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Wednesday May 11, 2005 - 11:19:23 GMT
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Seeing deficits and revaluations


A father said to his double-seeing son, “Son, you see two instead of one.”
“How can that be?” the boy replied. “If I were, there would seem to be four moons up there in place of two.”
Aldous Huxley, The Doors of Perception

FX Trading

Today we see the US Trade Deficit report for March. Many traders are placing bets on the number. Will it be under or over? If over, maybe it means the Currency Account deficit concerns will be back in play for dollar bears. If under...well…

Either way you see it, it’s another one of those numbers that seems to us only a small piece of the puzzle, and we don’t think it is much of a driver of the dollar here. In fact, we have never believed trade deficits were ever much of an indicator for trading the dollar—it’s just not reliable. And if an indicator is not reliable it falls into the random category, along with sunspots.

Why do we say it’s not a reliable indicator for the dollar? Simple, we look at the pictures! Below you can see the US Trade Balance in Goods and Services compared to the US dollar index—not much of a correlation there I don’t think.


If the dollar falls today, you can be sure one of the key reason assigned by the assembled punditry will be the trade deficit—and so it goes.

On second thought, we could see cause and effect on a bad trade number today. A bad number would cause more howls for Chinese revaluation from our political “leaders.”

This thought leads to another rambling thought about what I have been hearing lately. Many are now tired of the on again and off again slated revaluation of the Chinese currency. So a theme seems to be developing, it is: “Buy gold on dips as a way to play the revaluation.” It’s probably easier/safer than trying to sell $-yen here [but who knows when a dip is the beginning of a plunge]. But even assuming we know what a dip is, there’s always that lingering big but out there…take a look at the next somewhat convoluted chart to see what I mean:


Yup! As gold (blue line) has risen, $-yen (red line) has fallen. So if $-yen falls on revaluation—than gold goes higher. Maybe! Notice also on this chart that oil (black line) seems to be moving in tandem too with gold. BUT, what if revaluation triggers a slowdown in Chinese exports—as some are warning, as in the AP story this morning?

“Export growth would slow to below 10 percent, down from more than 34 percent last year, even if the yuan appreciates by only 3 percent to 5 percent, said the report by Zhai Zhihong, a senior official at the National Bureau of Statistics. [My emphasis]

“If the yuan's value were allowed to rise by up to 15 percent, as some have speculated, China's exports could "contract by a rather large amount," Zhai wrote in the report, viewed on the bureau's Web site Wednesday.”

If Mr. Zhihong is right about a revaluation’s impact on China, we shouldn’t assume crude or gold or any other commodity will rally as a result. But, who knows if Mr. Zhihong is right. There we go again, placing our bets on a thread of limited information about the future. It’s move validation to prove markets are about expectations—and have little to do with reality. We see what we want to see.

Jack Crooks


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