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Thursday October 16, 2008 - 14:17:39 GMT
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Currencies Feel the Flow ... of Capital Rushing In and Out of Global Stocks

Key News
• Skippy on the Menu: Australia Turns to Kangaroos to Fight Global Warming (Bloomberg)
• Roach Says U.S. Jobless Rate May Reach 8% or Higher (Bloomberg)
• Foreign Buying of Long-Term U.S. Assets Rose to Net $14 Billion in August International demand for long-term U.S. financial assets in August grew as investors sought Treasuries and shunned debt issued by Fannie Mae, Freddie Mac and other agencies. (Bloomberg)

“Let it be your constant method to look into the design of people's actions, and see what they would be at, as often as it is practicable; and to make this custom the more significant, practice it first upon yourself.”

          Marcus Aurelius

FX Trading – Currencies Feel the Flow ... of Capital Rushing In and Out of Global Stocks

Looks like someone popped the champagne cork too early.

I say that because stocks made short order of Monday’s record climb. On Wednesday, the Dow dropped the most in 21 years. The plunge of over 700 points erased over a trillion dollars in market capitalization – only the second time that’s happened ... ever.

As the worldwide effort to shore up banks and lending settles in, investors are realizing much of the damage has already been done. Certain interbank rates and money-market rates are showing improvements in the cost to borrow. That’s a testament to extremely motivated governments and central banks.

But the global economy is sick. And there’s not an immediate cure. And that’s keeping the mood from lightening up.

Of course, we’re stuck on stocks because much of the US dollar’s performance in the last couple weeks seems tied almost directly to flows of risk capital, i.e. money running into and out of the global stock markets. (See Is the Dollar Due for a Correction or The Die Seems Cast.)

It seems that this correlation may stick for a while, as the lending system is far from healed and the worst is not over global economies. Look to smaller, less-developed nations for evidence ...

South Korea Heads South

One of our members recently inquired about the fundamentals of South Korea and the eventual impact it might have on the South Korean won. Our simple answer:
Considering the dynamics of the financial crisis, South Korea doesn’t look to be in an optimal position and their currency is very vulnerable.

More specifically, recent estimates call for slower GDP growth in South Korea. The culprit of slower growth is a struggling export market. Slumping exports our becoming commonplace. In fact, so many emerging markets are realizing that they can’t cut it if the US is excluded from the global economic equation. Not to mention Europe is following in those sinking footsteps and can’t be counted on. And China can’t fill the void on its own as some expected.

And now that S&P has threatened to cut the credit ratings on a handful of major Korean banks, the stock South Korean stock market and currency are taking a hefty beating. After falling a whopping 9.7% versus the dollar overnight, it appears that the won is in for more trouble.

Emerging Market Currencies in a Heap of Trouble

So as the United States and the rest of the world take every effort in pushing through a recession and skirting a depression, there will be plenty of tough times still ahead. Some bright spots, and market rallies, will be mixed in ... but that’s all they’ll be for quite a while – just little spots.

Until a legitimate recovery pushes through the financial system, the global economy is set to majorly disappoint. For that reason there are opportunities to catch major trends within the universe of emerging market currencies.

We’ve already explained how the foreign exchange market was due for a major rebalance. As we see it, this rebalancing act is still in the beginning stages.

Capital flowing out of emerging markets is gaining serious momentum. The global economy is worsening and demand is disappearing ... all because the system of lending and borrowing has frozen up. A major recovery in confidence is the first and most important step in thawing out the credit markets. And that’s crucial to jumpstarting global demand and shoring up the global economy.

Until then, we’re happy to play for US dollar strength against currencies of budding economies whose promising development has collided with a serious road block. There’s a whole list of them we’re watching that are in a heap of trouble.

And if this piques your interest, click here to read about an up-and-coming Black Swan Capital newsletter focused entirely on currencies of emerging and developing nations. We plan on launching very soon, but figured we’d let you in on the secret ahead of time.


John Ross Crooks, III
Black Swan Capital LLC


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