Thursday August 11, 2005 - 11:37:03 GMT
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Black Swan Capital - www.blackswantrading.com
Pound and euro playing the Fib game!
“Television pundits lose their intimidating effect; they even look ridiculous. They seem to be excited about something terribly unimportant. Suddenly pundits become clowns, which is a reason the writer Graham Greene refused to go on television.”
Nassim Taleb, Fooled by Randomness
Traders have voted: And they have spoken loudly—The Bank of England isn’t cutting rates again anytime soon. No hanging chads or faulty ballots here, the chart tells the story:
Chart: pound daily
But on second thought, maybe it’s that funky Fibonacci thing. The pound has retraced 38% of the distance between its July ’05 low to Feb ’05 high. A nice move, assuming could ride it while withstand the volatility of the pound. And this isn’t the only currency that seems to be playing the Fib game.
The euro is inching closer to its first Fib zone:
Chart: euro daily
And here too, the betting consensus is leaning toward no more rate cuts from the European Central Bank.
The catalyst for the rally in the euro and pound were probably based on the simple assessment that both currencies looked cheap, or overdone and due for turning. The later rationale of a re-rating of European economic growth prospects came along the way—timely indeed. Or did the falling currency stimulate economic activity then lead to a rising currency? How leads and who follows? It is all so darn confusing.
Let’s say the euro zone gloom was overplayed. It is a legitimate rationale for the currency to strengthen—the pound too. But, no matter how one dices and slices what we know now about the comparative economic outlooks for the US versus the euro zone or the UK, the US wins the game hands down.
We pointed out yesterday that a real economist—a good one to boot (yes there are such animals)—is anticipating a third quarter GDP growth in the 5% range for the US. And another thing we know is the Fed is raising rates—we just don’t know how many times more. But if our good economist is correct, it’s not too far a leap in logic to suggest the Fed “overshoots!” In economic talk—tightening beyond the elusive “neutral rate” and lurching well into the restrictive zone.
The point being—sure optimism on evidence the gloom in the euro zone is one thing. But comparing the relative growth potential and monetary policy outlook of Europe and the US, respectively, it’s tough to consider this move in both the euro and pound anything more than a standard correction than a new bull market in either currency.
Our story sounds good to us. And we know until the market validates it, it is only a story. Because trading is about doing right, not being right. The trend is where the action is. And for now we keep watching the Fibs. But if the existing rationale for the euro and pound grows stale—a powerful driver in the other direction is waiting in the wings. And then we start playing the Fib game in the opposite direction.
Black Swan Capital
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