Wednesday January 26, 2005 - 12:08:46 GMT
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Black Swan Capital - www.blackswantrading.com
More converts to a dollar theme
“I will not be pushed, filed, stamped, indexed, briefed, debriefed, or numbered! My life is my own.”
No. 6, The Prisoner (Patrick McGoohan)
“There is now a consensus in the financial markets that the US dollar is headed for a prolonged slump in order to reduce America's large current account deficit. There are two ways the falling dollar can reduce the external deficit. It can encourage an upsurge of exports or import substitution. What pundits have not noticed is that the US does not have adequate manufacturing capacity to eliminate the external deficit,” wrote economist David Hale yesterday in the Financial Times.
The new rationale is gaining converts among the economist-powers-that-be.
We add Mr. Hale’s view in support of Mr. Stephen Roach’s, he of Morgan Stanley fame; both are widely followed, very smart, and influential.
Yes, Mr. Hale still believes a declining dollar will be a step in the process of improving the deficit. However, he believes the US will need either “a gradual manufacturing revival or, dramatically, through a domestic spending recession” to take a real bite out of the deficit problem.
Messrs. Roach and Hale are providing some guideposts (representing the raw material market participants use in formulating expectations). It is a recipe for real change. And should the Bush administration begin echoing a similar theme, a la more promotion of the US tax provision for US business to repatriate funds as a catalyst for a “new manufacturing renaissance;” it would put some teeth behind a “strong dollar policy.” It’s a policy that, for the most part, has been nothing more than mealy-mouthed jawboning.
I have been rambling often of the yield differential as a key driver supporting the dollar. Below is a chart I follow that can often give some clues on that process. The blue line represents the US 2–year Treasury Note future (it is the price so it moves inverse to yields) vs. the red line which represents the euro. The positive dollar yield impact is well supported by this chart…I think.
CHART: EUR/USD vs. US 2-yr Note Weekly
I have labeled the left side of the chart, to the peak in 2-year Treasury note prices as “credit-reflation.” The right side, after the 2-year note peak, is labeled as “credit tightening.” This is not a reliable trading indicator for our time frames, but it does give you an idea of a change in the macro economic backdrop, which represents another piece of the puzzle.
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