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Friday March 4, 2005 - 11:26:49 GMT
Black Swan Capital -

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Maybe all is not in the dollar price


“To be sure, imbalances can arise, and they may even act as tipping points. However, there's a strong internal corrective mechanism in free-market economies. Prices serve as signals, telling businesses to produce more and consumers to buy less. The real problems arise when government, always under the guise of making things better, interferes and exacerbates the problem. In so doing, the economy doesn't get a chance to correct - - and learn -- from its own mistakes.”

Caroline Baum, Bloomberg

FX Trading

Below an excerpt from, “EUR/USD Downside Risks from Record High Employment ISM Index”, an this excellent research piece, dated 3 Mar ’05, by Monica Fan, Global Head of FX Strategy at the Royal Bank of Canada:

“The non-manufacturing ISM Employment Jobs Index surged to 59.6 in February, to its highest level since the series inception in 1997. This points to significant upside risks to Bloomberg consensus forecasts for 225K (RBC: 240K) growth in non-farm payrolls tomorrow, after the lacklustre 146K increase in January. Non-farm payrolls could biased significantly to the upside and non-farm payrolls could print above the current range of forecasts of 150K to 303K.”

The RBC strategy piece was forwarded to me by a well-connected trader friend. So I am sure many traders are well aware of the potential for non-farm payrolls. This makes the following email I received from one of Black Swan’s extremely perceptive clients so apt:

“Buy the rumour, sell the fact could be playing out right is set up for disappointment if payrolls don't live up to 300K plus...I have cut back on some dollar longs (taken profit), tightened up stops (stop profits) on the rest, and expect after tomorrow we will see opportunity to re-establish some new dollar longs.”

He is right. But the practical problem we have with placing stops in any seemingly logical fashion around the non-farm payroll number is that prices move so quickly in one direction, then often reverse and reverse again. A cynic would say: “First the dealers take out the stops on their books; then they move the market in the ‘right’ direction.” (Note: But because I am rarely cynical about the forex trading community, I won’t say that—a least until it appears to happen to me another 10 or 15 times.)

So, other than those now looking up and down at the order books, we are all in the same boat together as the non-farm payroll number approaches. It is a guessing game. Lay down your money, and take your chances. But here is what we do know that may provide some reference if the number comes in anywhere near consensus (which would be a real coup for economists’ who seem to miss this number with increasing regularity):

1) The US is hiring. Europe is firing.
2) The Fed is raising rates. Europe is on hold.

Of course, those “knowns” are already in the market price too.

But what is not in the market price, I don’t think has a lot to do with what Steven Vames, writing for The Wall Street Journal this morning, said this about the “carry trade”:

“In the second half of 2004, a falling dollar and comparatively low U.S. interest rates made the dollar an ideal currency to borrow, or fund, the trade…More recently, a long list of factors have been unraveling the attractiveness of such trades. Among them have been the durability of the early-2005 dollar rally, rising U.S. interest rates, a more shaky outlook for the Australian dollar, traction in the Japanese economic recovery and the potential revaluation of the yuan by China.”

I would add to Steven’s list the potential for a devaluing Chinese yuan. (Gulp! Gasp!) I found this interesting factoid in an article titled “Let it Ride” by Kenneth Rogoff, economic columnist for Foreign Policy magazine:

“If the costs of flexible exchange rates are hard to detect‚ the risks of trying to stabilize currencies are all too obvious. China‚ for example‚ has shown that it can stabilize (indeed‚ fix) the yuan-U.S. dollar rate‚ but only through a draconian system of capital controls that severely punishes ordinary citizens seeking to invest their money in something other than the country’s bankrupt banking system. Although some left-leaning economists seem to think heavy-handed financial controls are wonderful‚ the truth is that they just don’t work well for more-developed economies that need sophisticated and competitive financial markets to channel savings toward productive investments. Unfortunately‚ if China were to suspend its capital controls without allowing its exchange rate to float‚ it would almost surely suffer a massive speculative attack à la Mexico in 1994 or Asia in 1997 and 1998.” [emphasis added]

If we couple Mr. Rogoff’s view, with what Morgan Stanley’s Andy Xie has been telling us for a while about the hot money speculation in China being predicated on easy money as far as the eye can see, and add in the remnants of money still playing the carry-trade game, we have the makings of something I don’t believe is “in the price.” And I think it could be something lingering in the background should we get a blowout jobs report today: the possibility the Fed starts taking 50 basis point ladles of punch away from the bowl. It could be a catalyst for a significant flow of money back into the buck that is now unaccounted for.

Is everything in the financial world just “one degree” away from Mr. Alan Greenspan? It sure seems like it.

Tighten down on those helmets and be careful out there.

Jack Crooks


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GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Mon 10 Sep 2018
AA 08:30 GB- GDP, Trade, Output
Tue 11 Sep 2018
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A 09:00 DE- ZEW Survey
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AA 12:30 US- CPI
Fri 14 Sep 2018
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