Tuesday March 15, 2005 - 11:09:58 GMT
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Black Swan Capital - www.blackswantrading.com
Currency dithering not for long
“Fear and greed outweigh rational analysis in every investment decision.”
F.J. Chu, The mind of the market
There could be some market moving data due out today—we get a look at US retail sales for February and Treasury International Capital (TIC) for January. Again, it’s a nice mix of cyclical vs. structural for traders to consider. Right now, we are dithering within some tight ranges among the majors.
Last week, structural concerns (deficits and dollar reserve reallocation among central banks) trumped cyclical dollar good news. But maybe there are some reasons why the dollar may get a little breathing room this week:
1) US interest rates seem to be moving on rising US inflation and growth expectations.
2) Growing concern from a consistent China bull, Morgan’s Stephen Roach, that a slowdown in China may be imminent. His piece yesterday, “China Disconnect” makes for interesting reading. And it supports my belief that commodities markets are getting a bit overextended as speculation seems to be running well ahead of reality. Mr. Roach reminds us that despite our view that ongoing China growth is a slam dunk, Chinese leaders prefer stability over growth. They always have.
3) Emerging market debt is tightly linked with items 1 & 2 above. Despite the movement in US Treasuries, we haven’t seen much in the way of credit spread widening from the emerging market arena. When we do, we might begin to see some investors looking for an escape hatch—and that probably leads back to short-term US deposits and the dollar.
4) And this is a stretch, I know, but I think the big players (at the central banks) realize there could be a lot more damage here on many fronts—economic and political—if the dollar spikes down below its ’04 lows.
The flip side of this scenario is:
1) Structural concerns are real, and no matter how good the US economic growth is, the dollar continues to fall until progress on the deficit(s) is made.
2) Mr. Greenspan for all his show of aggressiveness realizes that he holds the cards to global growth. At some point soon he will moderate his stance in order to save the US consumer, take pressure off China, and continue to pump up the monetary base and life into the asset bubbles near and far. This is becomes a not so implicit signal to keep selling dollars.
No doubt, scenario number two rules the day among the majority of traders—one need only view the dollar index chart to understand that.
US $ Index Chart
Perceived bad news on the TIC data today and the dollar could be in for yet another week of structural pounding. Either way, the dithering we’ve been doing this morning could end very soon.
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