Thursday February 23, 2006 - 11:24:40 GMT
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Black Swan Capital - www.blackswantrading.com
Rising sun and falling copper?
âThose studying chaotic dynamics discovered that the disorderly behavior of simply systems acted as a creative process. It generated complexity: richly organized patterns, sometimes stable and sometimes unstable, sometimes finite and sometimes infinite, but always with the fascination of living things. That was why scientists played with toys.â
James Gleick, Chaos
Lot of talk of high yielding currencies on the other side of the carry, as in carry-trade, coming under pressure as the US, Europe, and drum roll please...........Japan, raise interest rates. The BOJ launched a salvo across the bow today.
âBank of Japan Governor Toshihiko Fukui said a seven- year bout of deflation has almost ended and the central bank will âgraduallyâ raise interest rates from zero percent,â Bloomberg reported.
And the Japanese trade deficit numbersâthe biggest in 23 yearsâgave the Bank plenty of ammunition. Rising imports stoking said deficit suggests the Japanese consumer is back in the game.
Lest we not forget besides high-yield currencies, prices of real goods, through the magic of derivatives, are also on the other side of that same carry-trade.
The question is: How much of the price embedded in commodities is made up of real economic demand and how much is the speculation premium based on an assumption of a steady stream of central bank liquidity? An equation below for the mathematical literate, which we are not:
Commodity Price = Real Demand as function of Real Supply + Speculative Premium
CP = RD Ć (RS) + SP
We suggest the SP (speculative premium) part of this equation is relatively large at this point in the cycle. And if the market believes the BOJ is for real this time, we could see much shrinkage in SP as the demand for yen, in the form of both domestic Japanese demand and global carry-trade closing demand hike up simultaneously.
Below is a weekly Elliott Wave chart of the yen we recently shared with our subscribers. And below that is the yen versus copperâŚ
Weekly Elliott for the Japanese yen:
USDJPY vs. Copper Daily
Interesting how the copper and yen chart have taken on a very similar patternâŚHmmm! If you are long copper and loving it, keeping in mind that much of that love may be dependent on the Bank of Japan and nothing else.
Black Swan Capital
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