Tuesday June 14, 2005 - 11:10:41 GMT
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Black Swan Capital - www.blackswantrading.com
Dollar correction on profit taking?
“My son, my son, if you knew with what little wisdom the world is ruled.”
Oxenstierna (Thirty Years’ War)
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A word on the “profit taking”…
The papers said there was “profit taking” yesterday, and that led to the sharp bounce higher in the euro. Why do they always refer to profit taking when this is a zero-sum game we play? For each profit taker, there is a loss taker. We know that trends—in fractal time frames—end when all the players playing at the time have capitulated to the trend i.e. they realize they holding are a losing trade so they finally throw in the towel. So, euro-$ bounced on “loss taking” yesterday!
Either way, the euro reversed yesterday forming a Doji candlestick. That’s a sign the power of the bulls and bears are equal. (Bulls couldn’t take it higher than the open, bears couldn’t take it lower than the open—thus a closing price back at or very near the open.) It doesn’t automatically mean a trend change is upon us. And it may mean nothing at all. But when a Doji appears after a significant trend and price oscillators are either oversold or overbought, it should be considered a warning flag.
Macro scene update from Stephen Roach of Morgan Stanley yesterday:
For new readers to Currency Currents, one of our underlying dollar themes is that China slows faster than many of the commodities crowd and major global leveraged players expect. And if this theme is correct, it means much of the money in China and Hong Kong—expecting to benefit from the yuan revaluation and Chinese commodity juggernaut as far as the eye can see—will come back to US shores and ultimately benefit the dollar over the intermediate-term.
That said, we noticed Stephen Roach has been growing increasingly concerned about Chinese growth lately. And yesterday he penned these words that seem to fit our story [our emphasis]:
“I have long argued that the over-extended American consumer was the weakest link in the global growth chain. In what I thought was the increasingly likely event of a US current-account adjustment -- and a falling dollar and rising real interest rates that seemed likely to accompany such an adjustment -- I stressed the mounting vulnerability of the American consumer. In my mind, it all hinged on the interest rate piece of this risk assessment. A normalization of real interest rates in the US would temper excesses in property markets and sharply curtail the asset-dependent spending excesses of the American consumer.
“…The interest-rate piece of this scenario seemed to be falling into place. The Federal Reserve appeared to be on a path of interest rate normalization.
“…That was then. No longer do I feel that the American consumer will be first to go in this adjustment process. I now believe that the Chinese producer will lead the way. A two-pronged slowdown now seems likely to unfold in China -- with internal policies aimed at a bursting of the property bubble and external forces putting pressure on China’s export dynamic (see my 23 May dispatch, “What If China Slows?”). Collectively, fixed investment and exports account for 80% of Chinese GDP, and these two sectors are currently surging ahead at a 30% y-o-y rate. With the Chinese government now serious in going after the excesses on the demand, supply, and financing sides of the coastal property bubble, the investment dynamic should slow appreciably.”
Black Swan Capital
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