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Wednesday October 19, 2005 - 11:24:40 GMT
Black Swan Capital - www.blackswantrading.com

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Flawed Perceptions

Key News
•Key reports due today (WSJ):
8:30a.m. Sept. Housing Starts. Previous: -1.3%.

Quotable
“Nature’s admonition to avoid the dice altogether...[E]veryone who bets any part of his fortune, however small, on a mathematically fair game of chance acts irrationally…[T]he imprudence of a gambler will be the greater the larger part of his fortune which he exposes to a game of chance.”

Daniel Bernoulli, taken from Against the Gods by Peter Bernstein

FX Trading
Warning: You dollar haters—and you know who you are—might experience some slight indigestion from today’s CC.

Other than the fact that the euro is tanking against the US dollar (yet still grasping a thin reed of support) the level of open interest (red line in the chart below) appears surprisingly lame. Does it tell us anything? Maybe it says there are still plenty of quiet dollar bears holding out hope the dollar will begin its long-term decline into oblivion. After all, there are too many “structural problems” facing the dollar—“it must decline” still seems a deep-seated belief among many players.

Chart: euro Futures Dec '05 Daily

No matter how much one believes something, doesn’t guarantee it must happen. And in a world where prices are still driven by real people, acting in both rational and irrational fashion (not sure how we distinguish between rational and irrational when it comes to investing), and where the actions of each player ultimately impact upon future expectations—Soros refers to this as “reflexivity’—forecasts or beliefs can be dangerous places to hang your hat.

“”The participants’ perceptions are inherently flawed, and there is a two-way connection between flawed perceptions and the actual course of events, which results in a lack of correspondence between the two. I call this two-way connection ‘reflexivity.’”

George Soros.

No where is “reflexivity” better dramatized for all to see than in the currency markets, assuming one can attempt to discern with some perspective instead of clinging to a story. The dollar demise story, which not coincidently mirrored the peak in the euro during late ’04/early ’05, is the best current example of “flawed perceptions” we’ve seen in a while.

“The arguments of the dollar skeptics are well known: they mostly revolve around America’s record current account deficit of more than 6% of GDP, which is widely viewed as unsustainable. Hence, the argument goes, central banks and private investors would start to shed dollar assets at some stage in the search for another reserve currency. Given the size of the euro area’s economy and financial markets, the euro is widely seen as the leading contender for the next reserve currency. However, as I see it, rumors of the imminent death of the dollar as the leading reserve currency are grossly exaggerated, for several reasons,” writes Morgan Stanley economist Joachim Fels. [Our emphasis]

The reasons, according to Mr. Fels:

(1)Reserve currencies don’t lose their status that easily.

(2)Large-scale currency diversification is difficult for dollar-peggers.

(3)The euro is not a glaring alternative.

(4)Diversification into risky assets may benefit the dollar

“Fears of a dollar-crash due to currency diversification are overblown.”

Thank you Mr. Fels!


Jack Crooks
Black Swan Capital

 

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Forex news reports can be found on the forex research headlines page below. Here you will find real-time forex market news reports provided by respected contributors of currency trading information. Daily forex market news, weekly forex research and monthly forex news features can be found here.

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Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



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Amazing Trader EVENT RISK Calendar:

Mon 18 Dec
10:00 EZ- final HICP
Tue 19 Dec
09:00 DE- IFO Survey
13:30 US- Housing Starts/Permits
13:30 US- Current Account
Wed 20 Dec
15:00 US- Existing Homes Sales
15:30 US- EIA Crude
Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP
Fri 22 Dec
09:30 US- GB- GDP
13:30 US- core PCE Deflator & Presonal Income
15:00 US- New Homes Sales
15:00 US- final University of Michigan
17:00 US- early Closes
Mon 25 Dec
00:00 Christmas Holidays

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  • POTENTIAL PRICE RISK: Medium Mon--10:00 GMT-- EZ- final November HICP. flash data are rarely changed.


  • POTENTIAL PRICE RISK: HIGH- Medium Tue --09:00 GMT-- DE- IFO Survey. Key report but usually not a market-mover
  • POTENTIAL PRICE RISK: HIGH- Medium- Tue --13:30 GMT-- US- Housing Starts and Permits. Leading indicators of activity

  • POTENTIAL PRICE RISK: HIGH-Medium- Wed --15:00-- US- Existing Homes Sales. Top Housing statistic
  • POTENTIAL PRICE RISK: Medium- Wed --15:30-- US- EIA Crude

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