Thursday March 10, 2005 - 11:27:18 GMT
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Black Swan Capital - www.blackswantrading.com
An array of reasons for a weak dollar
“All the perplexities, confusion and distress in America arise, not from the defects in their constitution or confederation…as from downright ignorance of the nature of coin, credit and circulation.
John Q. Adams
Mr. Buffet and Mr. Gates are having a good week—at least on the currency side of their portfolios as an array of “rising” rationales have routed the dollar so far:
Rising oil prices
Rising interest rates
Rising central bank reserve reallocation
Rising trade deficit
Each of these rationales could be taken in isolation and easily rationalized away by someone who believes the dollar will rise again. However, rationality and trading are very often mutual exclusive activities if one wants to make money, instead of trying to be right. It is why many traders who have been at this game for a while gravitate toward eastern philosophies. For it is there that we find such perplexing kernels of truth as, “Trade with an empty mind.”
From experience we know this is a simple truth. We have had those times in the zone flowing and trading in concert with price action, seemingly reading the mind of the market. It seemed so easy. And during those times it was easy because our only master was price action, which we willing obeyed, and not an array of rationales. Unfortunately those times in the zone don’t seem to last very long—or come about as frequently as we would like. It’s probably because we cannot square the simple truth, “Trade with an empty mind,” with our yearning for causality and certainty.
This passage from John Percival, editor of the Currency Bulletin, I think provides some basis for the western mind to understand why “Trading with an empty mind” produces results in the currency markets:
“Quite early on [as currency market trading developed] it became apparent the main driving forces for the price of the dollar, which is the unit in which the prices of most currencies are measured, were the same in securities markets.
“The fundamental driving force was the urge to maximize total return – in yield and price movement. What else could it be? Superimposed on this ‘underlying rationale’ was the ebb and flow in sentiment among the participants. At times, sentiment could become the sole determinant of price movement.”
This is not to deny there are fundamental driving forces in currencies—there are! And they are real and powerful. But it is to say that most of what is perceived as a driving force is nothing more than a rationalization for price action that can’t be defined—or if it can, not defined in a simple verbal manner.
Our system of analysis and reporting on currencies is a culture hell bent on explaining “Why?”, and often, again from experience, I know this can be more detrimental to a trading account than helpful. It one of the primary reasons I often rant about the pontifications of the powers that be. But in my ranting, the reality is, I become part of the reporting and analysis system I deep down disdain. It is yet another paradox.
John Percival has something to say on the subject of paradox that is one of the best single explanations of market action you can find anywhere:
“In all markets, price extremes are usually attended by a consensus that the trend, be it up or down, will continue; and by a peak of speculation in line with the trend. Hence the excruciating paradox of financial markets, that sentiment is most bullish at the peaks when prices have only one way to go which is down; and most bearish at the troughs vice versa: at the top there’s no-one left to buy, and at the bottom no-one left to sell. This paradox is absolutely central to the working of all financial markets and we need all the help we can get to understand it so thoroughly that it becomes part of our nature. The more bullish things are, the more bearish they are.”
At the moment, the market is very dollar bearish.
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