Thursday April 28, 2005 - 11:16:29 GMT
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Black Swan Capital - www.blackswantrading.com
Is crude leading the dollar?
“The top is never in sight when the vision is vitiated by hope.”
Edwin Lefevre, Reminiscences of a Stock Operator
Is it about oil prices now? After a dismal drop in US durable goods and a rally in bond prices, the dollar managed to rally back and trade higher against most major currencies yesterday. We consider that very good price action relative to the news—news that otherwise would/should have tanked the dollar for more than a few hours.
The yen was the exception to the dollar yesterday—it stayed strong. Analysts are chalking that up to lower oil prices. The logic being Japan benefits more than most when oil prices decline.
Experts on oil we are not! Currencies are plenty for us to handle. But, we’d say the June ’05 crude futures chart is looking a bit precarious:
Chart: Crude Oil
And if the dollar IS following crude—that should mean the dollar chart is looking pretty good:
Chart: US $ Index
Maybe those analysts are on to something with the crude/dollar connection:
Chart: Crude (inverted) vs $ Index
The key word is maybe!
As you know, our dollar story is fairly simple: it is a game of relative yield and growth. The US growth outlook took another hit from durable goods. And interest rates retreated accordingly. But the interesting part is that this time, most commodities followed interest rates lower yesterday—we did not see the usual reaction by the “reflation” trade crowd—buy commodities and comdols, the central banks will be pumping again.
Though one day does not make a trend, the dollar’s price action relative to the news probably means there is much more going on than meets the eye.
We get a slew of data today and tomorrow—maybe we can start assigning reasons again very soon.
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