserve, the Bank of England is taking a bilateral approach with monetary policy â€“ acknowledging both growth and inflation. The pound is making good immediately following the announcement.
As we work the rest of the way through this gauntlet of monetary and economic reports, the euro is trading at record-highs versus the buck. And there arenâ€™t a whole lot of reasons for it not to. A story on Bloomberg.com this morning highlighted the expectations for the Euro area economy to expand at a faster pace than the U.S. economy this year.
To that I say okay, but everyone knows just how badly the U.S. economy is faring these days. How impressive is it for a major industrialized economy to outpace the U.S. at a time like this? The actual figures cited in the article sure werenâ€™t that impressive. U.S. GDP is set to decline to 1.5% from 2.2% last year. Euro area GDP is set to decline to 1.6% from 2.6% last year.
Do expectations like that warrant and exchange rate of 1.53 euro per dollar? Iâ€™d have to lean towards no. But hey, itâ€™s the market that makes the call.
I just wonder if things in the euro area could get any worse. After all, the U.S. doesnâ€™t have a whole lot of room still to tumble. The euro area still could. And more importantly, traders and investors could be caught off guard if the Euro area starts on a more noticeable slide, no matter how orderly the decline.
One structural dynamic that has the potential to shift â€“ demand from foreign countries for European capital goods (Carlos Caceres and Eric Chaney over at Morgan Stanley Global Economic Forum highlighted this point last month.) Thus far demand of this sort, from emerging economies in particular, remains solid. But you have to wonder when the exchange rate will come into play.
My guess is fairly soon. And the faster the market bids up the value of the euro, the sooner weâ€™ll see an overvalued exchange rate negatively impact the European economic backdrop. And then maybe the market thinks twice about 1.60 euro per dollar. Maybe.
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The ECB will most likely stay put on interest rates as well. But thereâ€™s no telling where these currencies might finish when the day ends. Good luck navigating these markets today and tomorrow.
John Ross Crooks III
Black Swan Capital
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