Monday August 1, 2005 - 11:21:30 GMT
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Black Swan Capital - www.blackswantrading.com
Competing $ views
"All argument is against it; but all belief is for it.”
Competing themes: The euro zone economy has bottomed vs. the US economy finding a second wind.
Given the relative price action last week—and this morning, it suggests the better than expected economic news in Europe (countering the extreme pessimism, as we suggested in Currency Currents on Wednesday 27 Jul), has trumped US good news (consumer confidence and GDP). How far can this euro rally run? The 12500-level might just shakeout a few dollar bulls.
euro weekly chart...
However, given that view, one of our major themes of rising US rate differential and a surprise on how quickly said differential could grow is still in play.
Here is excerpt from Stratfor on the implications of the positive US data we saw last week:
“Strong consumer-demand growth and a white-hot housing market continue to form the backbone of the growth, a trend which has proven true these past two years, as opposed to the government spending which added octane to the system in 2002.
“But there were two new features in the growth that should undergird U.S. economic strength for several more quarters. First, businesses -- which have been extremely reluctant to open their pocketbooks since the Sept. 11 attacks -- finally joined the party by expanding spending at a 9.3 percent annualized rate.
“Second and far more importantly, consumers actually managed to burn through retailers' and wholesalers' accumulated inventories. U.S. inventory stockpiles racked up their first declines since 2003.”
If Stratfor is correct, it means the US economy is gaining momentum. It could give the Fed a green light to be more aggressive going forward.
Morgan’s Joachim Fels thinks the yield differential will widen and the Fed will catch up to the BOE by year end. Here is an excerpt from a recent posting titled “Four-Four Two” (our emphasis):
“Why 4-4-2 then? Well, 4-4-2 is where I now think these three central banks’ official interest rates will end up around the turn of the year. And just in case you were wondering: no, I don’t expect the ECB will have hiked the refi rate to 4% by then. Most likely, rates in the euro area will simply stay where they are, at 2%. I have given up flirting with the idea of an ECB rate cut in the second half of the year now that the business surveys suggest that the growth cycle is turning up again. However, as I will explain later, I still believe that a rate cut looks more likely than a hike in the remainder of this year. Likewise, I have thrown in the towel on my view that the Fed would stop hiking the funds rate somewhere near the present 3.25% level. I humbly concur with our US economists’ long-held view that a 4% handle for Fed funds at year end looks more likely. What hasn’t changed, though, is my view on the Bank of England, which has long been that rates would be cut later this year.”
For now, we continue to expect a corrective rally in the euro, and possibly the rest of the pack. But it’s a good idea to keep one eye squarely focused on the Fed.
Black Swan Capital
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