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Tuesday December 16, 2008 - 18:00:34 GMT
Black Swan Capital - www.blackswantrading.com

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I Love the Smell of Rate Cuts in the Morning

Key News
• Trichet Sees Limit to Interest-Rate Cuts, Signals ECB May Pause in January (Bloomberg)
• Chinese Central Banker Plans More Rate Cuts as Investment, Economy Weaken China’s central bank Governor Zhou Xiaochuan said interest rates may fall again this month after exports declined, inflation slowed and a report today showed property investment cooled. (Bloomberg)
• The Treasury Market Reaches Breaking Point www.euromoney.com/Article/2060042/CurrentIssue/65745/The-treasury-market-reaches-breaking-point.html

Key Reports Due (WSJ):
7:45 a.m. ICSC Chain Store Sales Index For Dec 13: Previous: -0.8%.
8:30 a.m. Nov Consumer Price Index: Expected: -1.3%. Previous: -1%.
8:30 a.m. Nov CPI, Ex-Food & Energy: Expected: +0.1%. Previous: -0.1%.
8:30 a.m. Nov Housing Starts: Previous: -6.3%.
8:55 a.m. Redbook Retail Sales Index For Dec 13: Previous: -0.4%.
2:15 p.m. Dec FOMC interest rate decision expected, Federal Funds Rate: Previous: 1%.
5:00 p.m. Dec 13 ABC/Washington Post Consumer Confidence Index: Previous: -52.


Quotable
“It is important to say all the great thoughts again, without knowing that they have already been said.”

         Elias Canetti

FX Trading – I Love the Smell of Rate Cuts in the Morning

Interest rate decision out of the FOMC today – Mr. Ben Bernanke and his busy policy-makers announce their latest decision on interest rates this afternoon in the US. Will Ben schmooze the media like Trichet? Doubtful. Estimates say rates will drop another 50 basis points, down to 0.50% from 1%.

Unless Benny B. decides to save some of what little ammo he’s got left for future FMOC get-togethers, I expect the consensus estimate of 50 basis points off will prove accurate. But what will that do to the market?

My guess would be very little. As seems to be the case, the market correctly expects the rate cuts but doesn’t care about the nominal decision. The thing that matters is their reasoning and accompanying message.

Obviously the Fed understands their words can cause more than a little ripple through markets. That’s why they so carefully solder together each and every word of the announcement following these FOMC decisions. With rates nearing zero, the question is what the Fed will do as the situation remains increasingly difficult for the US economy.

First, this question assumes rate cuts have actually helped ease some pain. Second, it assumes Americans (and the markets) have any confidence the Fed CAN discover new, successful ways to ease the pain.

On the table so far is talk that the Fed may try to fuel the economy with cash by purchasing US Treasuries. This week’s FOMC meeting was originally only supposed to be a one-day affair. But they added an extra day for the sole purposes of discussing liquidity-inducing options – opening up their balance sheet, as it’s being called – that they might be able to take to shore up economic activity.

There probably won’t be any concrete decisions announced today, as they seek to further narrow down their possible avenues, but they will seek to make sure of one thing: that the market (or economy) doesn’t feel like it’s been left hung out to dry.

Based on the way the Fed has behaved over the last year, it seems to me they must say something today to keep hope alive. And should things actually happen that way, stock markets will probably finish the day on a positive note. Of course, based on the recent inverse correlation, we know that means the US dollar won’t be as fortunate.

We’ve explained that a more-significant correction was in order for the buck. That looks to have gotten underway last week and is continuing this week. Many analysts are jumping on this price action as an end to the US dollar’s mid-year rally (also known in dollar-bear lingo as an “anomaly”.)

Could they be right? Sure. Do we think they’re right? Definitely not yet.

Dollar bulls and bears alike are pointing at a head-and-shoulders technical pattern now set to drive the dollar lower. Based upon how you typically calculate the size of the subsequent breakout below the neckline, the buck would fall down to roughly 81542 before it stabilizes.

 (Chart unavailable in text format.)

Looking at how near we are to that target, it appears that the sharp, immediate sell-off could already be reaching a stabilization point. After that it will make sense to reevaluate whether further weakness is needed.

My point here: don’t look to this head-and-shoulders pattern as the be-all-that-ends-all. There’s no denying it is a powerful reversal move and more downside could very likely be on the way. But be careful not to read too far into this chart pattern. The markets will need to digest plenty of key fundamental data over the next couple months. You can be certain that the bad stuff isn’t going to only fall on the US economy.


Regards,

John Ross Crooks, III
Black Swan Capital LLC

 

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