Wednesday March 23, 2005 - 11:26:25 GMT
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Black Swan Capital - www.blackswantrading.com
The $ dynamics have changed
“Actions originally prompted by conscious intelligence may grow so automatic by dint of habit as to be apparently unconsciously performed.”
Robert Ornstein, The Psychology of Consciousness
For many, selling the dollar has become a “dint of habit.” But it seems some new habits may have to be formed thanks to these few words from the Federal Open Market Committee yesterday, “…pressures on inflation have picked up…” Surprise moves prices!
Based on the price action in the bonds yesterday, there is no doubt now the market understands the Fed is serious. And given the swift and powerful reversal in the dollar, there seems little doubt the dynamics of yield differential strongly favor of the buck.
Below are the comments I shared with Black Swan clients’ yesterday morning, before the Fed announcement.
We are faced with the classic conundrum today on the Fed announcement.
1) Everyone is expecting a rate hike of 25 basis points. Some expect strong language to replace the “measured” pace. It sets the stage for buy the rumor, sell the news. If the news is sold, the dollar gets hit.
2) However, with commodities markets cracking a bit and credit spreads due to widen out, the so-called global carry trade could be in trouble. And if the Fed’s action and language are perceived as aggressive, we would expect the dollar to rally—especially against the Aussie.
Black Swan’s intermediate-term story/theme/script is a simple one:
A. The structural concerns (deficit, reallocation, etc.) are overblown
B. The dollar rally is supported by yield and fundamentals
C. The dollar has fallen far enough and probably bottomed in December ’04
This view may not be crystallized in a day or week. But, it seems the ongoing march higher in US rates will convert more traders to this theme over time.
It is conversion flow among various players—price and value led—from dollar bearish to dollar bullish that we will are watching for. Instead of: How low will the dollar go? The new question may be: How high will it go? The three year downtrend in the dollar is about to be broken. I think we have seen a bottom. First target is 8500-level, then 9000…
US$ Index Chart
The other shoe to fall in this story is of course the global carry-trade, which I have harped on much lately. If, or when, it does it would represent a strong prop for the buck and represent a money flow from longer-term players into the dollar, not just the chart reading types.
Today we get a look at the US consumer and producer price index for February. Maybe we will find out why the Fed says “pressures on inflation have picked up.” If so, it could be another hit to bond prices and rally in yields. And since yield seems numero uno in the currency game at the moment, the dollar may not have time for a rest. Stay tuned, the show begins at 8:30 a.m. EST.
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